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August 02:
Source: http://www.naturalgaseurope.com/european-commission-vs-gazprom-time-to-do-a-deal-24881
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August 02:
The Russian Energy Giant Has Strong Incentives to do a Deal
Last week the Deputy Chairman of Gazprom
Alexander Medvedev met with the EU Competition Commissioner Margrethe
Vestager for the first time to discuss the antitrust case launched
against the company. Following this meeting Mr Medvedev made it clear
that he hoped that the case could be ‘amicably settled’. There are
indeed compelling reasons for Gazprom to do a deal. First market
developments are rendering Gazprom’s existing business model irrelevant
and it is that business model which is being substantially challenged in
the antitrust case. Secondly, the consequences of an actual published
EU competition decision against the company would be devastating in
terms of reputation and scale of liability. Both these factors provide
compelling incentives for Gazprom to file draft Commitments to the
Commission to provide a basis for a deal.
At first sight it looks like doing any
such a deal would be very difficult to do. The Commission’s
Directorate-General for Competition launched raids on Gazprom offices
across the EU, and those of its corporate allies in September 2011. In
September 2012 it formally opened an investigation into Gazprom
focussing on attempts to foreclose markets, denial of access to
competitors to competing pipelines and excessive pricing. Negotiations
were commenced with the Commission from December 2013 to June 2014.
These negotiations did not result in an offer of commitments from
Gazprom to settle the case. After Commissioner Vestager took over in
November 2014 she reviewed the case and filed antitrust charges against
Gazprom in a document known as the ‘statement of objections’ in April
2015. Gazprom now has until mid-September to file a defensive reply to
the statement of objections.
As if to make the situation worse aside
from the issues under dispute in the antitrust case, Gazprom has been
seeking to stop the reverse flow of gas to Ukraine from the European
Union. In particular, it has sort to block reverse flows of gas on the
Brotherhood pipeline from Slovakia through to Ukraine. This attempts to
stop reverse gas flows at the very least conflicts with the spirit of a
operating in a single gas market, and arguably appears to be a breach of
both EU energy liberalisation and antitrust rules.
To make matters even worse, the antitrust
dispute has been overlaid with the Ukrainian-Russian conflict. Former
Competition Commissioner Almunia in fact suspended the antitrust case in
June 2014 over concerns that the case could inflame the situation. The
major concern since Commissioner Vestager reviewed the case and filed
the statement of objections with Gazprom is that the radicalisation of
the Russian state since the beginning of the Ukraine crisis will make it
impossible for a deal to be secured. Gazprom which is majority owned by
the Russian state, and required by law to obtain Kremlin consent for
any settlement, will find it impossible to obtain such consent.
Despite the darkening clouds of conflict
and war and the dispute over the antitrust case itself there is a
compelling case to now settle.
First, the European market in which
Gazprom has operated for the past 20 years is being transformed. Gazprom
used to have comfortable long term supply arrangements with numerous
vertically integrated dominant domestic incumbents. The long term supply
contracts were usually for all or most of the incumbents import needs,
with significant take or pay clauses, destination clauses and with
prices set round the oil price. Now already in North Western Europe we
have an increasingly open deep and liquid gas market with gas to gas
competition traded on open hubs. As a result of the 2009 Ukraine-Russian
gas crisis, when gas supplies to Europe were cut for two weeks, and the
more recent concerns over supply security due to the Ukraine conflict
the EU and the Member States are seeking to expand the North West
European gas model to the whole of the European Union. The three
underpinning factors which make the North West European model work, full
application of the third energy package; physical interconnection
between national markets and new sources of supply is being extended to
the rest of the Union via the ‘Energy Union’ programme.
A further compelling factor is the
increasing irrelevance of oil price indexation, something Gazprom has
defended tooth and nail so far. However, the fall of oil prices from
$112 a barrel in June 2014 to approximately $53 a barrel in July 2015
suggests high oil prices are in trouble. This is compounded by falling
Chinese demand, continuing shale oil production in the United States,
combined with the prospect of increasing flows of Iraqi and Iranian oil
onto global markets. These factors are likely to keep prices from rising
any time soon. Worse still there is a flood of LNG entering global
markets from Australia, Papua New Guinea, and shortly from the United
States, where approximately 60bcm of capacity is being developed (more
than half of what Gazprom is likely to sell into EU markets in 2015).
Europe is likely to face, whatever Gazprom does, lower prices and much
greater gas liquidity from more diverse sources than ever before.
Clearly Gazprom as a potentially low cost
producer, with vast gas reserves and being proximate to the European
market, could benefit significantly from access to an open, deep liquid
single European gas market. However, what Gazprom will not be able to do
in future is to undertake the traditional practices alleged to have
been undertaken by the Commission in the antitrust case, including,
excessive pricing; attempts to operate differential territorial pricing
schemes or attempts to foreclose markets.
Secondly, if no settlement is reached
with the Commission, Gazprom faces being handed down a public
prohibition decision. Media commentators focus on the prospect of a fine
of up to 10% of worldwide turnover which would put a fine at between
$12 to $15 billion. Any fine would be much smaller, around $500-$1500
million. It is not however the fine that is really the problem for
Gazprom. There are in fact three very serious problems with a
prohibition decision for Gazprom. First, is the reputational disaster
from a public prohibition decision, which may well make the company far
more politically allergic than it already is. This reputational issue
has so far been underestimated in any analysis of the case and could
result in an even more rapid reduction in demand for Russian gas than
hitherto. Second, any public prohibition decision could provide the
basis for bringing civil damages claims in national EU courts against
Gazprom by energy companies and energy intensive users and possibly
class actions by consumers and small businesses all of whom would allege
illegal overcharging on antitrust grounds. Given that the claims would
in most countries date back to at least 2004 the scale of liability
could be immense. The third issue relates not to Central and Eastern
European, and Baltic markets where the Commission is investigating, but
Western Europe. Gazprom still has a number of major long term supply
contracts with clients in Western Europe. Each of those contracts has
price review clauses which will be triggered when a significant market
event occurs affecting price. A prohibition decision which affected
pricing in Central and Eastern Europe would particularly because of an
increasingly integrated European market also affect Western Europe,
triggering a further round of (inevitably downward) price reviews.
Gazprom cannot go back to the traditional
closed national markets and national incumbents of old it did business
with. They are slowly but surely being replaced with an integrated
single European gas market. It would be much better for Gazprom to
recognise the increasingly integrated market realities of the European
gas market and practical legal realities of the antitrust case and do a
deal.Source: http://www.naturalgaseurope.com/european-commission-vs-gazprom-time-to-do-a-deal-24881
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