Arbitration decision between Energoinvest and Hungarians made: Federation owes 11.16 million dollars

We are publishing the statement of Energoinvest d.d. and BH Gas d.o.o. regarding the conclusion of the Arbitration Process concerning the dispute with the Hungarian transporter FGSZ in its entirety.

- The managements of Energoinvest d.d. Sarajevo and BH-Gas d.o.o. Sarajevo inform the public that on April 19, 2024, the Arbitration Tribunal in an ad-hoc arbitration under UNCITRAL rules, seated in Zurich, made a decision in the case of the lawsuit filed by the Hungarian gas transporter FGSZ against Energoinvest, BH-Gas, and the Government of the Federation of Bosnia and Herzegovina, and the counterclaim filed by Energoinvest and BH-Gas against the Hungarian gas transporter.

The procedure relates to claims arising from long-term unfair business practices and overcharging for transport services by FGSZ in the period from 2019 to 2021, on the one hand, and regarding the consequences of Gazprom's sudden and unilateral decision at the end of 2020 to cease gas supply via the Hungarian transport route, now through TurkStream. In the proceedings, FGSZ requested the payment of a contractual penalty for what it considered an early termination of transport services through Hungary.

On the other hand, Energoinvest and BH-Gas sought payment of compensation from FGSZ for the refund of amounts paid for unfulfilled transport, as well as the refund of overpaid gas transport services that FGSZ had unreasonably charged in previous years.

Regarding the contractual penalty invoked by FGSZ as the basis for its claim, the Arbitration Tribunal concluded that such a contractual penalty is valid. This decision of the Arbitration Tribunal thus confirmed that the amendment to the contract through the concluded and signed Annex to the gas transport contract through Hungary from May 2020, which introduced an enormous contractual penalty, was indeed detrimental to the interests of BH-Gas and Energoinvest.

As the public has already been informed, in 2020, the then management of BH-Gas, for reasons known to them, insisted on concluding an annex to the Gas Transport Agreement, which stipulated an enormous contractual penalty of USD 30.5 million in favor of FGSZ if BH-Gas and Energoinvest were to terminate the Agreement for any reason.

The decision of the former BH-Gas management remains indefensible, given that Gazprom, the sole supplier of gas to Bosnia and Herzegovina for decades, prioritized gas delivery via the new TurkStream. Furthermore, instead of insisting on signing the unfavorable Annex to the contract, there was an opportunity at that time to switch to a different contractual regime for gas transport with the Hungarian transporter FGSZ under more favorable conditions (as did other gas buyers who used the same route for transport through Hungary).

According to the documents presented during the arbitration process, it is observed that the then management of BH-Gas misled both the competent ministry and the Government of the Federation of BiH, constantly claiming that the penalty for terminating such an annex to the contract at any time until December 31, 2023, would only amount to USD 7.5 million, even though at a meeting in Budapest on January 9, 2020, the then management of BH-Gas and FGSZ had already agreed that the contractual penalty would actually be increased to a staggering USD 30.5 million. Based on these completely untrue assurances to the Government of the Federation of BiH, the then management of BH-Gas obtained letters of support from the Government of the Federation of BiH.

After Gazprom unilaterally decided to change the supply direction to TurkStream at the end of 2020, despite Energoinvest's opposition, the then management of BH-Gas first informed the Government of the Federation of BiH that the decision to change direction was a political decision by Gazprom. However, as early as March 2020, for reasons known only to them, the then management of BH-Gas made untrue claims and sent a self-willed letter to the Hungarian transporter FGSZ, claiming that Energoinvest had made a unilateral decision to change the transport direction, thereby consciously bypassing the truth about Gazprom's ultimate demand and the occurrence of force majeure.

After Gazprom ceased supplying gas to BiH via Ukraine and Hungary on April 1, 2021, the then management of BH-Gas continued to pay USD 1.019 million and USD 896,000 to FGSZ and Transport Gas Serbia for non-existent gas transport. Such payments continued until August 2021. The then management of BH-Gas did this despite an explicit prohibition from the Government of the Federation of BiH to make any further payments.

