Just hours before Ukraine signed a $10 billion deal with Royal Dutch Shell on Jan. 24 to extract shale gas in eastern Ukraine, the nation was hit with a $7 billion bill from Russia’s RAO Gazprom, the company that stands to lose the most from Ukraine’s energy independence from Russia.
The bill is Gazprom’s attempt to charge Ukraine for the gas it did not purchase in 2012, under a take-or-pay clause in the 2009 gas agreement that regulates the purchase of gas between Gazprom and Naftogaz Ukraine.
The gas agreement was signed by then Prime Minister Yulia Tymoshenko in the middle of a gas war in January 2009, when supplies of Russian gas to Europe via Ukraine’s network were interrupted because of disputes over price and terms of supply to Ukraine.
The $7 billion bill from Gazprom represents a threat to Ukraine’s finances and is about half the sum Ukraine paid for its imported gas last year. The bill equals nearly a third of the nation’s hard currency reserves that currently stand at $25 billion.
The 2009 gas contract obliges Ukraine to buy 52 billion cubic meters of gas every year.
Under the 2009 contract, this volume can change by up to 20 percent. A request for such a change has to come six months before the start of the year, and agreed to by both sides.
This clause (2.2.3) brings the minimum volume Ukraine is allowed to purchase down to 41.6 billion cubic meters.
Moreover, if Ukraine fails to buy the contracted volume of gas by more than 6 percent of the contract in any given month without prior warning, it has to pay a fine of 300 percent of cost of gas it failed to buy in the period of April through September, and 150 percent of the cost of gas in October-March.
Naftogaz officials have said they gave a timely warning to Gazprom in 2011 about the need to reduce the purchase volume for Ukraine in 2012, but it’s unclear whether Gazprom had approved the request in writing as required by the contract.*
Ukraine imported 33 billion cubic meters of gas in 2012, according to Energy Ministry data. Most of it was imported by state-owned Naftogaz and OstChem Holding Limited (Cyprus), which belongs to gas and chemicals tycoon Dmytro Firtash. OstChem bought about 8 billion cubic meters of gas. Also, 55 million cubic meters of gas came from German RWE in November-December. Ukraine pumped this gas by reversing its own pipeline.
Ukraine pays about $430 per 1,000 cubic meters for imported Russian gas at the moment. The price includes a $100 dollar discount negotiated by President Viktor Yanukovych in 2010 in exchange for prolonging the stay of Russia’s Black Sea Fleet in Crimea.
Standard & Poor’s international rating agency seems to be the only agency that predicted the bill from Gazprom. In their Jan. 23 report, they predicted that Ukraine would get a $1.2 billion bill from Gazprom.
Standard &Poor’s also suggested that in 2013 Gazprom’s fine for take-or-pay gas could reach $5 billion.
Dragon Capital investment bank has attempted to make sense of the bill. Its experts say Gazprom did not approve Ukraine’s request to reduce the volume of gas, and are demanding the cost of 16.5 billion cubic meters of gas at last year’s price, the difference between the contracted 52 billion and purchased 25 billion cubic meters.
Ukraine has no plan to challenge Gazprom’s bill in court. Foreign Minister Leonid Kozhara said on Jan. 29 that Ukraine will seek to resolve the dispute out of court. He did not rule out, however, that Russia’s bill may eventually be restructured. Industry insiders say Ukraine will wait for Russia to go to court.
Under the 2009 contract, all disputes are to be settled in an arbitrage court in Stockholm.
Ukraine, which has been unhappy about the 2009 contract with Russia and jailed Tymoshenko to over signing it because she allegedly lacked authority to do so, has never challenged the validity of the contract or its individual clauses in court, prompting speculations in the industry that someone in the current government is benefitting from it.
Ukraine’s President Viktor Yanukovych and Prime Minister Mykola Azarov have made many unsuccessful attempts to renegotiate the contract.
Russian Gazprom has not commented on the $7 billion bill.
Russian experts are skeptical about Gazprom’s intention to go court over the bill because it might cause a “domino effect” with other business partners in Europe should the take-or-pay clause be recognized as invalid.
Ukrainian is undertaking long-term plans to diversify its gas imports. The country signed a potential $10 billion deal with a consortium led by Shell and Exxon-Mobil to develop an offshore oil and gas field, and a potential $10 billion shale gas production sharing agreement with Royal Dutch Shell on Jan. 24. And Chevron won a tender last year to explore fields in western Ukraine, but hasn’t signed a PSA yet due to environmental concerns. Ukraine is estimated to have up to 1.2 trillion in shale gas reserves.
