Contractual uncertainties

Russia is trying to force companies to pay for its gas in rubles, while the EU has still not decided to implement full energy sanctions amid opposition from some member states. Listen to a discussion on the legal issues for European firms surrounding Russia’s invasion of Ukraine, and the implications of a cut from either side. We also look at the current status of Nord Stream 2 and potential loopholes in the regulatory framework. 

Host: Richard Sverrisson, Editor-in-Chief, Montel
 Guest: Ana Stanic, Principal, E&A Law

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:05

Hello listeners and welcome to the Montel Weekly Podcast, bring You Energy Matters in an informal setting. Today's episode tackles the legal issues surrounding Russia's invasion of Ukraine. What's the current status of Nord Stream Two, and what are the implications of this? Are the sanctions imposed by the EU and the UK watertight, or are there some loopholes? And what about European utilities that have subsidiaries or business activities in Russia? How could the EU unilaterally decide to completely cut energy supplies from Moscow and what would happen if it were to do helping me, Richard Sverrisson to grapple with these key questions is Ana Stanic of E&A Law. A warm welcome, Ana. Good to have you back on the pod.

Ana Stanic, Principal, E&A Law: 0:49

Thank you. And thank you very much for having me.

Richard Sverrisson, Editor-in-Chief, Montel: 0:52

To start off, Ana, how do you view this invasion of the events as they've continued over the last two or three weeks?

Ana Stanic, Principal, E&A Law: 0:59

I think for me as a, as an energy lawyer I've concentrated primarily on looking at the statements made by the European Union when it announced that it wanted to reduce its energy dependency on Russia by two thirds already by the end of this year. And then the entire sort of way in which it proposes to do that's been the key issue to grapple with for me in the last few weeks.

Richard Sverrisson, Editor-in-Chief, Montel: 1:22

So in terms of where alternative supplies could come from,

Ana Stanic, Principal, E&A Law: 1:25

Where the alternative supplies would come from. How do you reduce something by two thirds and not by a hundred percent?'cause presumably if you start reducing something by two thirds, the other side will say we just reduce it by a hundred percent. We don't hold the levers, all the levers of this kind of in this relation, announcing and it's something like that has repercussions of the revenue as we've already seen in the market. So yes. So looking at that and trying to unpick it has been very, we're very important because obviously it it, if we get it wrong we have, we get the whole. Of not only our move to energy transition completely wrong, but also our economic future wrong.'cause, if we can't secure what we announced to secure then there's a huge risk.

Richard Sverrisson, Editor-in-Chief, Montel: 2:14

Do you think this is then a sort of very ambitious move, or is it achievable in such a short space of time?

Ana Stanic, Principal, E&A Law: 2:21

I don't think it's achievable. And there's two things. Obviously the Oxford Institute of Energy Studies has gone through and unpicked the figures and has come to, a position where, the U EU could secure about 30 BCM of new of new LNG at assuming we could pay for it by the end of this year. There's a huge debate on whether we could reduce our gas consumption by 38 BCM at the same time. This is this, talk about consumers turning their thermostats on it off, down by 1 1, 1 degree and how much that would bring. But there's much more real, much more serious issues. As I say, if we can't achieve. What we set out to achieve from a purely supply perspective or even a demand perspective. That's one thing which I think they've, they show. The second thing that nobody's really talked about is what would be the cost of us doing this? Could we actually afford this? We are already seeing most of our industry and certainly our agriculture not being able to survive. Even the current prices, if we were to go and try to outbid. The Asian markets to try to secure the 30 BCM or the 50 BCM that they're saying that we should, we would have to secure by the end of this year. It's, does, can our industry remain competitive? Can they even afford it? We've seen already demonstrations in places like island or of farmers who simply say that they can't afford the energy prices. They can't afford to rear the pork, the pigs. And if we, and if that then has as a consequence, the domino effect that we simply don't have the supply of food, then that's a serious concern. And then ultimately as a lawyer, I step back from all of that and I ask myself, okay, assuming that we could afford it, which is a big question that I don't think we can. Assuming that we could get the supplies and that we could dis reduce our demand by 38 BCM and that we could, I don't know, from where between now and November now inject 90% effectively, which that, which 90% of storage in the eu, which means 90 BCM, between. And given that it's I think around 30, 40 bcm now, it's another 50 BCM that we need, assuming we could do all of that. Can we actually legally do this? And the answer, I think to the, to, other than four contracts that expire at the end of this year, which I understand are some Polish contracts all other contracts would require gas buyers to. To actually breach the times of their contract. And that would obviously open them up for arbitrations who's gonna pay them to breach their contracts alternatively, and who, who is going to be the two thirds that breach their contracts? How is this going to be organized? And if it's not two thirds, if it's a hundred percent on the basis of an introduction of sanctions, that would effectively then provide the comp, the gas companies. With at least temporary protection from claims on the basis that sanctions prohibit them from making payments under contracts. And that's clearly would have to apply to all a hundred percent of gas supplies. Those are the kind of legal conundrums that, that, need, needed to be thought through.

