Ukraine GTSOU prepares for Gazprom transit arbitration – CEO

LONDON (ICIS)–Ukrainian gas transmission system operator GTSOU and incumbent Naftogaz are gearing up to start arbitration against Gazprom for partial non-payment of transit services, GTSOU’s CEO Sergiy Makogon told ICIS on 7 September.

The Russian producer has been paying 30% less than expected under its five-year contract after flows at the eastern Sokhranivka border point with Russia were suspended in May, Makogon said.

The reduction in payment reflects the loss of transit via the Sokhranivka border point, which amounted to 32.4mcm/day before being suspended.

GTSOU declared force majeure at the interconnection point amid concerns Russian occupants were diverting transit gas to the occupied territories and offered to reroute volumes to the Sudzha entry point under Ukrainian control.

Gazprom declined to take up the offer and also reduced flows via the Sudzha border point from the offered capacity of 77.2mcm/day to an average of 41mcm/day since May.

Under the contract held with Naftogaz, as the organiser of transit, Gazprom is expected to transit and pay for 109mcm/day of gas shipped to Europe.

Gazprom is expected to pay for the transit irrespective whether it ships or not and Makogon said Gazprom’s failure to pay was a violation of the contract.

At time of writing, Gazprom had not responded to a request for comment.

Although reduced by 60% against contracted volumes, the Ukrainian transit for Russian gas continues to remain in operation despite earlier expectations that it would be diverted to the newer Nord Stream corridor delivering gas to Germany.

As of early September, Russia stopped all flows via Nord Stream 1, citing technical problems with its compressors.

CORPORATE GOVERNANCE

Ukrainian and European traders told ICIS the stability and predictability of the Ukrainian gas infrastructure was critical, particularly now when markets are on edge as Gazprom has been cutting off supplies to less than a quarter of European contracted levels.

They raised concerns about proposals by the supervisory board of MGU, the shell company overseeing GTSOU, to dismiss the operator’s management, including Sergiy Makogon, just as the country is fighting a war and preparing for a difficult winter.

Makogon said disagreements with the supervisory board appeared earlier this year.

He had approached the government in May with a proposal to reform the company’s corporate governance by scrapping the two-tier structure and establishing a new supervisory board directly at GTSOU, as is the case with other state-owned enterprises.

International stakeholders such as the World Bank or the Energy Community, an EU-affiliated institution helping Ukraine to reform its energy markets, have aligned in expressing support for corporate governance reform at GTSOU, according to letters sent to the Ukrainian energy ministry and seen by ICIS.

Makogon said the mandate of the current MGU supervisory board would expire in two years’ time and that some members may not want the board to be disbanded earlier.

In a statement on its website, MGU said it supported proposals to establish a supervisory board directly at GTSOU but noted the need for financial improvements at GTSOU.

PREPARING FOR WINTER

The operator has been facing multiple challenges in supporting the repair of war-damaged infrastructure.

The cost of the destruction in the energy sector is not known but analysts say country-wide damages may be worth close to $1trillion.

Makogon said as many as 300,000 households were disconnected from gas supplies in the early days of Russia’s war this spring.

The operator has been working with distribution companies to restore to supplies but there are still 236,000 households in the occupied eastern territories without access to gas.

This has meant that gas demand has dropped from 41mcm/day before the war to around 18mcm/day currently, with the worst affected being industrial consumers who had been hit by soaring gas costs as well as infrastructure damage.

Nevertheless, Makogon said the country has been gearing up for the heating season, with GTSOU taking part in multiple exercises to test the resilience of the system, including the full reversal of gas flows from west to east.

Ukraine is expected to rely primarily on its local production and stored gas to cover demand but Makogon said there was also physical import capacity available in case of need.

He said the total physical import capacity with Hungary, Poland and Slovakia which had doubled to 54mcm/day remained in place and that neighbouring countries such as Hungary and Poland had been working to test it.