October 11, 2011

Gazprom and the EU: Raiding the Gas Companies


William C. RAMSAY
The Energy Editorial, September 2011

It was a matter of time before the Commission competition authorities looked into the business arrangements between Gazprom and its European partners. Some would ask why it took so long. For years Gazprom has used its capital budgets to take ownership positions downstream in client states in gas transmission, distribution and storage. While Europeans for decades have paid high oil-linked gas prices to Gazprom to encourage upstream investment in harsh Russian frontier gas for European markets, Gazprom has been re-establishing its old Soviet gas network primarily in former Comecon countries and beyond – in Europe’s major markets. Some western companies even swapped their Eastern European gas assets to Gazprom for positions in Russia’s upstream. Why these companies want to be a minority shareholder with Gazprom – you would have to ask their Boards of Directors.

The Commission has launched an effort to get a look at the inner workings of the Gazprom – European gas trade. The experiences of the Ukrainian cut-offs gave plenty of evidence that there were rigidities in some supply arrangements that stood in the way of an efficient market response to supply stress. Sure, the gas community did better in the last cutoff, but that is relative to what?

Why would the Commission worry about Gazprom comportment in European markets? Basically, it is because Gazprom is not just a company. Gazprom is clearly an extension of the Kremlin’s economic and security strategies – it is a foreign policy tool. The world watched disinterestedly as the Kremlin used Gazprom in the 90s in its near abroad, against Armenia, the Baltics and in the conflict in Boznia Herzegovina. No one paid much attention to that until the gas pressure fell for the first time in western European pipelines. Like any national oil or gas company, Gazprom managers probably wish the Kremlin would find other tools to conduct its foreign policy. But that has not happened yet and recent developments in Russia’s Presidential race would suggest it won’t change for a while.

So far the Commission has not accused Gazprom of anything. Nor has the Commission accused the European companies of any wrongdoings. But there is far less transparency in the gas sector than elsewhere and Europe is relying ever increasingly on gas. Germany’s recent decision to get out of nuclear will have major implications for German gas demand – which they will meet in part through Nordstream and greater reliance on Gazprom. The third package envisages international investors in European energy infrastructure just as European companies expect to be able to invest in other countries’ energy sectors. Commission action now should contribute to preserving that intent – but on Community terms.

The “Third Package” provides a well informed roadmap to guide the integration of the European market. It is not a geopolitical roadmap. It is designed to create a stable, predictable environment for investors to have the confidence to invest and consumers to be satisfied of the security and affordability of their supply. Hopefully this exercise can put to rest lingering doubts and provide a higher degree of transparency to European gas markets.

But the Commission needs to play this card carefully. Gazprom is an important supplier of gas to Europe and has been (with minor exception) an excellent partner. There are vast resources of oil and gas in Russia as yet not mobilized. The logical customer for these fossil fuels is Europe. The only real test for the Commission to apply is whether European companies and Gazprom are playing the game according to the rules. That will be hard enough to interpret as the rules are changing. The Commission will be judged on its evenhandedness. No one has an interest in unduly raising tensions in energy markets where the challenges are great enough as they are.

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