The Arbitration Tribunal determined that the switch to TurkStream was imposed on BH-Gas and Energoinvest and that this switch to TurkStream was not caused by the will of BH-Gas or Energoinvest. Nevertheless, the Arbitration Tribunal concluded that Gazprom's intention to change the supply direction to TurkStream was foreseeable. As a result, the Arbitration Tribunal did not accept Energoinvest and BH-Gas's argument that Gazprom's unilateral change of transport direction was solely and only a result of force majeure as defined by the gas transport agreement with FGSZ. This position of the Arbitration Tribunal confirms the unreasonableness and harmfulness of insisting on concluding the Annex to the Agreement with FGSZ and agreeing to an unreasonable contractual penalty.

On the other hand, Energoinvest and BH-Gas fully succeeded in their claim that FGSZ must refund the amount of USD 1.019 million that the then management of BH-Gas had unreasonably paid to FGSZ after the change in gas supply direction. Despite FGSZ's opposition, Energoinvest and BH-Gas convinced the Arbitration Tribunal that FGSZ had retained such amounts even though it was no longer providing any gas transport services through Hungary. The Arbitration Tribunal confirmed that FGSZ must refund these unfounded payments.

Energoinvest and BH-Gas also fully succeeded in their claim that FGSZ had charged inflated prices in the previous period. The then management of BH-Gas paid these illegal and excessive prices without objection. The Arbitration Tribunal confirmed that in the period from January 1, 2019, to March 31, 2021, alone, the Hungarian transporter charged USD 19.09 million for gas transport, which is an incredible USD 8.94 million more than the Hungarian transporter was entitled to. The total damage to BH-Gas thus amounts to USD 9.96 million. The Arbitration Tribunal ordered FGSZ to pay these amounts to the BiH side.

Consequently, taking into account the amounts owed to FGSZ and to BH-Gas and Energoinvest, BH-Gas and Energoinvest owe the Hungarian transporter the remaining part of the contractual penalty in the amount of USD 11.16 million. By initiating their own proceedings against FGSZ, BH-Gas and Energoinvest successfully managed to reduce by 50% the damage caused by the then management of BH-Gas by accepting the enormous contractual penalty. All of FGSZ's claims against the Government of the Federation of BiH were rejected in their entirety.

The outcome of the proceedings confirmed Energoinvest's position that the then management of BH-Gas insisted on and imposed the signing of a detrimental Annex to the contract and paid unfounded amounts to the Hungarian transporter after April 1, 2021. FGSZ must refund these amounts only because Energoinvest, by insisting on the counterclaim, managed to get the money back. The proceedings also confirmed that the then management of BH-Gas, without any objections, agreed to pay excessive prices for years to the Hungarian transporter, with amounts sometimes reaching up to 420% higher per month compared to the Hungarian transporter's tariffs approved by their Regulator.

At the same time, the then management of BH-Gas insisted on and misled the Government of the Federation of BiH into supporting the conclusion of the Annex to the contract, which stipulated a contractual penalty in favor of FGSZ in the amount of an unbelievable USD 30.5 million, by claiming exclusively in their written communications to the Government of the FBIH that it concerned penalties of USD 7.5 million.

Therefore, regarding the costs, the detrimental effect of the enormous penalty in favor of FGSZ, after BH-Gas and Energoinvest managed to recover USD 9.96 million based on their counterclaim, was overcome by the end of 2021. This is because BH-Gas and Energoinvest, after switching to TurkStream, no longer paid inflated transport costs through Hungary. This shows how disastrous the efforts of the then BH-Gas management were to continue paying the Hungarian transporter at all costs – for an empty pipeline through which not even 1 m3 of gas passed for Bosnia and Herzegovina from April 1, 2021, onwards. The competent authorities should investigate the motives for such actions.

BH-Gas and Energoinvest, with their legal team, are analyzing further steps to potentially further reduce the damage caused to these companies by the illegal and negligent actions of responsible persons from BH-Gas at that time.