Russia halts gas supplies to Ukraine as fight between Naftogaz and Gazprom starts in Stockholm Court

Head of the Ukrainian Naftogaz state oil and gas firm Andriy Kobolev (R) speaking next to Ukrainian Prime Minister Arseniy Yatsenyuk (L) during a special hearing of the Cabinet ministers in Kiev, June 16, 2014. After a series of meetings in Brussels and Kyiv aimed at settling the price argue between Ukraine’s and Russia’s state-owned energy monopolists – Naftogaz and Gazprom – Stockholm Arbitration Court will finally step in to help find the truth, kyivpost.com reports.

Naftogaz filed a lawsuit against Gazprom early in the morning on June 16, said Andriy Kobolev, oil and gas giant’s chief executive officer, during the Cabinet of Ministers meeting. Naftogaz demands to make changes into the pricing of 2009 contract between two companies.

“Company demands to set a fair and market-based price for the gas supplied by Gazprom to Ukraine,” reads the statement on Naftogaz’s website. The legal action also includes the demand for Gazprom to reimburse the overpaypament of $6 billion accumulated since 2010.

Gazprom wants $486 to be paid per 1,000 cubic meters of gas but is willing to give a $100 discount, while Naftogaz wants the $268.5 price that in effect under overthrown President Viktor Yanykovych’s pro-Russian regime. Ukrainian Energy Minister Yuriy Prodan, in a hustle for compromise, named a $320 price, but it was not met by Russian side with enthusiasm.

The contract implies the possibility of changing the conditions of pricing, a point of crucial importance for Ukraine’s court battle, Kobolev added. Besides, the 2009 contract calls for settling disputes in the Stockholm Arbitration Court.

“I think we have very, very good chances in court,” Prime Minister Arseniy Yatsenyuk said. He also ordered to work out a law outlining country's energy policy under current tense situation which needs increasing the amount of supplies through reverse flows from the European Union.

Meanwhile, Gazprom filed its own lawsuit with the Stockholm Arbitration Court on the same day. It claims Naftogaz owes Gazprom $4.5 billion for the gas supplies.

Moreover, starting June 16, Gazprom initiated supplying the gas on a pre-paid basis, after threatening to doing so for the last several weeks. “Gazprom has critically limited the gas supplies starting today,” said Naftogaz’s Kobolev.

“Ukraine can just take what it wants from the pipelines (supplying Russian gas to the European Union), as the gas intermingles in reality. This will mean a shortage of gas in pipelines to Europe, and perhaps the prospect of disruptions in gas supply to Europe later this year,” reacted Timothy Ash, emerging market analyst for Standard Bank in London.

“At least the summer months are the low season for gas use - but they are still important for pumping gas into storage in western Ukraine to maintain gas flow through the winter. So the message is that this is unlikely to bring a short-term hit to gas supply in Europe, but it will build up problems for the winter, unless a deal is reached quickly,” he added.

Mykhailo Gonchar, head of Nomos energy consultancy, believes Gazprom is interested in portraying Ukraine as an unreliable partner in the energy business in the eyes of the European Union. In such a case, Gazprom could more easily convince EU partners of the need for its South Stream project – the pipeline connecting Russia and the EU through the Black Sea, bypassing Ukraine. But the project needs EU financing and Bulgaria, one of the EU member nations, earlier this month  froze work on the South Stream pipeline at the EU's request.

The gas war is part of Russia’s aggressive policy against Ukraine since the democratic EuroMaidan Revolution on Feb. 22 ousted Yanukovych, who is being sheltered in Russia against charges of mass murder and mas corruption.

Institute for Energy Strategies analyst Yuriy Korolchuk said that Ukraine's court case would be stronger if all its debts with Russia were settled beforehand. However, this remains a complicated issue since the size of Ukraine’s debt depends on the price it is being charged. And that price has been a moving target.

Anton Antonenko of DiXi Group analytical center thinks that the current gas crisis should be viewed as an opportunity to increase Ukraine’s energy efficiency and to move towards energy independence from Russia.

Yatsenyuk on June 11 said that country has 18.3 billion cubic meters of gas stored underground, enough for Ukraine to survive without importing Russian gas until October.

Russia supplied Ukraine with around 28 billion cubic meters of gas last year, while 20 billion came from home production and another 2 billion came from the European Union through reverse flows.