Shortly after Royal Dutch Shell and Naftogaz signed a shale gas production deal, Gazprom blamed Naftogaz for failing to meet obligations imposed by the gas supply contract, and issued a bill of $7 billion.
In accordance with the 2009 take-or-pay contract, in 2012 Ukraine should have paid – regardless of whether it had been imported or not – for at least 41.6 billion cubic meter of gas, while the actual amount of imported natural gas was nearly 8.7 billion cubic meters less. In addition, Naftogaz itself imported from Gazprom only 24.9 billion cubic meters of gas.
Naftogaz claimed it had no intention to pay the bill since the contract prescribed to pay for the natural gas actually supplied to Ukraine’s territory. As the stakes grow, the gas dispute is moving towards a stalemate dilemma: to go to court, or to find a compromise.
At first glance, Gazprom’s position in the international arbitration court in Stockholm would be stronger, since it might prove the violation of the 2009 gas supply contract. On the other hand, Naftogaz might file a counter-claim to Gazprom challenging the validity of gas pricing for Ukraine. And in this case, the court would not necessarily take the side of the Russia’s company.
Besides, this case will hardly come to trial for several reasons. First, the principle of take-or-pay had formally been broken in 2009-2011, as Ukraine’s real demands in natural gas were lower than 41.6 bln cubic meters. It could have been an opportunity to go to court, but Gazprom allowed Ukraine some slack, preferring instead to realize the benefits that arise from compromise.
Moreover, under the 2009 contract, Gazprom could have suspended gas supply to Ukraine as Naftogaz failed to meet its formal contractual obligations, but it has not played that card.
The price of gas is the most powerful tool of influence on Kyiv, and Moscow would hardly like to lose it. Also, if Naftogaz submits a counter-claim and wins the trial, the 2012 RWE Transgas case would not seem as an accident, but rather as a beginning of a discouraging and unpleasant trend for Gazprom.
In October, Czech RWE Transgas won its arbitration case against Russia over a take-or-pay clause in the long-term contract. The case was reportedly worth $500 million.
The take-or-pay principle is often applied by Gazprom not only to Ukraine, but also to other gas distribution companies in Europe. In favorable macroeconomic conditions, while the European economies were growing steadily, this principle had served Gazprom as an insurance against unexpected losses and risks. But after the world economic crisis broke out in 2008, many European companies bound by take-or-pay contracts to Gazprom, suffered substantial losses.
Besides, the courts – as it was in the case of RWE Transgas – tend to treat that principle as an attempt of unfair pricing, and to rule in favor of consumers, not suppliers. Moreover, in 2012 the European Commission launched an antitrust investigation to check Gazprom’s anticompetitive practices on the European natural gas market, which may result in huge penalties.
Consequently, the long-term take-or-pay contracts do not perform all of its functions for Russian gas producer any longer. The principle contributes merely to a slower decrease in gas prices for Gazprom’s clients.
Neglecting the take-or-pay principle, during 2010-2012 many Gazprom’s partners – such as Italy’s ENI and Edison, Germany’s E.ON, RWE and Wingas, France’s GDF Suez, Austria’s Econgas, Slovakia’s SPP, Poland’s PGNiG, Turkey’s Botas, and others – succeeded in negotiating natural gas price and volume reduction.
Ukraine also got a $100 discount under the 2010 Kharkiv Agreements, but nevertheless Gazprom’s gas prices for Ukraine remained 10-12 percent higher than the average European ones.
Kyiv has long been trying to renegotiate the 2009 contract with Moscow. Mykola Azarov’s government has repeatedly tried to initiate a new agreement, but negotiations with Gazprom came to nothing. Moscow made it clear that the price could be reduced in exchange for full membership in the Customs Union of Russia, Belarus and Kazakhstan, as well as Gazprom’s access to Ukraine’s gas transport system.
So far, Kyiv is trying to avoid such a scenario, and the speeches at the recent World Economic Forum in Davos confirmed that the Ukraine’s government still prefers to be uncertain on that matter.
Yet it’s obvious that the solution of the Naftogaz-Gazprom dispute lies in a political dimension, and not in a legal one. Years of Russian-Ukrainian conflict proved a simple axiom: Russia and Ukraine are equally dependent on cooperation in the gas sphere. Ukraine needs gas to increase its industries’ export potential, and Russia needs to sell natural gas to augment its budget.
This is especially true in times of economic slump and recession. Russia learned this axiom long before, exploiting Ukraine’s dependence on gas supplies and prices. But now it seems Ukraine has also fully embraced it. Therefore, both conflicting parties should keep negotiating to reach a mutually acceptable solution.
Igor Gretskiy is an associate professor at the School of International Relations at St. Petersburg State University, Russia. He specializes in Russia’s foreign relations with Ukraine and Poland.
