FINANCIAL STATEMENTS
ANNUAL REPORT 2017
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requirements. As the practice
of implementation of the new
transfer pricing rules has not
yet developed and wording of
some clauses of the rules may be
subject to various interpretations,
the impact of challenge of the
Group’s companies transfer pric-
ing positions by the tax authori-
ties cannot be reliably estimated.
Arbitral Tribunal requests.
Gas Sales Arbitration.
The Gas Sales Arbitration was
initiated by both Naftogaz and
Gazprom on 16 June 2014 under
the auspices of the Arbitration
Institute of the Stockholm
Chamber of Commerce. In
its Request for Arbitration,
Gazprom claimed payment of
unpaid invoices for gas delivered
under the Gas Sales Contract
from November 2013 to May
2014, while Naftogaz claimed a
retroactive revision of the price
under the Gas Sales Contract,
and compensation for previous
overpayments under the prices
applied before the revision.
In addition, Gazprom has later
added a claim for payment of gas
which Gazprom did not deliver,
but which Naftogaz allegedly
nevertheless was obliged to pay
for under the Contract (the “take
or pay” claim).
On 31 May 2017 The Arbitral
Tribunal rendered a separate
award in the Gas Sales Arbitration.
The separate award is final and
legally binding, and sets all
legal and factual issues required
to resolve the parties’ claims
except for certain elements
and/or values of a numeric or
quantifiable nature that had
to be defined before the Final
Award. The Tribunal in its award
of 31 May 2017: (a) declared
“take or pay” claim invalid from
the date of the Contract and up
to the date of the Final Award;
(b) decided that Naftogaz is
entitled to a market-reflective
reduction of the sales price and
to gas market indexation of the
price formula, with retrospective
effect from April 2014; (c) has
declared invalid provisions
in the Gas Sales Contract in
respect of a destination clause,
illegally prohibiting sales of the
gas outside of Ukraine from
the date of the Contract. The
Tribunal has obliged the parties
to determine the elements of gas
price formula to be used for gas
supplies starting from 27 April
2014 through negotiations. Such
negotiations took place during
June-August 2017, but the parties
failed to reach agreement on
remaining issues, and thus, the
Tribunal had to decide on such
issues on its own. After additional
oral hearings in October 2017,
all remaining issues and any
resulting monetary claims were
left for the final award.
On 7 November 2017 Gazprom
has challenged the separate
award on Gas Sales Arbitration
in the Court of Appeal of Svea
(Sweden).
On 22 December 2017 the Arbi-
tral Tribunal rendered the Final
Award in the Gas Sales Arbitration,
stating the following:
•
Contract price for natural gas
shall be calculated with 100%
reference to the European
hub price under the revised
price formula.
•
Gazprom “take or pay” claim
was fully rejected.
•
Annual contract quantity
(“ACQ”) of gas that Naftogaz
is obliged to purchase during
2018–2019 was set at the
level of 5.0 billion cubic
metres. This Final Award also
contains a quarterly distribu-
tion of gas deliveries in 2018.
•
The contractual annual vol-
ume of gas on “take or pay”
terms (“MAQ”) was set as 80%
of ACQ.
•
It is not responsibility of
Naftogaz to pay for gas vol-
umes delivered to occupied
territories of the Donetsk and
Luhansk regions to the parties
other than Naftogaz.
•
As a result, as set in the
Final Award, and taking the
obligation to pay for gas
consumed but not paid for,
Naftogaz was ordered to pay
to Gazprom USD 2,019 million
and late payment interest in
amount equal to 0.03% on
any amount overdue for each
day of delay in payment after
22 December 2017 until the
payment has been made.
Later, on 17 January 2018, the
Arbitral Tribunal has amended
this amount, and has set a
net payable from Naftogaz
to Gazprom at the level of
USD 2,030 million plus respec-
tive late payment interest
after 22 December 2017.
During January-February
2018 Naftogaz and Gazprom had
a number of negotiations to agree
the gas supply process in 2018.
Following the Final Award in this
case, in February 2018 Naftogaz
has made a prepayment for
gas deliveries to be made in
March 2018. However, Gazprom
has returned this payment and
refused to make gas supplies
in March 2018. Such actions
from Gazprom currently prevent
Naftogaz from fulfilling the Final
Award requirements in respect
of offtaking MAQ volumes in
2018, and could result in a new
claim from Naftogaz in respect of
compensation for losses against
Gazprom. The Company considers
Gazprom’s refusal to supply gas as
a contractual violation and non-
compliance with the Tribunal’s
Final Award.
Gas Transit Arbitration.
