The European Commission has published today (22nd April 2015) a statement that provides details of the Statement of Objections it has sent to Gazprom with respect to the anti-trust action it has now brought against that company.

I reproduce it below together with Gazprom’s reply.

The EU will do everything it can to prevent Greek cooperation with Gazprom

This news comes as no surprise to anyone who has followed the tangled relations between the EU and Gazprom.

The background to this story is that the EU bureaucracy has always been antagonistic to Gazprom.

The reasons for this are twofold:

The EU bureaucracy has never been happy with a large state-owned company based outside the EU operating outside its control within the EU area and cutting individual deals with individual EU companies and governments.

Going far beyond that, however, is the deep resentment of the EU and of the West as a whole at the refusal of the Russians to let Western oil and gas extraction companies operate inside Russia in the way they do in some other oil and gas producing countries.

Back in the 1990s, when the USSR broke up, the West saw in Russia an El Dorado of natural resources. The so-called “dash to gas” that took place then assumed limitless supplies of natural gas flowing to Europe from Russia, extracted there by Western companies.

That didn’t happen because of the determination of the Russian government to keep control for Russia of the country’s natural resources.

It is impossible to understand the furious Western response to the Khodorkovsky case without taking this factor into account. At the time of his arrest Khodorkovsky was cutting deals with Western investors that some in the West saw as offering hope of a large scale entry of Western companies into the Russian energy industry.

It is impossible also to understand the West’s personal hostility to Putin himself without this background. Rightly or wrongly, Putin has come to be seen as the individual who blocked the opening up of the Russian energy industry to Western energy companies. Many of the allegations concerning Putin’s supposed fortune were originally intended to insinuate that he was doing this because he has a personal stake in the Russian energy industry, alleging that he is its actual owner. This accounts for some of the fantastic figures one sometimes sees bandied around for the amount of Putin's wealth.

As for Gazprom, it is no secret that many in the West (e.g., the Swedish economist Anders Aslund) want to see it privatised and broken up, with its parts sold off to Western companies.

The EU Commission’s case against Gazprom has been in preparation for some time. What seems to have precipitated its publication today is alarm that, following a visit by Gazprom’s CEO Alexey Miller to Athens, Greece might be about to sign a deal linking up to the pipeline Russia is building to Turkey.

The EU Commission wrecked the preceding South Stream pipeline project by insisting that the EU’s Third Energy Package, which requires separation of ownership of production and distribution infrastructure, must retroactively apply to it. It did so in the expectation that South Stream was so important to Russia that Gazprom would submit to the Third Energy Package and agree to share ownership of South Stream with Western companies. The EU Commission undoubtedly saw this as a first step towards getting Western companies involved in the gas industry in Russia itself.

To the EU Commission's astonishment and to the dismay of central and eastern Europe, where countries had been relying on South Stream to fill their energy needs, Russia instead responded by cancelling South Stream and contracting to build a pipeline to Turkey. In doing so, however, Russia left it open to the Europeans to decide whether or not they wanted to join up with this pipeline at some future date.

Several central and eastern European countries have said they want to do so and there have been reports circulating that Greece was looking to sign a pipeline deal with Gazprom in return for a $5 billion prepayment with which it could meet its current obligations to the IMF. There were even some reports that Greece might even sign such a deal today (22nd April 2015).

The rushed announcement today (22nd April 2015) of the anti-trust action against Gazprom seems to have been intended in part to avert that possibility. Not only would such a deal have represented a revolt by Greece against the EU's anti-Gazprom energy policy. More alarming still, it would mean that Greece, with which the EU is engaged in difficult negotiations over its bailout, would obtain a source of funding from outside the EU, which would strengthen its position in the bailout negotiations. That is a nightmare the EU leadership wants to prevent at all costs.

That does not of course mean that the case the EU is bringing against Gazprom is only about Greece. As I have said, given the EU bureaucracy's hostility to Gazprom, this case has been brewing for some time. Even if there was no risk of a deal with Greece the case would have been brought eventually. The fear of a deal between Gazprom and Greece has determined the timing of the announcement, not the substance of the case.

That Gazprom as an entity is the ultimate target is obvious from the complaints the EU Commission is bringing against it.

Buried in the text of the EU’s statement there is obvious annoyance at the way in which Gazprom has been able to use what are actually standard terms in commercial contracts forbidding resale of its product to prevent, for example, the success of the EU’s attempt to supply Ukraine with Russian gas through the process known as “reverse flow”. That explains this comment in the EU statement:

“Gazprom imposes territorial restrictions in its supply agreements with wholesalers and with some industrial customers in above countries. These restrictions include export bans and clauses requiring the purchased gas to be used in a specific territory (destination clauses). Gazprom has also used other measures that prevented the cross-border flow of gas, such as obliging wholesalers to obtain Gazprom’s agreement to export gas and refusing under certain circumstances to change the location to which the gas should be delivered. The Commission considers these measures prevent the free trade of gas within the European Economic Area (EEA)”

Gazprom insists that it has a right to operate within the EU and to cut deals with whomever it chooses and to do so in a way that protects its legitimate position within the market. It has operated within the EU in that way for more than 20 years --- ever since its creation --- without this causing any problem, and it sees no reason why retroactive EU legislation should be applied to it to tear up longstanding agreements it has made.

