Gas Price Negotiations and Dispute Between BOTAS and Gazprom: A Legal Insight

January 13, 2016 | 00:00
Gas Price Negotiations and Dispute Between BOTAS and Gazprom: A Legal Insight
Gas Price Negotiations and Dispute Between BOTAS and Gazprom: A Legal Insight
In Q4 2015 the Petroleum Pipeline Company of Turkey (BOTAŞ) filed a request of arbitration with the International Chambers of Commerce (ICC) against Gazprom by virtue of a contract between the two companies that provided for the provision of gas from the latter to the former.

This event received a lot of attention in the media, while at the same time, triggered a number of rumors and speculations around the case.

This note aims at providing a preliminary commentary from a legal perspective to the issues involved.

A discounted price for up to 10,25% seems to have been agreed between BOTAŞ and Gazprom in 2014; nevertheless, such discount was never included in the actual contract. BOTAŞ filed an arbitration request with the ICC, requesting that the Arbitration Court determines the adequate gas price, following the parties' failure to explicitly include a discount in the contract and Gazprom’s failure to admit or apply any such discount.   
         
From a legal perspective, this is a typical ICC arbitration for the determination of gas price, as provided by the relevant contract. Despite the fact that both parties are state owned companies, no confusion shall be created as to the Parties to the arbitration: Despite the close links that each of the Parties to this dispute have with their national governments, this is not an arbitration between governments, but a dispute between two gas companies. To this end, the ICC may not have been the right institution for a state to state arbitration of this type.

The core issue that the Arbitration Court will need to decide upon is whether the discount agreed unofficially between BOTAŞ and Gazprom should, nevertheless apply. This is a contractual matter and the Court would need to assess whether any undocumented commitments made by Gazprom and/or the government of the Russian Federation regarding this discount constitute a contract and thus are binding upon them. In the meantime, the gas flow to Turkey will not cease; should BOTAŞ win the case, discounts will apply retroactively.

Similar Practice and Future Projections


In fact, often cases of such a type do not actually end up in the Court. The request for arbitration is simply a means of exercising pressure to the counter party so that a dispute is resolved amicably without having to undertake the costs and the overall hustle such a complicated procedure would entail.

Sometimes, arbitration clauses in gas supply contracts provide for a preliminary obligation of the parties to try settling their dispute by negotiations for a certain period prior to commencing arbitrations proceedings. Negotiations may continue in the interim period even during the constitution of the arbitration panel or the preliminary proceedings.

BOTAŞ has a tradition of settling gas price disputes with the threat of arbitration, which are eventually not carried forward. It must be mentioned that the contract is not publicly available to further assess the particulars of the arbitration clause.

Hence, one may suggest that BOTAŞ is using the threat of arbitration to achieve receiving the discount form Gazprom. It is highly likely that we will not see an arbitration in this case and that the parties will settle the dispute after negotiations, given especially the geopolitical circumstances in the broader region.

Arbitral awards in ICC Arbitrations are usually scheduled to be rendered in six months from the date of the last signature of the tribunal or from the signing of terms of reference (see Article 30 of the ICC Rules of Arbitration). Nevertheless, the Arbitration Court may extend these limits which often results in arbitrations lasting even for years. This is sometimes the case with complex disputes on gas prices adjudicated during ICC or other institutional arbitrations. For example, in 2005 BOTAŞ was reported to have brought a claim against the National Iranian Gas Company for refusal to lower prices. The arbitration lasted for years and resulted in BOTAŞ receiving an award for USD 760 million.

That said, if the parties end up in arbitration, the procedure is likely to be lengthy, as rather complicated issues will need to be closely examined and decided - in particular, the legal validity of undocumented commitments in the context of political agreements or the determination of the gas price in cases of high input volume.

Would renegotiations over gas prices take place amid foreign relations between the Two Parties?


When it comes to the recent information in the media regarding the gas price renegotiation talks between Gazprom and Turkish importers, those should definitely be considered as rumors not holding much ground. Following the recent crisis in the foreign relations between Turkey and Russia, all discussions relevant to the energy sector between the two countries have frozen. There is mutual reluctance in taking specific action or continuing any former discussions on gas price discounts. Disputes submitted to arbitration will likely be left with the competent Arbitration Courts.

Turkey is substantially dependent on Russian gas and it would take some time until feasible alternatives are worked out to respond to a potential Russian decision to utilize the energy card, as a response to the downing of the Russian jet a few weeks ago.

On the other hand, Russia wishes to keep its role as the major gas provider in Europe and would not wish the general hostility, with which it has been viewed since the Ukrainian crisis, to continue. More importantly, the Russian economy heavily depends on energy exports and it would not make much sense to cut off a major importer, as Turkey is.

It must be borne in mind that all relevant energy agreements are complex internationally binding treaties that include serious penalties in case of breach or non-compliance. It would not be to the benefit of any of the involved parties to provoke a breach in such agreements, especially while disputes are still going and others such as the BOTAŞ-Gazprom gas price dispute have even recently been submitted before the competent international arbitration bodies, such as the ICC arbitration discussed above.
 
If gas prices were to be renegotiated, they would probably be fixed at a higher rate as a Russian counter measure; in that case, it would have a direct impact on the Turkish economy and subsequently on Turkish consumers. Lower prices would not be likely at this point. Again though, things seem to be at a stall right now- nothing seems to be moving and according to the above analysis, both parties would need more time to evaluate the situation before proceeding to take any action.

Overall, a discount would seem to me very unlikely as things stand. The geopolitical, legal and political circumstances would not allow the creation of a gas price renegotiation process parallel to the crisis created by the heavily affected external relations between the two countries. The status quo in the energy sector at the moment of the downing of the Russian jet will possibly not be overturned for some time, at least until the diplomatic picture clears up.



Orestis Omran is a counsel in the Brussels office of Dentons. Admitted in New York, Brussels and Athens and a member of the firm’s corporate department, Mr. Omran focuses on transnational litigation and international commercial and investment arbitration, especially on the energy sector. He represents and advises clients on a wide range of disputes involving the upstream, midstream and downstream oil and gas industry. He also has experience in drafting and negotiating oil exploration and development proposals with foreign governments. Full bio.

Image: Construction of a Gazprom gas pipeline. By: Fulvio314. CC-BY.
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