Naftogaz initiated the Gas Transit
Arbitration on 13 October 2014
under the auspices of the Arbi-
tration Institute of the Stockholm
Chamber of Commerce. In its
Statement of Claim, Naftogaz
claimed a revision of the transit
tariff with retroactive effect, com-
pensation for underpayments
as a result of tariff revision, com-
pensation for underdeliveries,
amendments to the Gas Transit
Contract authorising Naftogaz to
assign its rights and obligations
under the Contract to “Ukrtrans-
gaz” PJSC or any other entity
designated as transmission sys-
tem operator, and certain other
adjustments to the Contract. As
at 31 December 2017, Naftogaz’s
maximum monetary claim stood
at more than USD 12.5 billion
including interest (up to USD
10.6 billion excluding interest).
Gazprom has submitted a coun-
terclaim in amount of approxi-
mately USD 7.0 million including
interest (up to USD 5.3 million
excluding interest), but has
reserved the right to make addi-
tional counterclaims after receiv-
ing the award in the Gas Sales
Arbitration.
Both the Gas Sales Arbitration
and the Gas Transit Arbitration
were initiated by Naftogaz fol-
lowing unsuccessful efforts to
reach agreement with Gazprom
in negotiations. The monetary
claims in both Arbitrations have
been updated on a continuous
basis until the awards, inter alia in
respect of interest calculations.
On 28 February 2018 the Arbitral
Tribunal rendered the Final Award
in the Gas Transit Arbitration, stat-
ing the following:
•
Naftogaz’s claim for mini-
mum contractual volume
of gas transit (underdeliv-
eries) during 2009–2017
was decided in favour of
Naftogaz. As a result, the
Tribunal awarded approx.
USD 4,674 million to be paid
in favour of Naftogaz by Gaz-
prom for its failure to deliver
minimum gas transit con-
tract volumes. This amount
represents compensation of
losses in this respect, plus
interest up to 28 Febru-
ary 2018.
•
Naftogaz also claimed com-
pensation of VAT that arises on
damages awarded Naftogaz
for underdeliveries, taking
effect as at 1 January 2016.
However, the Tribunal has
rejected such claim from Naf-
togaz.
•
Naftogaz’s claim for underpay-
ments were not supported,
as Naftogaz in its request for
transit tariff revision in 2009
did not follow the contractual
requirements. At the same
time, transit tariff was retro-
spectively revised in relations
to the adjustment to the tran-
sit tariff as a result of the gas
price made by the Tribunal in
the Gas Sales Arbitration.
•
The Tribunal rejected Naf-
togaz claim in respect of the
possibility to assign its rights
and obligations under the
Contract to “Ukrtransgaz” PJSC
or any other entity designated
as transmission system opera-
tor.
•
The Tribunal has also rejected
Naftogaz claim in respect of
adjustments to the Gas Transit
Contract according to the EU
competition and energy law,
stating that it is not the role
of the Tribunal to implement
reforms in Ukraine but should
be decided by the Ukrainian
government.
Further, the Tribunal has per-
formed a set-off in respect of
amounts owing between the
parties pursuant to the Gas Sales
Arbitration and Gas Transit Arbi-
tration, supporting a respective
Naftogaz request. Consequently,
a single amount of USD 2,560 mil-
lion payable by Gazprom in favour
of Naftogaz was ordered by the
Tribunal. This amount also bears
a late payment interest. There
was no settlement of this amount
performed by the date of these
separate financial statements. Tak-
ing that Gazprom has appealed
the final award in the Gas Transit
Arbitration, and the fact that the
amount was not settled by the
date of these separate financial
statements, management follows
a prudent approach and does
not recognise the amount owed
by Gazprom after the set-off, as
decided by the Tribunal, as receiv-
able as at 31 December 2017.
As stated above, after both Final
Awards were rendered, Gazprom
representatives officially declared
a refusal to resume deliveries to
Ukraine as ordered by the Tribu-
nal in the Gas Sales Arbitration.
Additionally, Gazprom refused
to confirm its intention to settle
outstanding amount as decided
by the Tribunal in the Gas Transit
Arbitration. Instead, Gazprom has
officially suggested to amend
both contracts or to terminate
them, and thus to reverse the
awards of the Tribunal. Gazprom
actions violate and neglect the
awards rendered by the Tribunal
that are final and binding for Gaz-
prom. Naftogaz finds this position
unacceptable and has rejected
Gazprom’s proposals to make
amendments to the contracts.
Despite the fact that the Tribunal
has rejected Naftogaz claim on
VAT compensation of losses
for underdeliveries after 1 Jan-
uary 2016, Naftogaz treats the
amount awarded as a contractual
price of services adjustments,
that is subject to VAT under the
Tax Code of Ukraine. As a result,
Naftogaz has recognised respec-
tive VAT liabilities amounting to