This article was featured in our 2023 Energy Arbitration Report, which is part of a series of industry-focused arbitration reports edited by Jus Connect and Jus Mundi.
This issue explores the energy industry, encompassing information on electricity & renewables, based on data available on Jus Mundi and Jus Connect as of September 2023. Discover updated insights into energy arbitration and exclusive statistics & rankings, as well as in-depth global and regional perspectives on energy projects, disputes, & arbitration from leading lawyers, arbitrators, experts, arbitral institutions, and in-house counsel.
THE AUTHORS:
Sandra Geahchan, Associate at Eversheds Sutherland
Margaux Barhoum, Associate at Eversheds Sutherland
Russia’s invasion of Ukraine in February 2022 has raised significant alarm among European leaders and prompted a firm response towards Russia.
It notably triggered the adoption of several new sanctions packages against the Russian Federation, adding to the existing economic sanctions imposed on Russia since 2014 in the wake of its annexation of Crimea.
The strong stance taken by European States in support of Ukraine following the Russian invasion has not been without consequences on the European energy sector, especially as the EU has been heavily dependent on Russia for its supply of energy.
Over the course of the past two years, Russia has, in turn, substantially decreased the volume of its gas deliveries to Europe and enacted a series of presidential decrees that have affected energy-related contracts with European companies as well as European assets in Russia.
Russia’s Imposition of New Contractual Conditions
In response to Western sanctions, on 31 March 2022, Russia’s president issued a decree ordering companies affiliated with “unfriendly States” to pay for Russian gas in Roubles. European companies were directed to make payments through designated accounts at Gazprombank, the affiliate bank of Gazprom, the majority State-owned Russian gas company.
This move was perceived as an attempt by Russia to bolster the depreciating Russian Rouble.
The enactment by Russia of the so-called “Rouble Decree” compelled European buyers to either comply, with a risk of violating EU sanctions or see their supply of gas halted by Gazprom. Russia’s threats were serious: Bulgaria’s refusal to comply, for instance, was met with a suspension by Gazprom of its deliveries.
Since gas supply agreements typically specify the currency of payment, it is natural that contract negotiations and disputes would follow Russia’s unilateral decision to impose payments in Roubles. As an example, this gave rise to a dispute between Gasum, a Finnish State-owned energy company, and Gazprom. An award was reportedly issued by an ad hoc Stockholm-seated arbitral tribunal, resulting in conflicting statements from the parties. Gasum claimed the tribunal held that they were not obligated to pay in Roubles, while Gazprom stated the tribunal recognised the Rouble Decree as a force majeure event, ordering Gasum to pay over EUR 300 million in gas supply payments. It was further noted that both parties were advised to continue negotiations to resolve the situation regarding future gas supplies.
Even compliance with the Rouble Decree did not, however, shield European companies from adverse consequences. Notably, Italian energy company Eni had initially agreed to Moscow’s demands to transition to a payment arrangement in Roubles, a provision not stipulated in their long-term contracts. Eni disclosed that Gazprom’s gas supplies nevertheless fell below the minimal contractual daily average as of June 2022.
Eni is one of many European companies that have seen their Russian gas deliveries dwindle, sparking a surge of arbitrations against Gazprom.
Disputes Relating to The Suspension of Gas Deliveries
Indeed, a series of disputes have stemmed from Gazprom’s failure to comply with its obligation to supply minimum quantities of gas under gas supply agreements concluded with European companies.
Gazprom’s suspension of gas deliveries has forced some European companies to secure replacement volumes at much higher prices on the spot market to comply with their own delivery obligations. It has also exacerbated the volatility of gas prices in Europe, which could lead to further instability in the regional energy market.
A number of European companies have initiated arbitration proceedings with the hope of obtaining compensation, some of them requesting that Gazprom be ordered to cover the extra costs they claimed to have incurred to mitigate the consequences of the Russian company’s non-performance. For instance, the partially state-owned Czech energy group CEZ has initiated arbitration proceedings against Gazprom, seeking around CZK 1 billion (approximately USD 45 million) in damages for alleged non-delivery of natural gas by Gazprom Export in 2022. Other arbitrations arising from or contemplated in relation to Russian gas supply shortages involve major players like Germany’s Uniper and RWE, Bulgaria’s Bulgar-gaz EAD, Slovenia’s Petrol d.d, France’s Engie, and Italy’s Eni.
Gazprom has relied on force majeure to justify some of its failures to supply gas in compliance with its contractual obligations.
Sanctions-Related Disputes
The Russian invasion of Ukraine has also triggered disputes that relate to the enforcement of the European sanction regime vis-à-vis Russia.