Richard Sverrisson, Editor-in-Chief, Montel: 5:45

Absolutely.

Ana Stanic, Principal, E&A Law: 5:46

When this kind of an aspirational statements have been made, because obviously they have ripple effects in the market.

Richard Sverrisson, Editor-in-Chief, Montel: 5:53

Yeah, absolutely. And deep, underlying consequences. But I think and if I can just ask you to, if we can delve a little bit more into, to what you've just raised here now, for example, the contracts that, companies will have with gas prom. Is it, how easy is it just to exit those? You can't just rip them up, can you?

Ana Stanic, Principal, E&A Law: 6:10

It's not. It's not, you cannot exit them just because you decide that you want to exit them. Unless they have a, unless they are about to expire, then you you can't invoke force majeure in these kind of circumstances because you are choosing to, to voluntarily terminate them. And there's an argument that's being made that by. By the Russians now de demanding that the payments be made in rubles, that this could be a basis of saying that the breach is being made by the Russian side and therefore gives an opportunity to the other side to terminate the contracts. We have to see I'm not that clear on exactly what. Putin is demanding that the companies do on the one on, on the reportings that I've seen in certain places. It would suggest that he's saying that companies have to open accounts with gas from bank and deposit their euro or US dollar payments or whatever payments the gas is being denominated in under their own contract in that currency, and that then there will be a conversion. That amount into rubles that will be done by gas prom bank and then that rubles will be transferred to gas prom. If that is the case, then there's no breach because the payment is made in the do in the currency that's being denominated under the contract. The key will be what will be the rubal exchange and whether gas pump would be turning around and saying, you haven't paid enough, because the euro. Ruble exchange rate is different to the one you think it is, but ultimately the payment under the contracts are in, not in rubles provided that the supply, the buyers are paying it in the currency of denomination, then there's no breach. So then the question is how do you get out of these contracts? My understanding is that there's a numbers of buyers, including municipalities in certain Western European countries that are considering. Terminating the contracts in full and knowledge that they will be breaching those contracts. I, my understanding is that the ministries of that's not un western country are trying to advise the politicians that it is extremely unwise to terminate them. But as that, as a person in one of those the ministry has told me there's little common sense. Even though they have yet to find alternative sources of gas supply, it is there's a possibility that certain municipalities and potentially energy companies will simply terminate contracts for the supply of gas open themselves to legal claims. And potentially opening some cells to a position where there will simply be no gas supplies in those specific areas leading to shutdown of industry.

Richard Sverrisson, Editor-in-Chief, Montel: 9:03

So that's like the worst scenario possible then in a way, everybody loses

Ana Stanic, Principal, E&A Law: 9:07

The seriousness of the situation I think was made very clear by the CEO of bass. The world largest chemical group who has a repeatedly rejected calls for any kind of import ban of gas. Saying that this move would be totally irresponsible and it would throw the German economy, but obviously not just the German economy. There would be a domino effect that would affect all other economies in the EU that are highly dependent. On the German economy, and of course other company, other countries that in themselves are highly dependent on, on, on gas into what he says is that would be the biggest crisis since the end of World War ii.

Richard Sverrisson, Editor-in-Chief, Montel: 9:49

I think sev, several key German economists and leading business figures have come out and said the same, Ana. But do you think, if I can go back to the deal that was announced with Gas Brown Bank and so that, non Russian firms would pay in Euros and then the bank. Will transfer it or exchange it into rubles? Is this a way for both sides to save face as well?

Ana Stanic, Principal, E&A Law: 10:09

The German government, the German economic minister has basically it seems to me rejected this possibility. I dunno whether he looked into it and then rejected it or whether in whether he will now look into it more carefully. And as I say, I don't know fully. There's different reportings of what exactly. Is being required by Putin. But what I see and what I suspect is the, is the reason for Putin doing this and in a way, how the sanctions have, are helping strengthen the position of Putin is that he's effectively not finding a way. To have money arrive in Russia up until now most of the trades and most of the payments were not made into Russian, into the Russian, into Russia. They were paid into bank accounts of different companies, including Gas Pro and other affiliates or other intermediaries that were, that had bank accounts throughout the European Union or the uk. Now that this, there is a pretensions of them being sanctioned or that there is already sanctions in place that has not been, that is no longer possible. So what he's now securing is I don't, and I, again, I dunno to what extent, but I would imagine that it's to a large extent for monies that were previously held in, in, in foreign bank accounts to come to Russia and that this is the main reason for him doing so.

