Jan 17, 2022
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“Gazprom” caught Poland on a double redneck

"Gazprom" caught Poland on a double redneck


Gazprom applied to the Stockholm Arbitration Court with a demand to raise the price of gas for Poland retroactively – from December 8, 2017 and from November 9, 2020. Chairman of the Board of the Polish gas monopoly PGNiG Pavel Mayevsky called the claim completely unfounded, noting that the company is ready to “demonstrate this in the Arbitration Court.” Gazprom’s bids for price increases were filed in response to the Polish company’s requests for price reductions.

“Taking into account the fact that commercial negotiations to revise the price in accordance with the requirements of Gazprom Export did not lead to an agreement, the Russian company, in accordance with the contractual terms, referred these disputes to the arbitration tribunal for resolution,” Gazprom Export explained.

Disputes about the revision of gas prices arise between Poland and Russia regularly, because the contract allows them to be reviewed every three years, including retrospectively. The Polish side has already exercised the right to arbitration in 2011 and 2015, and in March 2020 achieved a change in the price formula of the contract. Then the court not only supported Warsaw’s demand and changed the formula from an oil peg to a peg to spot prices, but also ordered Gazprom to return to the Poles about one and a half billion dollars, which he had to do.

But shortly after the revision, prices in the spot markets jumped, and in 2021 at the moment they exceeded $2,000 per thousand cubic meters. It turned out that in such conditions the oil peg is much more profitable, so in October 2021 PGNiG again asked Gazprom to reduce the price. Spot gas prices in Europe in January averaged over $1,000 per 1,000 cubic meters, while with a net oil peg, the price would have been around $300.

The long-term agreement between PGNiG and Gazprom provides for the supply of up to ten billion cubic meters of gas per year to Poland. It expires at the end of 2022, and the Polish leadership has repeatedly stated that it does not intend to renew it. In addition, Warsaw is one of the main opponents of the Russian Nord Stream 2 gas pipeline, which, apparently, does not contribute to constructive negotiations with Gazprom.

According to lawyers, after the decision of the arbitration in March 2020, which tied the price of the contract with PGNiG to spot quotations, Gazprom is in a better position. True, in recent years, European courts have rarely ruled in favor of a Russian company. Anastasia Cheredova from Vegas Lex believes that the likelihood of resolving the dispute in favor of Gazprom largely depends on the “composition of arbitrators.”

Deputy General Director of the National Energy Institute Alexander Frolov believes that the litigation is due to the desire of Poland to defer payments under the contract, but it is unlikely to succeed.

– An important circumstance in this story is that at the end of last year, PGNiG management turned to Gazprom with a request to reduce prices, since they are not profitable for them. Although these prices are raised according to the pricing formula, which Poland itself has demanded to be revised.

The Polish side insisted that pegging to oil prices is not a market mechanism. From European to Russian, it translates something like this: “Although oil is a market product, and the link to it is no less marketable than any other mechanism, we do not want to pay at this price, because we calculated, and it turned out that it is higher, than if we were paying on an exchange-pegged basis.”

But now the situation has changed, and respected agencies like Bloomberg are writing in all seriousness that thanks to American LNG, gas prices in Europe are declining. Although they are declining from two thousand dollars to a thousand per thousand cubic meters, and if someone had said a year ago that this was a low price, he would have been ridiculed. And based on these quotes, the price of gas that Poland receives from Russia also changes.

When the Poles noticed that this price was “for some reason” changing upwards, they again asked to reduce it. And now imagine a situation in which one side first asks to change the formula for calculating the price, because it is “not a market one”, and then itself demands to abandon the mechanism on which it insisted.

In such circumstances, Gazprom’s position is only getting stronger. We have not seen the case file, but it is clear that under the new pricing formula, the company should have received more money than it actually received. Although it is unlikely that there was a very large underpayment.

The interesting question is why this controversy has arisen now. On the good side, they should have agreed that earlier there was an overpayment to Gazprom, and he returned one and a half billion, and then there was an underpayment, and now Poland is returning several hundred million. This is a purely working story, which, after the decision to change the pricing principles, does not require the intervention of arbitration.

But now everyone has little money. Of course, except for Gazprom, which has a lot of money. The Poles faced a simple choice – either they pay now, or they drag out the negotiations as much as possible and delay the moment when they have to pay. Perhaps, during this period of time, the situation on the gas market will somehow stabilize, and financial losses will no longer be so painful. In my opinion, that’s the only point.

“SP”: – Does “Gazprom” have a chance of success?

— There is no particular problem for Gazprom in this regard. It seems to me that it does not matter to them whether they will be paid now or a little later. Therefore, they calmly go to trials. The court will be obliged to raise its own decision for the period 2014-2017 with the calculations of the parties and, in theory, recognize that the Polish side must pay extra. But before this happens, it may take several months or even a year. Proceedings relating to 2014-2017 were resolved only in 2020.

The request to reduce gas prices also does not play in favor of PGNiG. It’s as if a client came to a car dealership, asked to sell him an elite car at a huge discount, and after the refusal he would go to court. Of course, gas is not a car. This is a fundamentally important product. But after all, the Russian side did not demand to change the principles of pricing, so why on earth Gazprom should sell raw materials cheaper is not at all clear.

If nothing had changed, Poland would now receive gas at $300 and would not blow a mustache. For a year they would have paid about three billion dollars, and now they will have to pay about ten billion. This, of course, is a very rough calculation, but, most likely, Poland should already pay more than Gazprom returned to it.

It seems to me that with all these proceedings, Poland is simply delaying the inevitable, and as a result, the judge will hit the gavel and issue a verdict not in favor of PGNiG, although this is a question for lawyers. But, in my opinion, Poland will in any case have to pay more than if it had not run around the courts and demanded a revision of prices.

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