Compensation claims possible from EU buyers if Russia cuts gas supplies – negotiator

LONDON (ICIS)–European energy companies which have had their gas supplies cut off by Russia should continue nominating volumes on a daily basis to ensure they receive the correct compensation packages in case of arbitration or compensation court cases, a negotiator has told ICIS.

Speaking to ICIS, Morten Frisch senior partner in UK-based Morten Frisch Consultancy said affected companies would normally be entitled to receive a discount on default gas, which involves quantities of gas a seller failed to deliver for reasons other than maintenance or force majeure.

Such compensation can be claimed under a gas sales agreement by a gas buyer. As an alternative to default gas, buyers can also claim a lump sum compensation payment, Frisch said.

“This means that if gas buyers claim default gas or a compensation payment in line with the terms of the gas supply agreement and the gas seller refuses to provide any of the two contractual remedies on a timely basis, gas buyers could initiate court proceedings against suppliers such as Gazprom and likely win.

“Gas buyers may be entitled to receive the equal amount of contracted gas that had not been delivered normally at a 30% price discount from the applicable invoice price according to the pricing formula in the contract when the default/shortfal gas is delivered,” Frisch said

Alternatively, they may opt for a lump sum financial compensation payment said Frisch, a gas strategist and negotiator, who has 25 years’ experience acting as an expert witness in gas contract arbitrations and court cases.

“If the gas seller has failed to deliver [the] buyer’s contractual gas supply nominations due to gross negligence or wilful misconduct then the lump sum financial compensation would not be subject to any limitation,” he said.

CONTINUE NOMINATING

However, in order to strengthen their cases for obtaining compensation and to facilitate the calculation of this, gas buyers should continue nominating supplies on a daily basis even if they do not receive gas.

“If buyers fail to continue sending to the seller daily gas supply nominations, their case could potentially be weakened,” he said.

Since April, Gazprom has cut or reduced supplies to companies across Europe, even though their contracts had not expired and the supply cuts were not the result of force majeure.

The latest company to have had its supplies cut is France’s Engie, whose gas imports will be suspended from 1 September for non-payment in full of July deliveries, according to Gazprom.

In the case of Poland and Bulgaria, incumbents PGNiG and Bulgartransgaz held supply contracts with Gazprom until the end of 2022 but the Russian producer suspended deliveries in April amid claims the customers did not comply with a Kremlin-initiated ruble payment scheme.

Other companies such as Denmark’s Orsted and Anglo-Dutch Shell have also had their imports curtailed for similar reasons.

None of the companies which had their supplies cut or reduced have initiated arbitration or court cases against Gazprom yet.

However, Frisch believes that once the current energy crisis abates, affected buyers would first make compensation claims and if such claims are not accepted by Gazprom they will consider arbitration or court cases.

“Arbitration or court cases may not be feasible right now. Gazprom might use sanction-related excuses not to turn up to hearings. However, once the dust settles, I can see many companies starting arbitration or court proceedings. Should the arbitration route fail, the gas buyer can use a court case as a fallback position” he said.