Dear All,

please kindly see below an open letter regarding the ongoing trilateral gas discussions on behalf of Andriy Kobolyev, CEO of Naftogaz of Ukraine.

I would like to take this opportunity to answer the questions that are most frequently asked by our European partners about the current status of negotiations between Naftogaz Ukrainy and Gazprom.

First, why does Naftogaz not pay for gas delivered by Gazprom to Ukraine? Second, why is the Russian Federation's latest proposal not acceptable for Ukraine? Third, what compromise is Ukraine ready to make to settle the dispute?

On the gas payments: we are ready to pay, and we repeatedly made this clear to Gazprom. Moreover, Naftogaz has paid all invoices for gas supplies the price of which is not disputed. Naftogaz is prepared to pay for the remainder of the delivered gas as soon as we reach agreement on price. Naftogaz will not pay $485/tcm - the price demanded by Gazprom - because our contract clearly states that we should be charged $268.5/tcm. This price cannot be changed by our Russian counter-party unilaterally.

Speaking of the proposal made by Gazprom to adjust the price by a decree of the Russian Government, we strongly believe that the gas price should be set in a contract between buyer and seller. Any proposal enabling either party to change the price unilaterally is unacceptable to Naftogaz, just as it would be unacceptable to any other entity acting in a reasonable manner.

Also, we are not asking for a discount to the unreasonable price being charged by Gazprom. We are asking for a fair market price. The price levels Ukraine is currently receiving from the EU shippers are much lower than what Gazprom is offering, even with the so-called discount factored in. The latest offer I have on the table from a major European gas supplier is around $300/tcm.

So what way do we see out of this impasse?

During the previous rounds of trilateral negotiations involving the EU, we said that we were ready to accept a compromise put forward by the European Commission. It was a package solution and included the following points:

a) The parties agree on an interim price of $326/tcm to be applied from April 2014 to July 2015. This price is the most feasible and straightforward choice: it is not based on any market research and is nothing more than the simple average of $268.5/tcm, the price we have been arguing for, and $384.5/tcm, Gazprom's offer.

b) Naftogaz pays for all unpaid gas deliveries at the agreed price. When Naftogaz and Gazprom, either by way of negotiations or via arbitration agree on a new price, final settlement between the parties will take place.

c) Both parties retain the right to apply for arbitration to determine a fair and market-based price level. Any other matter of the existing contract between Naftogaz and Gazprom may also be subject to review via Stockholm arbitration.

d) The package solution is to be spelled out in a commercial agreement between Naftogaz and Gazprom, and cannot be changed in a unilateral manner.

To reinforce this plan, the Ukrainian Government had even indicated its readiness to provide a sovereign guarantee for Naftogaz's future payments for actually taken volumes of gas provided the Russian side accepts this plan.

The compromise offered by the European Commission is still valid.

We truly hope that Gazprom agrees to this plan during the upcoming new round of trilateral talks in Kyiv. If there is no agreement, we will have all grounds to believe that Gazprom's real goal is not to settle the outstanding issues with Ukraine but to promote the South Stream project. The clearly artificial gas price dispute with Naftogaz could be used as a new tool in this promotion, serving as an excuse to halt gas supplies.

We keep our fingers crossed and hope to resolve our differences in a civilized manner. Further escalation is clearly not in the interests of any of the parties involved.

Best regards,
NJSC Naftogaz of Ukraine