On Monday, June 16, 2014, Gazprom and Naftogaz each announced that they were commencing arbitration proceedings under the SCC Rules (seated in Stockholm, Sweden).

The arbitration arises under Contract No. KP dated January 19, 2009 (the “Contract”), a 10 year, long-term gas sales agreement between Gazprom and Naftogaz for volumes ranging from 40 to 52 billion cubic meters of gas per year. On the basis of the statements released by the parties, it appears that Gazprom will be alleging a debt claim. Naftogaz appears likely to invoke the price review provisions and seek a decrease in price. The value in dispute is in excess of US$4.5 billion.

To resolve the dispute, the tribunal will likely need to consider the price review provisions in the Contract. Pricing terms and price review provisions are confidential and rarely disclosed. However, Ukrainskaya Pravda — a Ukrainian news outlet — purported to publish the terms of the Contract when it was agreed. Assuming that the Contract published by Ukrainskaya Pravda contains the price review provisions that are relevant to the current arbitration between Naftogaz and Gazprom, the tribunal will be required to interpret some unusual terms.

For instance, the Contract published by Ukrainskaya Pravda does not appear to provide a set period of time during which the parties may initiate price reviews. The parties appear to be allowed to initiate a price review at any time during the Contract’s term. There do not appear to be any limits on the number of times that the parties can commence price reviews. While providing flexibility, this type of price review clause also creates the possibility that the parties are frequently reviewing the price; which would be very disruptive. For example, if either party is unhappy with the result of the arbitration, then it can immediately seek to commence a new price review. The tribunal will be aware of this possibility and it may color the decision it reaches.

The price review provisions in the Contract published by Ukrainskaya Pravda require the tribunal to determine whether there has been a material change in the market for fuel and energy products. But the Contract does not appear to define “market” explicitly. The tribunal will need to determine what market data they should evaluate in order to determine whether there has been a material change. The definition of “market” may be contentious. While Gazprom supplies almost the entirety of the country’s imported gas, Ukraine has begun to diversify its energy supply. Some European energy companies have recently begun providing “reverse flow” gas to Ukraine through Poland and Hungary. Data from markets outside Ukraine may be relevant. The tribunal will need to determine whether it is allowed to consider this data from markets outside Ukraine under the terms of the price review provision.

The terms of the Contract published by Ukrainskaya Pravda also require the tribunal to determine whether or not the price produced by the price formula reflects the “market price”. The Contract does not specify any approach for determining the market price. Moreover, while the price formula is indexed to gasoil and mazut (a low quality fuel oil), and each is weighted equally, there is no explicit wording about why these variables were chosen and whether or not their weighting relates to any specific market segmentation.

In short, the price review provisions of the Contract published by Ukrainskaya Pravda provide the tribunal with little guidance and a tremendous degree of discretion. This makes the proceedings more complex and is likely to increase the uncertainty about the result. Parties entering into long-term gas supply contracts should give careful attention to the lessons that can be learned from this example.

There are an array of options available when negotiating price review provisions and the drafting choices made by the parties can have an impact on the magnitude and complexity of future pricing disputes. Proper consideration of price review provisions is key and can help limit the uncertainty in price review arbitrations. For more information on drafting options and other pricing and dispute resolution considerations in modern long-term gas supply agreements, see our initial post providing a primer on modern long-term gas supply contracts.

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Photo of Jeremy Wilson Jeremy Wilson

Jeremy Wilson is co-chair of the firm’s International Arbitration and Disputes Practice Group. He advises and represents parties in investor-state matters, price review disputes, and commercial arbitrations, including in both ad hoc proceedings under the UNCITRAL Rules, and institutional arbitrations under the rules…

Jeremy Wilson is co-chair of the firm’s International Arbitration and Disputes Practice Group. He advises and represents parties in investor-state matters, price review disputes, and commercial arbitrations, including in both ad hoc proceedings under the UNCITRAL Rules, and institutional arbitrations under the rules of the ICC, SIAC, HKIAC, the SCC, the DIAC, and the LCIA, in venues around the world. Jeremy has particular experience and a proven track record advising clients in the energy, life sciences, media, and consumer brands sectors.

