CEZ initiates arbitration against Gazprom over damages worth Kc1bn

Prague, Feb 9 (CTK) - Czech energy group CEZ formally launched arbitration proceedings against Russia's Gazprom over reduction of natural gas supplies last year, seeking compensation for damages of around Kc1bn, CEZ spokesman Ladislav Kriz told CTK today.

The possibility of arbitration was mentioned last October by Daniel Benes, chairman of the board of directors and CEO of CEZ.

"The Geneva-based arbitration will be decided by a three-member arbitration tribunal," Kriz said.

The situation over Russian gas supplies became complicated when Russia launched an attack on Ukraine last February and the European Union adopted a series of anti-Russian sanctions in retaliation.

Kremlin-controlled Gazprom has the world's largest natural gas reserves and a monopoly on exporting the strategically important commodity from Russia through a network of pipelines.

Last year, Russia completely halted gas supplies via a major pipeline, Nord Stream 1, for example. The pipeline delivered Russian gas to Germany through the Baltic Sea. Its capacity was up to 167 million cubic metres per day.

However, Benes believes that Russia's energy war against Europe began in 2021, about a year before the invasion of Ukraine last February.

According to him, Russia had subtly stopped supplying gas as the level of the storage tanks' capacity was declining. "It was a sneaky move by Russia," Benes said in a discussion programme on the public Czech Television (CT) last October.

Even then, he described international arbitration as the only possible step. "At the moment when someone does not fulfil a contract you have, it is difficult to talk about anything other than compensation for damages," Benes said when asked whether CEZ was negotiating with Gazprom on supplies for this year.

He said the supply shortages had clearly damaged CEZ, estimating the loss at hundreds of millions to several billions of crowns. CEZ will try to recover it but the question is what it can get, Benes told CT.

The outcome of the arbitration will depend on the circumstances under which the alleged damage to the Czech company took place, Petr Tomasek from the Department of Business Law of the Faculty of Law of Charles University in Prague told CTK.

If CEZ proves that the contract was breached, it will have a considerable chance to be granted damage compensation, according to Zdenek Novy from the Department of International and European Law of the Faculty of Law of Masaryk University in Brno.

In such a case, CEZ could claim Gazprom's assets in foreign countries, but with respect to assets located in Russia, this is unlikely, said Tomasek.

According to economists polled by CTK, the launch of the arbitration is a logical step but is unlikely to have a major effect in practice. The significance of the arbitration is political rather than economic, said XTB analyst Tomas Cverna.

At the end of January this year, Prime Minister Petr Fiala said that last year the Czech Republic reduced its dependence on Russian gas from the previous 97 percent to the current maximum of 4 percent. The state replaced gas from Russia with gas imports from Norway and LNG (liquefied natural gas) from overseas. In the future, Czechia wants to cut its dependence on Russian gas altogether and also replace imports of Russian oil with other sources.

Due to the Russian gas shortages, the wholesale price of gas for the European market increased to nearly EUR350 (about Kc8,400) per megawatt hour (MWh) last August. Since then, however, it has dropped significantly, falling below EUR68 (roughly Kc1,630) per MWh in recent days, driven by a mild winter and high LNG shipments.

vr,hel/er