Richard Sverrisson, Editor-in-Chief, Montel: 11:40

There's also the issue of, companies like Gas Pro Germania and Gas Pro marketing and trading. What do we're seeing noises that the German network regulator is gonna take over gas Pro Jamia. So this is all, it's a very rapid situation. It's a very fast moving situation, Ana, but we, we discussed before Christmas, in December about Nord Stream two. Now that seems to be completely dead in the water now, isn't it?

Ana Stanic, Principal, E&A Law: 12:05

Absolutely. So we saw on the 22nd of February that the certification processes was entirely frozen. And that the situation of the security of, and the impending invasion that happened two days later was used as a basis to, to freeze the certification. And obviously what has happened since then is with the introduction of sanctions is that lawyers are no longer able to advise Nord Stream two. So they have all they've all basically been asked to put pen and paper and down and and and the actual case. The PCA has advised that the case is suspended, the North Student Twos case against the European Union pursuant to the Charter treaty for the time being suspended. But just to put things in perspective, I. There has been quite a lot of discussion in the legal community about the fact that lawyers are prohibited from representing Russian and Russian related companies, especially the ones on the sanctions list in any shape or form. And this raises the issue of rule of law and basic a basic sort of tenants of legal representation, which obviously no matter how gre gruesome a crime has, someone has committed or a war crime, they have sofa being entitled to representation.

Richard Sverrisson, Editor-in-Chief, Montel: 13:35

And you say, this is, at the moment, lawyers can't represent any Russian company. So this is basically in, in breach of, longstanding legal principles.

Ana Stanic, Principal, E&A Law: 13:44

Yes. So the these are quite complicated issues now to address.

Richard Sverrisson, Editor-in-Chief, Montel: 13:50

Absolutely. I can certainly see there's there, there could be, for instance, maybe a set of legal claims made against the decision. The German government, for example, for stopping the certification process. Could we expect that to, to come in in, in months or years time.

Ana Stanic, Principal, E&A Law: 14:07

They could be brought they can't be brought by any in terms of Nordstrom two because it's gas prom and it's on the list. It certainly cannot be brought by any German lawyer or any European lawyer. So it would be Russian lawyers who would be bringing the cases, which I assume do not have rights of audience. I don't know how the German courts work on whether they can appear. As Russian lawyers there, but presumably they could. But but the point of the thing is that its lawyers until now are unable to represent them. And in fact they've they are no longer representing them. Gas prom has disin, all those lawyers also because it's accounts are blocked. So how can it, he cannot even pay for the legal fees or court fees for that matter.

Richard Sverrisson, Editor-in-Chief, Montel: 14:52

Absolutely. It's an absolute minefield. But then what about the sanctions, Ana? The sanctions that, are they completely watertight? Is there, is it, IM, is it impossible for a country to import Russian coal?'cause the way I understand it, it's more about. The registration of the vessel rather than the actual the contents of the vessel.

Ana Stanic, Principal, E&A Law: 15:13

The, there is an exception. So there has so far not been an intention to to stop. And this is where the things become complex in terms of going back to the announcements of how do you reduce something by two thirds. Rather than a hundred percent. Presumably once you start breaching contractual terms or introducing sanctions, then they would've apply across the board to everyone. You couldn't just say in certain countries we have sanctions and in others we don't, and so on. So in order to reduce the imports other than through our process of where contracts allow you to do that, and we've said that. That nobody's aware of how this could be done. Then you are looking at some sort of a blanket rule, in which case you're talking about a hundred percent gas ban on gas imports, which obviously we clearly couldn't afford. Even on, even the EU doesn't commission doesn't claim that we can if we go back. And and certainly there has, and obviously there have been calls on okay, we'll do it on oil. And maybe on coal. But then how do you do that? Without there being retaliation from the other side? And if the retaliation from the other side is to say, okay, will you start doing that? We just stop all gas. Then we again, this is where the sort of, it's a game of chicken. And then the question is, who play? Who can play this game? And what impact does it have finally, on on, on the economies. Just one other thing. Obviously another thing to think about all of this in terms of gas and reducing gas imports, whether it's by two thirds or how, however much is, this and the studies done, let's say by the Oxford Institute of Energy Studies is very much a mathematical exercise. So first you, as I say, you put in the pricing part and you see what actual implications it actually has. Could Europe even afford the rising Asian prices that we would be seeing as a result of us directly competing for significant amounts of LNG gas? And then the other thing that we need to think about is where are, is the demand for Russian gas. Uniform across the European Union, and the answer is no. There are certain parts of the European Union that are more dependent on gas inputs from Russia and piped gas than others, especially Southeast Europe as. As the European Commission knows very well, having done a study on this not so long ago. And so we would be in a situation where countries, for example, like Bosnia would simply have no gas at all arriving to them. Bulgaria, even if the inter, inter, the interconnector with between Bulgarian Greece was to be completed by October of this year. Which we, hopefully it will be, but we're still only talking about them being able to get about one, one and a half BCM through there. They need another one and a half B, CM from somewhere else. There's Croatia that could potentially simply. Replace the one BCM, that it gets a Russian gas from the LNG terminal on crook, but that would require it to Rene on the already on the contract that it has signed with Hungary to pass to, to sell one BCM of gas via the LNG terminal. It could obviously do so by exercising in emergency saying that there's an emergency, but obviously then that would leave Hungary short. M So there are certain parts of the EU that simply cannot wean themselves off ration gas. Certainly not this year. And as the Oxford Institute of Energy Study has shown, even on a mathematical basis, the issue is even if we were to manage to do it this year, the it would be even more difficult to do it next year. And obviously these kind of steps. Are we reversible once they're taken? So going back and obviously as we were saying, there is a domino effect, possibility of a domino effect. You cut certain supplies or you announce cuts in certain, in supply demand for gas. That may result in Russia saying, okay, we won't supply you with any other things. Which obviously doesn't only include fossil fuels. It also can, will potentially include agricultural products and the rest. So it's, our interdependency with Russia is much greater than we would like it to be. And it's not just our interdependency. With the Russia, as we've discovered with Brexit, it's our interdependency generally. How the supply chains and how the economy of the world works. So no one can be an island, at least not at this point.

