Naftogaz receives Gazprom notice to terminate contracts, says it will take 3 years

Ukraine’s natural gas state enterprise Naftogaz
received a notice from its Russian counterpart Gazprom (GAZP RX) that it
intends to request the Stockholm court to terminate their 10-year contracts for
supply and transit of natural gas signed in 2009, Naftogaz commercial director
Yuriy Vitrenko told journalists on March 5. He noted the contracts will
practically likely remain valid over their scheduled life – till the end of
2019 – as the court hearing will take about three years. “Our position is that
so far we see no reasons to terminate the transit agreement,” Vitrenko said, as
cited by Interfax-Ukraine. At the same time, Vitrenko said that Naftogaz has
already sent a letter to Gazprom with a proposal to revise (i.e. increase)
transit rates. He did not rule out that Naftogaz will initiate another court
hearing in Stockholm in case it won’t be able to agree upon new transit rates
in its negotiations with Gazprom.

Recall, Naftogaz has become a net winner in litigation with Gazprom
that started in mid-2014. Namely, the Stockholm court ruled in December 2017
that Naftogaz has to pay USD 2.02 bln under their gas supply contract, while it
ruled in February that Gazprom has to pay USD 4.63 bln under their gas transit
contract. Gazprom called this decision asymmetric and unfair and initiated
early termination of the contracts with Naftogaz, calling them disadvantageous
for the Russian side. Also, Gazprom refused to supply natural gas to Naftogaz
as of March 1, which generated an interim gas capacity deficit in Ukraine last
weekend.

Alexander Paraschiy: The end of
court litigation, which lasted more than three years, has not enabled Naftogaz
and Gazprom to find common ground on the interpretation of their gas contract.
It seems like Gazprom is still not intending to supply Naftogaz with any
natural gas, even though the court obliged the Ukrainian company to buy from
Russia no less than 4 bcm annually in 2018-2019. It is likely that Naftogaz
will continue importing 100% of its gas from EU countries (which it has done
since November 2015) while Gazprom will try to continue minimizing transit of
its gas through Ukraine.  Also, we stick to our expectation that Gazprom
won’t pay Naftogaz the amount awarded by the Stockholm court in cash.