Dag Mjaaland, “Major efforts by the entire team will be required in order to succeed.”

Dag Mjaaland is a Partner at Wikborg Rein’s Oslo office and is part of the firm’s Petroleum and Energy practice. Mjaaland heads Wikborg Rein’s Russia team. He has extensive experience from the diplomatic service, most recently as Deputy Director General of the Legal Department of the Ministry of Foreign Affairs. Education: 1982 Cand. jur., University of Oslo. 1979 Bachelor of Arts (Intermediate subject: Russian), University of Oslo.

– Stockholm arbitration between Naftogaz and Gazprom is about many billions of dollars. But people are not less interested in the emotional side. Could you please share your feelings during these 4 year-long arbitrations? What did you feel at the beginning, in the middle and when you were reading the final awards?

– From the beginning I felt confident that I and my team had the necessary experience and expertise, a feeling that I maintained throughout the arbitration in spite of the numerous and significant challenges that we encountered. When I finally saw the Tribunal’s awards, I was filled with joy and relief that we had succeeded with most of our claims, as well as in respect of most of Gazprom’s counterclaims, in particular its take-or-pay claim for USD 46 billion (by the end of 2017).

– It may sound strange for you, but many people in Ukraine consider the take-or-pay clause in the contract with Gazprom as something that can be ignored. When working with you I could not help noticing that you treated take-or-pay claims of Gazprom as the biggest threat to Naftogaz. Why?

The take-or-pay claim posed an existential threat to Naftogaz, due to its size and the fact that there was no precedent where such a claim had been rejected. In addition, we knew that in the end, we would probably have to rely on a provision of the Swedish Contract Act, Section 36, that is rarely applied, particularly between professional parties.

– And what did you feel when you were reading the Tribunal’s decision on the take-or-pay?

I felt a tremendous relief, because the outcome was decisive for the future existence of Naftogaz. Our victory on take-or-pay was by far the biggest success in the arbitration, and was due to a tremendous team effort based on our expertise on gas sales agreements and competition law, as well as the expertise of our Swedish colleagues on Swedish contract law.

– I think it is important to tell the readers that such arbitrations are very complex and rather risky; that the outcome depends on what both sides do, on the external factors and, of course, on the subjective views of this Tribunal. That is why we did not win on all of our claims. But one of the claims that we did not win on, is being pursued by us in the new arbitration that we have just started. It is the transit tariff revision claim. We need to explain why and what the difference is. And I would also like to use this case to show how we handled ambiguity inside our team.

The Tribunal in the transit arbitration confirmed that the tariff revision clause gives the Tribunal the authority to revise the tariff, but decided that the request for tariff revision that Naftogaz sent in 2009 failed to meet legal formalities. There is a similar situation in respect of the supply arbitration, but the difference is that we developed a new price revision request in 2014 and this request allowed Naftogaz to win on the price revision, while we did not develop a new request for the tariff revision in 2014. Using this case as an example, or any other case, what would you do differently, with a benefit of hindsight?

– The two cases are very different. In particular the tariff revision claim was of a more complex nature. We were concerned that an additional request for tariff revision might undermine the 2009 request and add further complexity to the matter. On the whole, we considered that Naftogaz might have more to lose than to win from advancing an additional claim. Based on our knowledge at the time, and the prevailing circumstances, we made the right decision. With the benefit of hindsight, in particular that we would not succeed on the existing claims, we might have made another decision then. This is the only example that I may think of where we might have done things differently with the benefit of hindsight.

– In 2014 a formal position on Naftogaz and the Ukrainian Government was to claim that Q1 discount (de-facto provided by Putin to Yanukovych for his refusal from EU integration) had to remain. That is why Naftogaz paid for supplies in Q2 2014 only with this discount. Naftogaz also claimed it in the arbitration.

At the same time, we had different views on our side. Even though I do not challenge that our formal position was based on a genuine belief of the government, I personally worked on developing economic arguments for a revision to market prices, not to keep the discount. I know that you personally also focused more on the legal arguments for market prices, while your Swedish colleagues were working on the Swedish law grounds to keep the discount.

In your experience, is it usual to have such a pluralism on the same side of the arbitration, demonstrated even by the fact that we had numerous alternative claims?

– Yes, this is not unusual. In this case, my main concern was that we should pursue all realistic legal avenues, while at the same time avoiding any inconsistencies.

– If we count till the expiration of the contract at the end of 2019, because of the supply arbitration Naftogaz saved circa USD 80 billion under the take-or-pay obligations and more than USD 2 billion due to the price revision. Does a proverbial saying “a penny saved is a penny earned” apply here?

– Yes, clearly. If we had not succeeded, this is what Naftogaz had been obliged to pay to Gazprom.

– The Tribunal awarded Naftogaz a compensation of USD 4.6 billion from Gazprom. How much money has Naftogaz already received?

– USD 2.1 billion, which was offset against Naftogaz’s obligation to pay additionally for gas deliveries in November and December 2013 and April-June 2014 pursuant to the final award in the Supply Arbitration. The outstanding claim against Gazprom is consequently approximately USD 2.5 billion plus interest, which accrues at USD 500 000 per day.

– Gazprom is challenging the awards in a Swedish court. The process is supposed to take about one year from now. Statistics for such challenges say that their chances are very low. At the same time enforcement of the award, for example in the UK is linked to the end of the challenge proceedings (while in the Netherlands it may be allowed earlier). Is it fair to say we can expect to receive the rest of the money from Gazprom at least by the end of 2020?

– Based on the present status in the enforcement proceedings, expect that we will be able to start collecting the outstanding amount this year, and that further major collection will take place in 2020. Whether we will be able to collect the total outstanding amount by the end of 2020 is difficult to tell now, as it will depend on the further proceedings in a number of jurisdictions where Gazprom has assets.

– Gazprom and Naftogaz have already started the new arbitration. Gazprom basically claims reversal of the results from the previous arbitration. Naftogaz claims about USD 12 billion of compensation, mainly due to the tariff revision in 2018-2019. A major part of the claim consists of additional costs related to the expected termination of transit from 2020. How grounded are these claims?

– I believe that we have a robust claim. At the same time, I am fully aware that major efforts by the entire team will be required in order to succeed.


*The feature series “Naftogaz Against Gazprom” is running in partnership with Yuriy Vitrenko, Executive Director of Naftogaz Group. Opinions expressed in these features do not necessarily reflect the views of Naftogaz Group or the NV editorial team.