Europe Throws Down the Gauntlet at Gazprom

European Union competition officials will likely throw the book at Russian energy giant Gazprom on Wednesday, flexing Brussels’s strongest muscle and potentially reshaping an energy sector that has worked largely to Moscow’s advantage since the 1970s.

EU Competition Commissioner Margrethe Vestager, who leapt into global headlines last week when she opened an antitrust investigation of Google, is expected to charge Gazprom with a bevy of anti-competitive practices, including denying pipeline access to other energy suppliers and charging discriminatory prices to certain customers.

The high-profile antitrust case, in the works since late 2011 and officially open since 2012, continues a recent thrust by European bureaucrats to push back against Russia by digging deep into their regulatory toolkit. But it also threatens to further ratchet up tensions between Brussels and Moscow that have been severely strained over the Ukraine crisis.

The EU case takes aim at three pillars of Gazprom’s longtime business model in the European market, the Russian firm’s biggest outlet for natural gas. At issue are Russian restrictions on the free flow of gas between European countries; limits on third-party access to gas pipelines; and the linkage of gas prices to crude oil prices, which EU officials argue has led to discriminatory pricing. All three practices under investigation potentially undermine Europe’s energy security. If they can be resolved either through negotiations with Gazprom or in the courts, it would help create a genuinely unified European energy market better able to withstand supply shocks.

It’s not clear if Brussels will slap Gazprom with all three charges or focus on the seemingly more egregious violations of European Union law, such as Gazprom’s heavy-handed efforts to stamp out alternative sources of supply for Europe. In pursuing charges against Google, for example, the European Commission focused first on the most-documented market abuse while continuing to investigate other possible charges.

“Taking on Gazprom is about Vestager making a point: The rule of law applies across the board, and it also applies to monopolists that seemed untouchable in the past,” said Andreas Goldthau, an energy expert at Harvard University’s Belfer Center.

To be sure, the charges by themselves are only the beginning of a protracted showdown between Brussels and Moscow. The company could still negotiate a solution, said Alan Riley, a professor at City Law School, City University London. That would help it avoid hefty fines and possibly civil lawsuits, in addition to sparing Gazprom a devastating blow to its reputation as a reliable energy supplier. Indeed, earlier this month, Gazprom chief Alexei Miller signaled the company’s apparent willingness to abide by EU laws in a speech in Germany, vowing that “we will stick to the models and rules of the European market.”

But Gazprom is not purely a corporate actor; the Kremlin’s influence over Gazprom’s business strategy is undeniable, and the gas giant is often used as the sharp end of Russian President Vladimir Putin’s energy geopolitics. Given the dismal relations between Putin and Europe due to the Ukraine crisis and Western sanctions, that might make it tough for the company to cut a deal with Brussels, Riley said. That would leave competition officials and the company to slog it out in the courts, which could take years.

The European Commission’s allegations of anti-competitive behavior cut to the heart of Europe’s gas dependence on Russia, which began with a trickle in the mid-1970s at the height of the Cold War and which has continued to grow in the post-Soviet era. Today, Europe gets about one-third of its natural gas — or about 160 billion cubic meters a year — from Russian gas fields, much of which is shipped by pipeline via Ukraine.

Seeking to diversify its energy supplies has been a priority for Europe since at least 2009, when Russia cut off gas shipments to Ukraine for the second time in three years and created energy shortages throughout Europe. Over the past year, with the crisis in Ukraine and the specter of additional supply disruptions, diversification has become something of an obsession for Brussels. In February, the EU launched plans for a new “energy union” meant, in part, to help Europe find alternative sources of energy.

Diversification is behind one of the European Commission’s complaints about Gazprom: limits on pipeline access for other gas suppliers. That was one particular focus of the 2011 “dawn raid” carried out at Gazprom offices by European competition officials. Those allegations could be particularly troubling for Gazprom, because under EU competition law, dominant companies have to act “as if” they have serious competition, even if they don’t — and Gazprom clearly has not acted that way, especially in Central and Eastern Europe, where it dominates many countries’ gas supply.

Of more immediate relevance in the context of the Ukraine crisis are restrictions on the ability of European countries to resell Russian gas to neighbors in need. That essentially Balkanized a European energy market that was nominally unified. In times of gas supply cutoffs from Russia to Ukraine, such as happened in 2006 and 2009, that restriction limited the ability of other countries to send Kiev energy supplies to make up the shortfall. But during the most recent gas cutoff last summer, neighbors such as Poland and Slovakia were able to reroute Russian gas to Ukraine to stave off crisis.

As recently as one year ago, Gazprom executives continued to rail against that practice, which limited the company’s ability to squeeze any one customer. Gazprom chief Alexei Miller called those so-called reverse flows “illegal” last spring. When neighboring countries re-exported gas to Ukraine, Gazprom apparently retaliated: Poland, Slovakia, and Hungary all reported sudden and unexplained reductions in Russian gas volumes last fall as soon as they started helping Kiev.

Perhaps the toughest charge for Brussels to make stick would be that Gazprom has gouged European consumers by linking the price of natural gas to the price of crude oil. Decades ago, when oil and gas were often used interchangeably in power generation and industry, oil-linked natural gas prices became the global norm; Gazprom’s use of oil-linked contracts for its gas customers, in other words, is more a relic than a nefarious plot. What’s more, since oil prices have fallen off a cliff since last summer, oil-linked gas contracts could actually benefit European consumers, much as they have in Asian gas markets in recent months.

However, if the European Commission pursues Gazprom’s oil-linked pricing policy, it could have the broadest global implications. That’s because massive energy deals between Moscow and Beijing, including a 30-year supply of natural gas, are still based upon some link to the price of oil. If Europe forces Gazprom to jettison that old model, it could lead China to renegotiate the terms of the $400 billion gas deal it inked with Russia last May, and drive an even harder bargain on the second gas deal the two countries hope to finalize next month.

Europe’s rule-of-law approach to the Russian energy giant, in other words, might complicate more than the future of Gazprom’s cash cow in Europe: It could undermine the company’s long-planned pivot to Asia, too.

Photo credit: JOHN THYS/AFP/Getty