Gazprom, Ukraine Agree on Gas Transit, Settle Legal Disputes
A pressure gauge reads at 30 as it sits on gas pipes. Picture used for representational purpose only. (Photographer: Vincent Mundy/Bloomberg)

Gazprom, Ukraine Agree on Gas Transit, Settle Legal Disputes

(Bloomberg) --

Gazprom PJSC and Ukraine reached a landmark agreement that will allow Russian gas to flow to Europe via its neighbor through the end of 2024 and settle all of the related legal disputes, even as the U.S. imposed sanctions on a separate Russian pipeline project in the Baltic.

Ukraine’s gas company, Naftogaz PJSC, will organize the transit of Russian gas through the country, with a booked pipeline capacity of 65 billion cubic meters for 2020 shipments, Gazprom Chief Executive Officer Alexey Miller said in a statement on Saturday. In 2021-2024, the booked capacities will reach 40 billion cubic meters a year, he said.

The bilateral agreement paves the way for the continuation of Russian gas flows through Ukraine to Europe, which has been the key transit route for Gazprom even amid the legal spats and political tensions between the two nations.

It also supports European energy security, as Russia has been the EU’s dominant and often cheapest energy supplier, providing some 37% of the fuel to the region last year. The current 10-year transit deal between Russia and Ukraine was due to expire Jan. 1.

Gazprom, Ukraine Agree on Gas Transit, Settle Legal Disputes

“The transit via Ukraine will continue, the strategic nature of the transit was understood by everyone, and I believe it would help us open a new chapter in this relationship,” EU Commission Vice President Maros Sefcovic told Bloomberg News on Saturday.

The companies also agreed to mull the possibility of gas transit through 2034, according to a protocol signed late Friday evening in Minsk, Belarus. An extension for the following 10 years may be on the same terms as the five-year deal, according to Ukraine’s Energy Ministry.

‘Precise Deadlines’

“There are very precise deadlines until when everything should happen,” Sefcovic said. “I have no doubt that everything will go smoothly as of Jan. 1 because there was full understanding of what needs to be done.”

Russia and Ukraine reached the deal as the U.S. administration imposed sanctions on Russia’s future Baltic subsea gas-export pipeline, Nord Stream 2. The $11 billion pipeline is just weeks from completion, but it has faced criticism from the U.S. It wasn’t immediately clear if the pipeline work can be completed without Swiss contractor AllSeas Group SA, which said it would halt operations.

The U.S. Treasury Department and the project’s European partners will discuss the sanctions on Saturday, Russian Deputy Prime Minister Dmitry Kozak told reporters in Moscow. Treasury didn’t immediately respond to a request for comment.

“When we will make sense of these sanctions -- when they happen, what amount of these restrictions is imposed on European companies -- after these consultations end, we can talk, it’s still too early,” Kozak said, according to an Interfax report.

Talks to find a deal between Russia and Ukraine intensified in recent days as the deadline loomed. “To be honest we have done almost the impossible in three months,” Ukrainian Energy Minister Oleksiy Orzhel told reporters in Kyiv on Saturday.

Legal Issues

Under the deal, Gazprom and Ukraine have agreed not to start any new gas lawsuits against each other and to cancel all their current legal claims that haven’t been subject to court rulings, according to Miller.

The Russian gas giant will also pay to Naftogaz $2.9 billion awarded by the Stockholm arbitration in 2018. The sum includes a $2.6 billion debt and fines accumulated thereafter, a spokesman for Gazprom said in a separate statement.

“It is very important that these $3 billion in line with Stockholm arbitration will be paid in cash if we implement all the package of proposals before year-end,” Orzhel said.

‘Amicable Agreement’

At the same time, Ukraine will withdraw its legal claims against the Russian company. Last month Naftogaz filed a lawsuit against Gazprom with a court of arbitration in Stockholm, asking to revise transit fees totaling more than $12 billion.

Gazprom and the Ukrainian government are also set to sign an “amicable agreement” on canceling an antitrust claim that has reached about $7.4 billion, including fines. All the legal issues should be resolved by Dec. 29, according to the protocol.

Ukraine’s regulator has yet to decide on the transit tariff for Gazprom. “The sides understand that the tariff has to increase” for shipments of Russian gas via Ukraine, Orzhel said. “There will be a certain increase in transportation fees based on EU methodology and to be set by the regulator.’”

Gazprom and Naftogaz may also consider a direct gas-supply deal based on prices at the NetConnect Germany gas hub, Miller said. The Russian company may offer a discount, based on the size of the purchased volumes.

Ukraine’s Orzhel thanked the U.S. for its help.

“I am grateful for their consistent position,” he said.

©2019 Bloomberg L.P.

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