Yuriy Vitrenko: Details of the victory over Gazprom

Yuriy Vitrenko, Executive Director of Naftogaz of Ukraine, at a private meeting with ENERGY CLUB members shared details on how Naftogaz managed to defeat Gazprom in the largest commercial arbitration in history.

Ukraine had two cases in arbitration – a gas purchase contract deal and a gas transit contract deal. The final decision on the transit case was made on February 28, 2018, Yuriy Vitrenko recalled.

“In the arbitration case for the purchase of gas, the main problematic issue is take-or-pay position. Naftogaz had to pay for excessive volumes stipulated by the contract, which, however, were not needed by Ukraine. At the end of 2017, the amount of claims was $56 billion, if we add the volumes – for 2018 and 2019 – $80 billion.

Why were we able to win? Ukraine has proved that the volumes stipulated by the take-or-pay regulation made this contract enslaving for us. Although the principle itself is absolutely market-based”, he said.

In Europe, there is a certain connection to the real needs of the client, a legislative restriction, which maximum share of all their needs can be covered from one source. And there is also the opportunity to pay for certain volumes of gas and get them in subsequent years. There was no such thing in this contract, Vitrenko specified.

This was the first time in history when claims under the “take or pay” norm were completely canceled by arbitration.

Regarding the term "bonded." Not all laws have a specific provision that allows them to not fulfill contractual obligations if they are excessive. In Ukraine there were 8 lines of defense. The latter worked – regarding consumer protection under Swedish law. Naftogaz proved in court that the obligations under the gas purchase contract do not correspond to common sense and cannot be fulfilled either economically or technically. The court took the side of Ukraine.

Ukraine managed to revise the price of Russian gas for the rest of the time that the contract was in effect. We won on demand – to revise the price to the market level, untie it from oil products and tie it to the western hub. Consequently, the price from $485 in the 2nd quarter of 2014 was revised to $352 – which is significant. We had to pay $2 billion less for gas. And given the victory in the arbitration under the transit contract, we did not pay at all, because there was an offset.

Regarding the case of the transit contract. The main requirement was to revise the tariff. An alternative requirement was to compensate Naftogaz for lost profits for less transit than was stipulated in the contract. And although it was not possible to revise the tariff, Naftogaz proved that losses are also lost profits. In general, Ukraine received almost $5 billion in a transit decision.

“Relatively new transit contract. It finally contains the Ship or pay principle – Gazprom is obliged to pay for the reserved volumes, regardless of how much it pumps in the end. The fundamental difference compared to the bonded “take or pay” in the old purchase contract is the volumes, they are absolutely realistic. This contract guarantees the receipt of at least $7.2 billion”, summed up Vitrenko.

Tags: Gazprom, gas, Naftogaz, contracts, Stockholm arbitration, court, energy market, gas transit, Vitrenko

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