Naftogaz complaint may lead to suspension of Nord Stream 2 gas pipeline

By the end of April Ukraine’s state-owned supplier Naftogaz will file a complaint with the European Commission against Russian producer Gazprom for allegedly abusing its market position, according to a legal team that has represented the Ukrainian company in previous arbitration.

Dag Mjaaland and Aadne Haga, partners at the Oslo-headquartered Wikborg Rein legal firm, told ICIS that Naftogaz will urge the Directorate General for Competition to investigate Nord Stream 2 as a predatory investment.

It will also argue that Gazprom, the company spearheading the project, should be examined for potential abuse of its position in EU markets. From a legal point of view in order to be predatory an action must be expected to exclude competition so that monopoly profits can be earned.

Gazprom has already faced a Directorate General for Competition investigation for alleged abuse in central and eastern European gas markets.

In 2018 the commission body ruled that Gazprom had to remove restrictions placed on customers to resell gas across borders. It added that the producer could not act on advantages concerning gas infrastructure, which it may have obtained by leveraging its supply position.

Some observers have argued Gazprom would further consolidate its dominance and block competition in central and eastern Europe with Nord Stream 2.

Gazprom insists the project will help the EU improve security of supply, support climate goals and strengthen the internal market.

Speaking on the side lines of the Fight for EU energy security conference in Brussels, Haga and Mjaaland said it is possible to apply for the suspension of Nord Stream 2 until the probe is completed.

The transit dispute

Naftogaz has been one of the most vocal opponents of the pipeline, which will link Russia to Germany via the Baltic Sea, as it is expected to absorb volumes currently shipped via Ukraine once a long-term transit contract ends this year.

The transit of Russian gas via Ukraine has been at the heart of an ongoing political dispute between the countries.

Naftogaz, represented by Wikborg Rein, won an arbitration case against Gazprom in February 2018.

The Stockholm arbitration tribunal ordered Gazprom to pay Naftogaz $4.63bn for under-delivered gas under the terms of a 2009 transit contract.

The payment was netted out to $2.56bn, which represented the difference that Gazprom had to pay after Naftogaz settled a $2.1bn payment for volumes delivered in 2014 and 2015, which was awarded in December 2017 as part of another case.

Haga explained the December 2017 decision was preceded by an award in May the same year, which was around issues of principle in the same arbitration, with the court rejecting Gazprom’s multi-billion dollar claims for payment of volumes Naftogaz did not receive.

Ongoing cases

Gazprom refused to accept the transit award and challenged it at the Swedish Svea Court of Appeal in April 2018. It also initiated arbitration in the same month that sought to reverse the 2017 and 2018 arbitration awards, citing procedural defects, according to Mjaaland and Haga.

Naftogaz filed for a retroactive revision of the transit tariff with Gazprom at the Stockholm arbitration tribunal in July 2018. If granted, the payment could amount to $11.58bn excluding interest.

Last year Naftogaz also filed petitions in the UK, the Netherlands and Switzerland, requesting the seizure of Gazprom assets as a means to enforce the $2.56bn award.

Mjaaland and Haga confirmed there was now a consolidated arbitration proceeding concerning the cases filed by both companies. The lawyers said the Russian producer was expected to make its statement of claim on 14 June.

This would be followed by a statement of claim and a statement of defence by Naftogaz in November 2019. The main hearing is scheduled for the summer of 2021 and a decision is expected in the second half of that year.

European assets

Mjaaland and Haga said the Naftogaz proposed seizure of Gazprom assets had turned out differently in each jurisdiction.

In Switzerland, seizures were halted as Gazprom had put its assets out of reach.

In the UK the producer was ordered to provide security for Naftogaz’s claim exceeding the value of the seized assets. The sale of the assets and payments to Naftogaz was postponed until the ruling by the Svea Court of Appeal concerning the 2018 award, which is expected next year.

In the Netherlands assets were seized and a decision on whether Naftogaz can sell or otherwise turn these into payment of the $2.56bn award is expected in late May.

Gazprom has insisted in repeated statements to the press that it would continue to defend itself.