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Gazprom plans to terminate Naftogaz contracts: Update

02 Mar 2018 16:02 GMT
Gazprom plans to terminate Naftogaz contracts: Update

Added details of the arbitration procedure

London, 2 March (Argus) — Russia's state-controlled Gazprom plans to terminate its supply and transit contracts with Ukraine's state-owned gas supplier Naftogaz as the dispute between the firms escalates.

The firm will start the procedure quickly, Gazprom chief executive Alexei Miller said.

Gazprom will appeal to the Stockholm arbitration court to end the contracts, it said. But the court can take well over a year to reach a ruling. Naftogaz and Gazprom submitted initial arbitration requests contesting their supply and transit contracts on 16 June 2014, with rulings reached only within the last few months.

The procedure can be expedited for disputes of a simpler nature and provisional decisions can be delivered within five days if interim measures are needed to provisionally ensure a party's claim, the court said. Both contracts will remain in force until an arbitration ruling is made, under the court's process.

The arbitration court was "guided by double standards and adopted an asymmetric decision on the supply and transit contracts", Miller said.

The court made its decision on the state of the Ukrainian economy, Miller said.

Gazprom "categorically opposes" the economic problems of Ukraine being resolved at its expense, he said.

And Naftogaz is no longer obliged to buy 4bn m³ from Gazprom this year, the Ukrainian firm's chief executive Andriy Kobolev said on the country's Fifth Channel.

Gazprom did not fulfil its obligations under the contract, which was revised by the Stockholm arbitration court, he said. The firm will seek to freeze Gazprom's assets and fulfil the court's rulings, Ukrainian president Petro Poroshenko said.

The Russian firm declined to restart deliveries to Naftogaz on 1 March and returned its payment. This means that Gazprom cannot demand its take-or-pay obligation this year, Kobolev said.

Gazprom has rejected requests for higher transit volumes to European buyers and decreased pressure along its Ukrainian transit route, Naftogaz said.

By preventing other clients from increasing imports, it is impossible for Naftogaz to swiftly procure gas from other suppliers under extreme weather conditions, the firm said. The Russian firm is attempting to "freeze Ukraine or show that it is not a reliable transit country", Naftogaz said.

Overnight temperatures in Kiev have dropped well below seasonal norms in recent days, reaching more than 13°C below average at times. The cold snap was forecast to continue until 7 March.

But Ukraine will maintain transit at nominated levels, Naftogaz said. Withdrawals rose to maximum capacity and the firm has requested that customers reduce their consumption, it said.

Naftogaz requested that consumers in apartments reduce temperatures by 1-2°C. Some industrial users may have to lower their gas demand and industrial output, while schools will probably go on holiday for several days, the firm said. This will allow Ukraine to lower consumption by 8-9pc over the remainder of the cold spell, Naftogaz said.

The stockdraw has risen in recent days, reaching 116mn m³ on 28 February, up from 89.4mn m³/d earlier last month. Just under 10bn m³ remained in Ukrainian storage facilities on 1 March, above the 8.3bn m³ a year earlier. Stocks had been 3bn m³ higher than a year earlier on 10 January. But Naftogaz stopped purchasing EU supply at the start of February, choosing to rely on the stockdraw to meet demand.

Deliveries to Ukraine from Europe fell at the start of the month. Budince flows fell to 2.5mn m³ on 1 March from 7.4mn m³/d in February. And receipts from Poland fell to just above zero from 1.9mn m³/d, while Beregdaroc nominations to Ukraine dropped to 0.1mn m³/d on 1-2 March from flows of 2.9mn m³/d.

Naftogaz had planned to begin importing Russian gas for the first time since late 2015 on 1 March, but Gazprom refused to restart deliveries.

Naftogaz had received an invoice under the terms of the revised supply contract and had prepaid for gas for March, the firm said. But gas deliveries have not started.

An additional agreement to the 2009-19 supply contract between the firms is needed for flows to restart, Gazprom deputy chairman Alexander Medvedev said. The firm has returned the pre-payment to Naftogaz, it said.

Gazprom cancelled the invoice 15 minutes before the planned start of deliveries, Naftogaz said.

The Ukrainian company was to buy Russian gas at a price flat to Germany's NCG hub, chief commercial officer Yuriy Vitrenko had said.

Ukrainian foreign minister Pavlo Klimkin informed the European Commission about a possible emergency situation and has requested trilateral consultations regarding gas flows through Ukraine, the commission said.

Gas flows to the EU are normal and stable "at the moment" and the commission is ready to facilitate trilateral negotiations, it said. Low pressure on the transmission system is particularly problematic when temperatures are low and domestic demand and transit is high, the commission said.

The situation "raises concerns" for direct supply to Ukraine and "possibly" for transit to the EU, it said. All parties should find immediate solutions in line with the arbitration decisions, it said.

While Gazprom declined to comment on Ukrainian transit, it said it had raised sales to Europe.

Gazprom lifted sales to a record of 710.2mn m³ to Europe, excluding the Baltic states, and Turkey, on 1 March, it said. The firm's sales were a record high in February helped by strong withdrawals towards the end of the month.


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