The final verdict on Naftogaz and Gazprom's four-year legal battle over gas supply volume and payments was announced on the 1st of March 2018 in favour of the former, with Gazprom expected to pay a total of U.S. $125 billion to Naftogaz.
While the standoff between the two energy giants is far from over, the victory is much-welcomed news for Naftogaz. The company is struggling with the government’s reluctance to pursue further reforms and a significant internal consumer debt, for which it blames regional gas suppliers (oblgaz-sbyt formerly known as “oblgazy”) controlled by exiled Ukrainian oligarch Dmitry Firtash.
One important case in point is the public service obligations system (PSO) which obliges Naftogaz to supply gas – via subcontractors (oblgazy) – for subsidised prices.
In January 2018, Naftogaz and its subsidiary PJSC Ukrgazvydobuvannya demanded that the Cabinet of Ministers pay them UAH 111 billion (c. U.S. $4.3 billion) in compensation for losses incurred under the PSO. According to Naftogaz, between October 2015 and December 2017, the company supplied 40,7 billion m3 of gas to subcontractors under the PSO framework (i.e. for lower than the market price). Many of the subcontractors were imposed on them by the government, and did not pay Naftogaz for the supplies in full.
CEO of Naftogaz Andriy Kobolev insists that the current PSO is harmful to the government, consumers, and the development of the market because it creates opportunities for fraud and corruption. He called for an abolishment of the PSO system, more transparent market conditions, and free competition for each gas consumer (Interfax Ukraine, 23.01.2018). The PSO system has also been criticised by European observers. Nevertheless, Ukraine’s Ministry of Energy continues to insist on extending the PSO until April 2021, and even attempted to punish Naftogaz by suggesting that olbgaz-sbyts should purchase gas directly from Ukrgazvydobuvannya, circumventing Naftogaz as an intermediary (UNIAN, 01.02.2018).