Gazprom starts official gas transit termination procedure with Ukraine

Russia’s Gazprom said it officially notified Naftogaz on Monday that it had started the termination procedure of its transit and supply contracts following a fresh dispute over a Stockholm arbitration verdict last week.

Alexey Miller, chairman of Gazprom’s management committee said it had launched the procedure because of “significant damage of commercial balance between the two contracts”.

Miller referred to the awards made by the Stockholm arbitration tribunal in two separate disputes related to Gazprom’s supply of gas to Naftogaz and the transport of Russian gas to Europe via Ukraine.

Under the latest decision in the four-year transit dispute made by the Stockholm tribunal last week, Gazprom is now required to pay Naftogaz a net $2.56bn for under-delivered gas.

A source close to discussions said the transit contract could not be unilaterally terminated and added that it may take a few months until the procedure would be concluded. The transit contract is due to end in 2019.

Russia’s announcement about the termination procedure comes as the European Commission’s energy vice-president Maros Sefcovic said on Sunday it had reached out to both Ukrainian and Russian authorities.

Sefcovic said the parties had confirmed that the transit of natural gas to European markets “was not endangered”.

Naftogaz said on Sunday that the flow of gas to Europe and Moldova had been hovering around 265 million cubic metres (mcm)/day in the first three days of March.

On Friday Russia’s Gazprom insisted it would terminate the two contracts, raising concerns about the future of transit gas to European and Turkish markets as well as the supply of Russian gas to Ukraine.

Earlier on Thursday Gazprom said it would not supply the pre-paid gas to Ukraine, returning the cash to Naftogaz. The company insisted an additional agreement to the actual supply contract would have to be signed for supplies to start, acknowledging that it had returned the cash to Naftogaz.

To offset the Russian supply shortfall, Naftogaz had to secure gas from European markets.

This meant that Naftogaz had to pay 34% more for short-term EU spot natural gas at the end of last week than it would have paid Russia’s Gazprom under the terms of their new hub-indexed contract, Yuri Vitrenko, Naftogaz’ chief commercial officer has said.

Supplies from Gazprom to Naftogaz were meant to resume at the beginning of the month, under a German NCG-benchmarked deal. Ukraine was required to purchase a minimum 4 billion cubic metres of gas per year from Russia following a decision by the Stockholm tribunal last December.

But with Gazprom deciding it would instead terminate its Naftogaz supply and transit contracts, Naftogaz returned to the EU markets to plug the gap.

Flows from Russia to Ukraine were earmarked at 18mcm/day.

By Monday morning EU imports from Poland, Slovakia and Hungary were together delivering around 26mcm/day.

Forward prices on EU hubs did not firm much, suggesting no immediate risk of a cessation in flows was being factored into contracts.

Vitrenko said the additional cash spent on EU, rather than Russian imports would be billed to Gazprom. tom.marzec-manser@icis.com and aura.sabadus@icis.com