What Gazprom’s Accepting EU Rules of the Game Means for European Energy Security

Gazprom is de facto taking legally binding obligations to complete the “construction” of a single gas market in the EU. Its critics are losing their strongest argument – that the company is able and willing to misuse the EU market rules, Valdai Club expert Danila Bochkarev argues. 

On May 24, the European Commission ended its longest-running anti-trust case against Gazprom without imposing fine on the Russian gas company. The investigation, which began in 2011, could have led to a fine of as much as 10% of Gazprom’s turnover, or roughly $9 billion. The Commission’s anti-trust authority has an impressive track record of imposing fines on top global businesses. For example, in May 2009 Intel was fined for 1.06 billion euro for abusing its market dominance in IT equipment. In June 2017, Commission fined Google for 2.42 billion euro for “abusing dominance as search engine by giving illegal advantage to own comparison shopping service”. Many analysists and commentators expected that Gazprom would be the next large company to be fined by the European Commission.

However, instead of fining Russia’s largest energy company, the EU anti-trust authority decided to impose on Gazprom “a detailed set of (legally binding) rules that will significantly change the way Gazprom operates in Central and Eastern European gas markets”. In case of non-respect of these rules, the Commission can still “impose a fine up to 10 % of the company’s worldwide turnover”

What are the obligations imposed on Gazprom and why are they reducing the importance of security of supply issues for the European Union?

The four pillars of the deal are:·        

  • Destination closes must be abolished – therefore, Gazprom’s customers have the right to re-sell gas both at home and abroad, thus contributing to the European gas market liquidity and natural gas price alignment between different member states of the European Union.

  • Gazprom has to offer competitive price for its natural gas supplies to Central and Eastern Europe (CEE) in line with the Western European hubs’ benchmarks, namely TTF in Netherlands and NCG in Germany. Currently, gas prices in Central and Eastern Europe are relatively low as gas price is often linked to the oil/oil products basket averaged over 6-9 months with a 3-6 month time lag. This condition means that Gazprom would not be able to benefit from an increase in oil prices in case the prices it charges in CEE significantly diverge from that on gas hubs in Western Europe.

  • Gazprom cannot act on any advantages concerning gas “infrastructure, which it may have obtained from customers by having leveraged its market position in gas supply” According to this point, Bulgaria is formally held immune from lawsuits for its cancellation of the South Stream project in 2014. Therefore, Gazprom guarantees that it will not seek “any damages from its Bulgarian partners”.

  • Last but not least: Gazprom will have to take “active steps to integrate gas markets in Central and Eastern Europe”. This point – a formality at first glance – is perhaps the most important piece in the Commission’s decision. New energy infrastructure built in CEE – mostly with the EU funds – has increased interconnectivity between the “old” and “new” member states. Therefore, the Czech Republic, Hungary, Poland and Slovakia are already fully integrated in the European single gas market. On the contrary, interconnectivity of Bulgaria, Estonia, Latvia and Lithuania with the neighboring member states is not yet fully developed. According to the Commission’s plan, Gazprom will contribute to the interconnectivity of these semi-isolated markets not by building new infrastructure, but by giving its customers the right to deliver gas to and from these countries. This option will be available for the owners of the contracts for delivery of gas to CEE and will be applied to contracts with a duration of at least 18 months. In practice, it will mean that the companies that have bought gas “originally for delivery to Hungary, Poland or Slovakia, can choose to have Gazprom deliver all or part of it to Bulgaria and/or the Baltic States instead (and vice versa)”. Therefore, European energy companies will be able to directly compete with Gazprom across the Union. Furthermore, Gazprom – together with the Connecting Europe Facility (CEF) – will contribute to the integration of European gas markets/market liquidity and lower energy prices for European consumers.

Thus, Gazprom – often accused of using energy as a “weapon” – is de facto taking legally binding obligations to complete the “construction” of a single gas market. Non-respect of these commitments will result in fines, which will be higher than any potential gains that might be expected from infringement. At the same time, Gazprom critics lose their strongest argument – that the company is able and willing to misuse the EU market rules. Objective commercial interest in the EU gas market and commitments imposed on Gazprom by DG COMP will encourage this company to play by the rules in Europe.

Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.