Thursday, November 15, 2012

European Commission Challenges Gazprom

With the industry's eyes turned toward the BP-Rosneft deal, little attention is being paid to the  Russian state-controlled natural gas company, Gazprom.  This institution has held a monopoly on the control of gas to Eastern Europe, and a controlling interest in the gas to the rest of the continent.  Now, however, Gazprom's position is being challenged by the European Commission.

On September 4, 2012 the EU's antitrust authories opened a formal investigation into whether the company had blocked fair competition in the natural gas markets of Central and Eastern Europe.  The European Commission said Gazprom may have divided markets by hindering the free flow of gas across European Union member states, and imposed unfair prices on its customers.  "Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply," they said.  If found guilty on such charges, the EC could fine Gazprom as much as ten percent of its worldwide income. 

The EC investigation is currently focusing on the Eastern European countries of Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia and Lithuania--although it could be expanded.  It follows last year's raids on the office of Gazprom's European partners, probably in search of evidence to support the charges.

Russian President Vladimir Putin responded quickly, issuing a decree that strategicially important companies--including Gazprom--could not provide information to regulators from "unions of foreign states" without prior approval of the Kremlin.  Further, no approval would be granted if the changes "damage the economic interests of the Russian Federation."  Gazprom spokesman Sergei Kupriyanov characterized the investigation as commercial pressure, and threatened to direct Russian gas away from Europe.  The investigation "can be viewed as pressure from the European Union on Gazprom, with the goal of influencing prices and the results of commercial contracts, which clearly contradict the principles of market," he said.  Kupriyanov added the investigation is encouraging Gazprom to look to Asia for new markets.

The EC's actions are generally popular in Eastern Europe among a population that has been paying high gas prices under "take or pay" contracts.  "It is important what Brussels is doing," said Szymon Kardas, a Russian energy expert at the Center for Eastern Studies in Warsaw.  "This is the Competition Commission that took on Microsoft for its dominant position in Europe."  Lithuanian deputy ambassador to the European Union, Arunas Vinciunas, said, "For a small country it means a lot.  It shows that we can defend our interests through solidarity inside the E.U."  Not everyone agrees that the investigation is a good idea, however.  The Suddeutsche Zeitung called it an unprecedented action and a direct attack on Russia's President Putin.

Anders Aslund, a senior fellow at the Peterson Institute for International Economics, predicted Gazprom will be found guilty on all charges.  "The proceedings can take years," he wrote in the Moscow Times, "but the outcome appears obvious.  The oil-linked prices are likely to be deemed anti-competitive, as the very long-term contracts with fixed prices and volumes.  The Gazprom take-or-pay clauses that force a customer to take the whole volume or pay for it in any case will be prohibited, and prohibitions against reselling are evidently anti-competitive.  Finally, Gazprom will in all likelihood be fined billions of euros for its long-lasting malpractices."

Separate from the investigation, Gazprom is also under pressure because of weak demand in Europe and Asia.  In September, Gazprom announced it was restricting access to their pipelines by independent producers.  "Today the gas market in Russia has an excess of resources over demand," said Gazprom's deputy head of marketing and liquids processing, Alexander Mikheyev.  "In this situation we are looking at cuts to gas intake from independent producers."

The Europeans had long demanded that independents have unrestricted access to the pipeline network, as a way to insure a diversified supply for the European market.  But Merrill Lynch oil analyst Karen Kosanian points out that Russian domestic demand for natural gas is down 3.6 percent so far this year.  "In this environment Gazprom would have to shut in its own production to sustain the independents," she said.

The falling revenues, EC investigations, and competition from shale gas and LNG, have led Gazprom to lose its favored position in the Kremlin constellation of stars.  Gazprom has been the principle source of Kremlin revenue for decades.  The Russian government owns over 50% of the $119 billion company, and Gazprom accounts for 12% of all Russian exports, according to the Washington Post.  Profits were $44 billion in 2011, but have declined more than 23% in 2012.  Russian deputy minister of Economic Development, Andrei Klepach, said the company could face serious problems because of shale gas competition.  Further, the company has not made sufficient investment to modernize their operations.   "It's the nationalization of costs and the privatization of profit," wrote Rusenergy analyst Mikhail Krutikhin.