Ukraine's reliance on Russian gas supplies - 14 billion cubic meters out of 42 billion consumed in 2014 - is a major risk for the nation’s independence.
The brief cutoff of gas supplies in 2006 and 2009, in response to Ukraine’s refusal to serve Russian President Vladimir Putin’s interests, undermined Ukrainian energy security, says Vladyslav Vlasiuk, legal expert at ePravo, a law firm in Kyiv.
Since those events, Gazprom’s gas pricing has become an instrument of foreign policy rather than a market tool.
“You can imagine how difficult it might be for Ukrainian officials to recuse themselves from the energy sector since our politicians were making a fortune off of it for years,” says Stanislav Batryn, a partner at Lions Litigate.
“When we filed a lawsuit in 2013 against the Cabinet of Ministers of Ukraine and the Ministry of Energy and Coal Industry seeking the nullification of the 2009 gas contracts, in all instances it was unanimously ruled these are relationships between two independent economic entities. It means that any interference by (former presidents) Viktor Yushchenko, Viktor Yanukovych and later, Petro Poroshenko in this sector was not legitimate. The only exception is the minister of energy and coal industry because the state holds a 100 percent stake in Naftogaz.”
The two monopolies, Gazprom and Naftogaz, are suing each other in the Stockholm Arbitration Court over the price of gas supplies and use of the Ukrainian gas transportation system.
A ruling is expected by summer 2016 at the earliest.
“We told Gazprom that we would like to have a price review of the contract,” says Naftogaz managing director Yuriy Vitrenko. “They refused.”
Ukraine’s energy giant Naftogaz, which employs 14,000 people, now pays Gazprom $329 per 1,000 cubic meters of gas, while at the end of last year it was paying $378. The discount was made after European Union-brokered talks in Brussels.
According to Vlasiuk, Ukraine has an advantage regarding the determination of price due to clearly discriminatory Gazprom pricing.
“Unless Ukraine departs from $268.5 per 1,000 cubic meters, fixed by Yanukovych’s agreements with Gazprom in early 2014, and recognizes another price, for example $378, as a fair one, Ukraine will win this claim,” Batryn believes.
To support its stance in Stockholm, Ukraine issued all payment documents mentioning the price of $268.5 per 1,000 cubic meters of gas. This looks like a wise move and inspires optimism that the compromise price will be set at the level of $320 and leaves no chance for the $400-$485 estimate, according to Batryn.
He says that Shearman & Sterling, a company who recently won a case on behalf of Russia’s former oil giant Yukos, had proposed representing Naftogaz. Instead, Naftogaz commissioned the services of Wikborg, Rein & Co., a Norwegian company.
The Ukrainian government needs not only legal expertise, but also powerful lobbying instruments, because Gazprom has hired top-notch lawyers, according to Batryn.
ePravo’s Vlasiuk admits the arbitration process lacks transparency.
Naftogaz refused to comment on the matter, citing a desire to preserve the integrity of the proceedings.
Last year, Gazprom was the source for 14 billion cubic meters of gas for Ukraine’s energy market, or 33 percent of the nation’s needs. Ukraine has tried to diversify supplies with limited success.
Prime Minister Arseniy Yatsenyuk says that he’s proud that Ukraine is now buying more gas from companies in the European Union, such as Norway’s Statoil and Germany’s RWE, than from Russia.
Vitrenko says Ukraine can buy up to 20 billion cubic meters of gas from the West, almost half of the country’s annual needs.
Russia’s war against eastern Donbas is, however, taking an economic toll on Naftogaz. Last year, Naftogaz lost about $700 million due to Russia’s military aggression.