Richard Sverrisson, Editor-in-Chief, Montel: 20:07

So if you were to give some advice to the European Commission what would that be, Ana?

Ana Stanic, Principal, E&A Law: 20:13

I I would simply be saying that we shouldn't be making statements that, and or make scenarios that if they were to happen. Would have, that we can't live with the consequences of that. And I would say that we need to, it's not enough to say mathematically we could potentially reduce our supply by two thirds. We need to know what the consequences of those statements signed in terms of what it may res, lead the other side to do. And can we afford the response and have we thought through what that response would be. And more importantly, that the actual can, and are we able to afford it from a point of view of the of our economies. And I think the, these are the key things that we need to consider in the, cold light of day. But going back to your question on terms of the sanctions, the sanctions that are now in place obviously provide for a very important exception. In terms of, which says that whatever is strictly necessary for the purchase, import, or transport of fossil fuels, in particularly coal, oil and natural gas. But then it lists also titanium, aluminum, copper, nickel, palladium, all of that goes through Russia into the EU is exempt from sanctions. And the, so that's how the trade is able to continue unless. The sanctions that have been, the possibility of new sanctions that have been announced on the 4th of April are followed through happen now the indirect cons implication of this is that exception, this exception does not apply to a European company selling oil or gas to a non-European company. So when and let's not forget the sanctions in term is, are not entering into force until the 17th of May. So there's, there is still time, but for example, Yana, which is a Croatian. Energy Company has announced that unless things change, it will no longer be able to supply oil to Serbia. So even though there is an exemption that would otherwise supply if Serbia was in the eu, since the exception only applies within the eu for now as things stands, that agreement would be breached or not breached. That agreement will not be perform able to be performed.

Richard Sverrisson, Editor-in-Chief, Montel: 22:45

If I can just round off Ana by saying, so what kind of advice would you give to companies who have contracts with Russia, either in, in forms of natural gas or purchasing or oil or coal?

Ana Stanic, Principal, E&A Law: 22:57

To the extent that they are considering terminating them, obviously they need to carefully consider if they're able to do so legally based on their governing law. Obviously if there is a, if sanctions are introduced that extent to, to say, to purchase of gas, then they will have no alternative other than to comply with them to the extent. That they are, the sanctions don't change and they are the way they are now. Then companies that are dealing with other energy companies outside the EU will need to be approaching the European Commission to, to see if by analogy, those trades are allowed to continue since they are, if they were in the eu, they would be exempt from sanctions and these kind of clarifications will be, will need to be given and obtain, try to be obtained. But it's a very difficult and a very difficult situation.

Richard Sverrisson, Editor-in-Chief, Montel: 23:54

Yeah, absolutely. We'll continue to keep a very close eye on it, all the journalists at Montel News. But in the meantime, Ana, thank you very much for joining the Monte Weekly podcast.

Ana Stanic, Principal, E&A Law: 24:03

You're very welcome. Thanks for inviting me.

Richard Sverrisson, Editor-in-Chief, Montel: 24:06

So listeners, you can now follow the podcast on our own Twitter accounts at ly named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.