To comply with these sanctions, some European companies opted to terminate their contracts with Russian companies, with the latter disputing the validity of the termination. For instance, Danish wind turbine manufacturer Vesta Wind Systems A/S terminated contracts for the construction of wind parks in Russia it had entered into with WEDF, a Russian subsidiary of the Finnish majority State-owned company Fortum. Vesta claimed that sanctions-specific contractual clauses allowed it to validly terminate the contracts, which is contested by WEDF. Fortum’s Irish subsidiary, Fortum Finance DAC, has filed ICC arbitration proceedings seated in Stockholm.
Furthermore, some European companies stopped performing their obligations under energy-related contracts in order to avoid breaching the EU sanctions regime. Following the enactment of EU sanctions, German industrial gas company Linde suspended work under an EPC contract signed in 2021 for the construction of a gas processing facility in Russia.
The other party, RuChemAlliance (RCA), a joint venture between Gazprom and Rus GazDobycha, decided to terminate the contract. RCA has taken legal action to claim repayment of the advance it allegedly paid to Linde and sought an order to seize Linde’s Russian assets. Linde has initiated arbitration proceedings.
Investment Disputes
Investment disputes have also happened and are likely to continue to arise between European companies and Russia, as well as between Russian companies and European countries. European investors, specifically those that are affiliated with States viewed as “unfriendly” by Russia, have been facing significant impediments in relation to their Russian operations. These issues include a risk of expropriation of their assets and difficulties in withdrawing from Russia. Investors might seek remedies through BITs or the Energy Charter Treaty (ECT). European States may also face arbitrations arising from measures taken by European authorities against Russian companies. Some Russian companies have seen their assets being frozen, and the corporate structure of some Russian energy company subsidiaries has been placed under administration in Europe.
Foreign Investors v Russia
On 25 April 2023, Vladimir Putin signed a decree allowing the temporary administration of movable and immovable property belonging to foreign individuals associated with “unfriendly States”. This includes significant stakes in Russian energy companies such as Unipro and PAO Fortum.
Fortum, a Finnish energy company, has sent two Notices of Dispute to Russia under the Netherlands and Sweden BITs with Russia. This is the result of Russia’s temporary administration of Fortum’s stakes in the Russian company PAO Fortum on the basis of the above-mentioned presidential decree. Fortum plans to seek compensation of several billion Euros for the seizure of its assets in Russia.
Similarly, Russia has placed assets of the German company Uniper under temporary administration. While Uniper enjoys protection under the Germany-Russia BIT, it is still unclear whether it will commence investment arbitration proceedings.
Russian Investors v European Countries
A German law firm representing the Russian oil company Rosneft has revealed preparations for initiating an arbitration claim against Germany. This came as a response to Germany’s decision to place Rosneft’s German assets under trusteeship following Russia’s invasion of Ukraine.
Germany put forward Russia’s use of crude oil supply as a political lever and the necessity of the trusteeship to ensure Rosneft’s ability to fulfill its obligations. As Germany has recently decided to deny Russia the enjoyment of the protections of the ECT, Rosneft may be contemplating arbitration under the Germany-Russia BIT, which provides for ad hoc arbitration under the treaty.
Looking Forward
Europe has been actively working to reduce its dependency on Russian oil, natural gas, and coal, as it represents a serious threat to energy security in Europe.
Europe has made significant progress in that respect since the invasion of Ukraine, with gas storage facilities at a record-breaking 90% capacity by the end of the 2023 summer. One strategy involves increasing gas
imports through LNG non-Russian sources. Norway’s pipelines have stepped in as Europe’s largest source of gas, while the US has also benefitted from the energy crisis, with LNG imports from the US increasing.
However, a reduction in gas supplies in the global market means that the market is still prone to disruptions, and prices are still volatile. The crisis has not only exposed Europe’s dependence on Russian fossil fuels but also highlighted its vulnerability in relying on fossil fuels in general.
As a result, Europe is also exploring alternative energy sources and turning to clean energy sources, in alignment with the European Commission’s call to accelerate the transition to clean energy and a shift towards more sustainable and environmentally-friendly energy solutions.
ABOUT THE AUTHORS
Sandra Geahchan is an associate in the International Arbitration and Public International Law group of Eversheds Sutherland. She has experience in investor-State and international commercial arbitration proceedings governed by the rules of ICSID, ICC and UNCITRAL. Sandra holds a Bachelor of Arts in economics and international Studies from Emory University, as well as a Bachelor’s degree in Law (LLB) and a Master’s degree in Law (LLM) from SOAS, University of London. She is admitted to the New York Bar.
Margaux Barhoum is an associate in the International Arbitration and Public International Law group of Eversheds Sutherland. Her practice focuses on investor-State and international commercial arbitration proceedings. She also has experience in enforcement and annulment proceedings before French courts. Margaux has represented States and international companies in a variety of sectors including energy, mining, defence and construction. She holds a Master’s degree in International Business Law from Aix-Marseille University and a Master’s degree in Law (LLM) from Cardiff University. She is admitted to the Paris Bar.
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