Chambers UK ranks Jeremy as a leading lawyer for International Arbitration, noting client comments that Jeremy “is an excellent advocate”, “legally knowledgeable, commercially astute, pragmatic and personable to boot”. Clients also comment on his “impressive analytical and tactical skills” as well as his “quick and thorough understanding of complex legal issues”, while market sources have noted that he is “excellent on the law.” Chambers also notes his industry expertise, stating that the “very accomplished and knowledgeable” Jeremy Wilson is particularly commended for handling arbitrations in the oil and gas industries. Legal 500 UK notes “Jeremy Wilson is brilliant. As an advocate he is superb – careful, lucid and sensible submissions, clearly backed by an immense amount of preparation. A well-deserved reputation of excellence.”

Lexology recognises Jeremy as a Thought Leader in Arbitration, and he has been showcased in Legal 500’s UK Arbitration Powerlist.

Photo of William Lowery William Lowery

William Lowery is an international arbitration and cross-border disputes lawyer who represents clients in high-stakes commercial and investment disputes across the nuclear, energy, mining, commodities, life sciences, pharmaceutical, and construction sectors. His practice focuses on complex international arbitration, arbitration-related litigation, award enforcement, and…

William Lowery is an international arbitration and cross-border disputes lawyer who represents clients in high-stakes commercial and investment disputes across the nuclear, energy, mining, commodities, life sciences, pharmaceutical, and construction sectors. His practice focuses on complex international arbitration, arbitration-related litigation, award enforcement, and strategic dispute resolution involving technically sophisticated industries, long-term supply arrangements, infrastructure projects, and politically sensitive cross-border claims.

He has represented clients in arbitrations governed by the ICC, AAA/ICDR, JAMS, LCIA, LMAA, SCC, SIAC, and UNCITRAL rules, as well as in ad hoc proceedings, expert determinations, court litigation related to the recognition and enforcement of arbitral awards and foreign judgments, and 28 U.S.C. § 1782 actions. His experience spans both commercial arbitration and arbitration-related litigation, allowing him to advise clients from pre-dispute strategy through final award and enforcement.

William is recognized by Who’s Who Legal as a “Future Leader” in commercial litigation and international arbitration. Clients have told Global Arbitration Review that he is an “excellent practitioner[]” who is “practical and measured” in providing advice and “extremely responsive.”

William is particularly known for his work in the nuclear industry, including disputes involving nuclear fuel supply, U3O8, enriched uranium, conversion services, sanctions-related delivery issues, and long-term fuel-cycle contracts. He has represented and advised uranium mining companies, nuclear fuel suppliers, commodities companies, brokers, and utilities in disputes concerning pricing, delivery conditions, sanctions, export licenses, non-performance, and project abandonment under long-term supply and conversion agreements. His experience includes disputes involving U3O8 supply agreements, enriched uranium delivery obligations, and related issues arising under New York law and other governing laws.

William also has substantial experience in energy disputes more broadly, including upstream oil and gas disputes, investment treaty claims arising from expropriation of energy assets, gas and LNG price review disputes, midstream disputes, insurance arbitrations, and disputes involving crude oil, LPG, and other energy commodities. His matters have included representing Ukraine’s state-owned oil and gas company, Naftogaz, in its investment treaty arbitration against the Russian Federation arising from the expropriation of oil and gas assets in Crimea, resulting in an award exceeding $5 billion; representing clients in gas and LNG price review disputes valued in the hundreds of millions of dollars; and advising on disputes involving long-term crude oil and gas supply contracts.

William also regularly represents clients in life sciences and pharmaceutical disputes, including royalty disputes, milestone payment disputes, manufacturing and supply disputes, and other complex commercial disagreements involving innovative and highly regulated products. His recent matters include representing a multinational biopharmaceutical company in an ICC arbitration concerning royalty deductions with more than $300 million at stake, representing a life sciences company in a SIAC arbitration to recover an unpaid milestone payment, representing a global biotechnology company in a JAMS international proceeding involving a CDMO’s obligation to mitigate damages in good faith, and advising an international pharmaceutical company an expedited ICC arbitration.

In addition, William has significant experience in mining disputes, commodity trading disputes, and disputes arising from long-term supply relationships in the natural resources sector. He has handled matters involving uranium supply, mining project construction, cross-border commodity sales, sanctions-related non-delivery claims, and complex pricing disputes involving state-owned counterparties, utilities, traders, and producers.

William has further developed a strong practice in construction arbitration and infrastructure-related disputes. He has represented clients in disputes arising from EPC contracts, turnkey design and construction contracts, highway rehabilitation and construction projects, mining project construction, drilling and shipbuilding contracts, and other major industrial and infrastructure developments in Latin America and elsewhere.