Certainly there seems little logic in challenging the well-established link between gas and oil prices, which forms the basis of the price formula Gazprom has used. That formula has been accepted and used by the market for many years and it is not obvious why the EU thinks Gazprom should be forced to change it.

Gazprom itself was formed from the previous Soviet ministry that was in charge of the USSR’s gas industry, which actually created Russia’s gas industry and which built most of the pipelines within the USSR’s former territory, including those that crisscross Ukraine. As Gazprom pointedly says in its response:

“We also expect that it will be duly noted that OAO Gazprom was established beyond the jurisdiction of the EU, and that it is empowered by the laws of the Russian Federation with special socially-significant functions and has the status of a strategic government- controlled business entity.”

As a strategic state-owned Russian company that emerged from a Soviet ministry and whose operations are ultimately controlled by the Russian state, Gazprom considers its supply arrangements to be the product ultimately of intergovernmental agreements between Russia and the EU and between Russia and the sovereign governments that make up the EU states and to which it supplies gas.

In other words Gazprom is not a normal commercial company but is the vehicle through which Russia, a sovereign state that is not part of the EU, chooses to sell its gas. Any dispute between the EU and Gazprom is therefore, in Gazprom's view, in reality a dispute between the EU and Russia, and must therefore be decided politically, at an intergovernmental level, and not through the legal mechanism of an anti-trust action.

Gazprom makes this quite clear in the last paragraph of its response:

“OAO Gazprom expects the resolution of this situation in the framework of agreement, previously reached between the Government of the Russian Federation and the European Commission to find an acceptable solution to the antitrust investigation on the intergovernmental level.”

These sort of disputes will continue for as long as the EU sees Russia and Gazprom not as partners in the supply of energy, but as a threat.

Russia for its part has made it repeatedly clear that it is not prepared to have the EU's energy security decided at the expense of its own or at the price of its long term economic interests.

Though the EU market remains for the moment important for Russia, this constant harassment of Gazprom is driving it away and explains why it is redirecting its gas flow away from Europe, towards Asia and China.

As for the EU there has been talk for decades of the EU diversifying its gas imports away from Russia. Little however has so far been achieved. For the moment Russia seems to be having much more success finding alternative customers for its gas than the EU is having finding alternative suppliers.

At some point this is also going to become a major issue within the EU itself, with some EU member states becoming increasingly exasperated at the way in which the anti-Russian obsessions of some other EU member states and of parts of the EU bureaucracy are being allowed to damage their economic interests and those of the EU as a whole. A glance at a map shows why there is ultimately no alternative gas supplier to the EU that can replace Russia at anything like the sort of prices that Russia can charge.

Greece and possibly Slovakia and Hungary already look to be close to this point. The political realities within the EU however probably mean that this row is still some way away.

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EU Commission Statement 22nd April 2015

The European Commission has sent a Statement of Objections to Gazprom alleging that some of its business practices in Central and Eastern European gas markets constitute an abuse of its dominant market position in breach of EU antitrust rules. See Factsheet for further details.

On the basis of its investigation, the Commission's preliminary view is that Gazprom is breaking EU antitrust rules by pursuing an overall strategy to partition Central and Eastern European gas markets, for example by reducing its customers’ ability to resell the gas cross-border. This may have enabled Gazprom to charge unfair prices in certain Member States. Gazprom may also have abused its dominant market position by making the supply of gas dependent on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure.

Gazprom now has 12 weeks to reply to the Statement of Objections and can also request an oral hearing to present its arguments. The Commission will fully respect Gazprom's rights of defense and carefully consider its comments before taking a decision. Sending a Statement of Objections does not prejudge the final outcome of the investigation.

EU Commissioner in charge of competition policy Margrethe Vestager said: "Gas is an essential commodity in our daily life: it heats our homes, we use it for cooking and to produce electricity. Maintaining fair competition in European gas markets is therefore of utmost importance.

All companies that operate in the European market – no matter if they are European or not – have to play by our EU rules.

I am concerned that Gazprom is breaking EU antitrust rules by abusing its dominant position on EU gas markets. We find that it may have built artificial barriers preventing gas from flowing from certain Central Eastern European countries to others, hindering cross-border competition. Keeping national gas markets separate also allowed Gazprom to charge prices that we at this stage consider to be unfair. If our concerns were confirmed, Gazprom would have to face the legal consequences of its behaviour."

