Legal aspects of Ukrainian gas storages usage for European traders
Surging demand for Ukrainian gas storages
In recent months, the European gas storage capacities have been operating at their full, with the injection rates being almost complete, disallowing to satisfy demand for capacity in the nearest summer season. It is suggested that undergoing COVID-19 containment measures indeterminably hit gas demand across the European continent, particularly in the industrial and commercial sectors (Wood Mackenzie Analysis). For this reason, European traders start considering Ukrainian gas storages that may offer 32 bcm of overall capacity. Such earmarked capacity would represent significant source for European traders to store the gas.
While Ukraine wildly succeeded in implementing EU's Third Energy Package, for many European companies the Ukrainian legal landscape in gas-trading sphere remains largely unrevealed. In a foreshadow of demand for Ukrainian gas storages capacities from European traders, we perceive the particular attention to the legal aspects of the Ukrainian gas storages use.
On this occasion we earmarked in a nutshell the key legal points for European traders that are contemplating to deal with the Ukrainian gas storages:
1. Contracting with the Ukrainian Storage System Operator (SSO)
- Ukrainian regulator approved a standard form of contract that SSO is allowed to use while contracting with customers for gas storing. That standard form establishes all essential conditions of such contract that would include tariffs, coefficients and payment terms.
- At the same time, the Ukrainian regulatory outlook comprehends some ins and outs for traders wanting to utilize Ukrainian gas storages. Since the contract for gas storage with SSO is a standard form that parties could not derogate from, the traders have to be particularly mindful of the provisions of applicable Ukrainian law that would regulate the gas storage use in Ukraine.
International Arbitration. The particular attention should be drawn to such conditions as dispute resolution clause. If SSO signs gas storage contract with foreign party, the parties are allowed to opt for either domestic litigation in Ukraine or for international commercial arbitration. For the last few years market players started more frequent use of international arbitration pertaining to disputes in gas storage, gas price review of long-term gas sale and purchase agreements. The biggest workload of arbitration disputes appurtenant to gas trading are considered under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) and London Court of International Arbitration (LCIA). At the same time, traders and SSO frequently opt for the UNCITRAL rules in such categories of dispute, while tailoring the necessary provisions of arbitration procedure to better suit commercial needs of the parties involved.
2. Traders may benefit from customs warehouse regime
- Natural gas transported to the territory of Ukraine for the purposes of gas storage is imported with the customs regime of “customs warehouse”. This regime allows companies, including foreign ones, to store gas for up to three years without paying any taxes and customs charges with the condition of further transportation of natural gas from the territory of Ukraine. To make use of this custom regime traders would need to sign an additional agreement with SSO on customs declaring procedure.
- Starting from November 2019, the Ukrainian customs regulations established the requirement for the security customs charges, that is payable when transporting natural gas in the “customs warehouse” regime. However, the national gas storage operator is currently in talks with the Ukrainian Government to eliminate such charges in order to bring Ukrainian gas storage conditions more attractive for European traders.
- If trader so decides, it will be allowed to sell the gas in the domestic market of Ukraine after having the custom clearance of the gas volume.
In addition to Ukrainian gas storage capacities, Ukrainian TSO recently introduced short-haul service for European traders which effectively complements the “customs warehouse” and allows for discounted transmission between dedicated interconnection points with adjacent countries as Poland, Hungary, Slovakia, and Romania. To further facilitate the movement of gas flow from Europe to Ukraine, virtual interconnection points have been put in place on Ukraine’s western border to boost Ukraine’s import capacity.