The Commission's preliminary findings in the Statement of Objections

Gazprom is the dominant gas supplier in a number of Central and Eastern European countries. In light of its investigation, the Commission's preliminary view is that Gazprom is hindering competition in the gas supply markets in eight Member States (Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia). The Commission finds that Gazprom implements an overall abusive strategy in these gas supply markets, in particular:

• Gazprom imposes territorial restrictions in its supply agreements with wholesalers and with some industrial customers in above countries. These restrictions include export bans and clauses requiring the purchased gas to be used in a specific territory (destination clauses). Gazprom has also used other measures that prevented the cross-border flow of gas, such as obliging wholesalers to obtain Gazprom’s agreement to export gas and refusing under certain circumstances to change the location to which the gas should be delivered. The Commission considers these measures prevent the free trade of gas within the European Economic Area (EEA).

• These territorial restrictions may result in higher gas prices and allow Gazprom to pursue an unfair pricing policy in five Member States (Bulgaria, Estonia, Latvia, Lithuania and Poland), charging prices to wholesalers that are significantly higher compared to Gazprom’s costs or to benchmark prices. These unfair prices result partly from Gazprom's price formulae that index gas prices in supply contracts to a basket of oil product prices and have unduly favoured Gazprom over its customers.

• Gazprom may be leveraging its dominant market position by making gas supplies to Bulgaria and Poland conditional on obtaining unrelated commitments from wholesalers concerning gas transport infrastructure. For example, gas supplies were made dependent on investments in a pipeline project promoted by Gazprom or accepting Gazprom reinforcing its control over a pipeline.

The Commission's provisional findings are that these practices constitute an abuse of Gazprom's dominant market position prohibited by Article 102 of the Treaty on the Functioning of the European Union (TFEU). Such behaviour, if confirmed, impedes the cross-border sale of gas within the Single Market thus lowering the liquidity and efficiency of gas markets. It raises artificial barriers to trade between Member States and results in higher gas prices.

Background

The Commission opened formal proceedings against Gazprom on 31 August 2012.

Gazprom is the dominant natural gas supplier in all Central and Eastern European countries, with market shares well above 50% in most, and in some countries up to 100%.

Article 102 TFEU prohibits the abuse of a dominant market position, which may affect trade between Member States. Implementation of this provision is defined in the Antitrust Regulation (Council Regulation (EC) No 1/2003), which can be applied by the Commission and by the national competition authorities of EU Member States.

A Statement of Objections is a formal step in Commission investigations into suspected violations of EU antitrust rules. The Commission informs the parties concerned in writing of the objections raised against them and the parties can reply in writing of the objections raised against them. The addressees can examine the documents in the Commission's investigation file, reply in writing and request an oral hearing to present their comments before representatives of the Commission and national competition authorities. The Commission takes a final decision only after the parties have exercised their rights of defence.

There is no legal deadline for the Commission to complete antitrust inquiries into anticompetitive conduct. The duration of an antitrust investigation depends on a number of factors, including the complexity of the case, the extent to which the undertaking concerned cooperates with the Commission and the exercise of the rights of defence.

For more information, you may consult the public case register on the Commission's competition website under the case number 39816.

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Gazprom Statement 22nd April 2015

OAO Gazprom’s Statement on the adoption of the European Commission’s Statement of Objections within its antitrust investigation

On 22 April, 2015 the European Commission placed on its official website a press release informing that it had approved a Statement of Objections within the on- going antitrust investigation of OAO Gazprom’s activities in the countries of the European Union (EU).

OAO Gazprom considers the objections put forward by the European Commission to be unfounded. It should be noted that the Statement of Objections is only one of the stages within the on-going antitrust investigation and does not amount to finding Gazprom guilty of violating any provision of EU law.

OAO Gazprom strictly adheres to all the norms of international law and national legislation in the countries where the Gazprom Group conducts business. The business practices of the Gazprom Group in the EU market, including the principles of gas pricing, are in full conformity with the standards observed by other producers and exporters of natural gas.

We expect that within the framework of the on-going antitrust investigation our company’s rights and legitimate interests, rooted both in EU legislation and international law, will be taken into consideration.

We also expect that it will be duly noted that OAO Gazprom was established beyond the jurisdiction of the EU, and that it is empowered by the laws of the Russian Federation with special socially-significant functions and has the status of a strategic government- controlled business entity.

OAO Gazprom expects the resolution of this situation in the framework of agreement, previously reached between the Government of the Russian Federation and the European Commission to find an acceptable solution to the antitrust investigation on the intergovernmental level.

Information Directorate, OAO Gazprom