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    [NGW Magazine] Baltics Eye Freer Market

Summary

This article is featured in Volume 3, issue 11 of NGW Magazine - The EC-Gazprom settlement was given a qualified welcome by the Baltic States, where there is some resentment that no fine was imposed on the Russian monopoly. Markets may not change overnight but the short-term prospects are good.

by: Linas Jegelevicius

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[NGW Magazine] Baltics Eye Freer Market

The EC-Gazprom settlement was given a qualified welcome by the Baltic States, where there is some resentment that no fine was imposed on the Russian monopoly. Markets may not change overnight but the short-term prospects are good.

Russian gas giant Gazprom might be tempted to heave a sigh of relief after clinching a favourable deal with EU anti-trust regulators in late May, however the fight is just not over yet in the Baltic States – one of the regions to benefit from the decision. 

“A good number of europarliamentarians are not happy at all with the settlement pandering to Gazprom and its interests. The analysis of the violation of the EU’s competition law by Gazprom shows the discrepancy between the seriousness of the charges and the indulgent stance that the European Commission (EC) has taken towards Gazprom… The construction of Nord Stream 2 gasline endangers the security of energy supply of the entire region of central and eastern Europe,” Laima Andrikiene, a Lithuanian member of the European parliament, told NGW in Brussels on June 5. 

She is among nine MEPs who signed the enquiry to the EC, the European Union’s governing body. 

The EU legislators want to hear why the EC applies what they see as double standards in dealing with Gazprom – specifically, proposing an amicable settlement instead of imposing fines, which, the MEPs believe, is tantamount to an acquittal of the Russian monopolist.

Second, they want to know why the EC separated the Gazprom anti-trust proceeding from the Nord Stream 2 issue, even though it knew that its construction would only strengthen Gazprom’s hand in the EU gas market.  

And third, they ask, why did  the EC not extend the anti-trust proceeding to EU member states where Gazprom introduced unfair pricing? Anti-trust agencies in those states were not consulted, she said.

At Lithuania's initiative, the EC launched the probe into Gazprom's possible infringements in eight member states in 2012. The EC said in April 2015 that the Russian gas giant might have set unfair gas prices and abused its dominant position. 

Poland, Lithuania and Estonia have already threatened to sue the EC over the settlement. The EU’s decision to accept Gazprom’s offer has allowed it to escape fines of up to a tenth of its global turnover, which has especially upset Poland and eastern EU countries that had hoped in vain for a tougher stance.

Although the EC-Gazprom peace deal will not bring immediate gains, the experts that NGW spoke to agreed that the permanent positive outcome would be felt “soon.”

“First, the implementing of the EC ruling will take time. I do not expect any immediate tangible positive impact for the end user. However, on the macro level, the big market participants will start reaping the fruits soon,” Latvian energy expert Reinis Aboltins told NGW.

“The agreement will allow natural gas to be sold a whole lot more flexibly now. With the Gazprom gas resale restraints lifted, it will be very interesting to see how the market participants will use the new improved possibilities,” the analyst said.

“Third, the negotiating of gas prices with Gazprom is about to become a two-way street. Until recently, it was a one-way street, with Gazprom holding all the trump cards,” Aboltins said. This would be to the benefit first of the major suppliers and then the gains would trickle down to the end-users.

The decision not to fine Gazprom did not surprise Vidmantas Jankauskas, a Lithuanian energy expert and former chairman of energy price regulator, VKEKK. “The influence of Gazprom is big and it has grown with Nord Stream 2 underway,” he said. With the LNG terminal and a floating storage and regasification unit in Klaipeda and the construction of the Lithuania-Poland gas connector GIPL in prospect, Gazprom’s stature in the Lithuanian gas market has shrunk in the past few years. Yet last year it was Lithuania’s top gas supplier, increasing imports 59.5% from the previous year, from 882mn m³ to 1.407bn m³.

According to the expert, the scrapping of the so-called “destination clause” was something that not only the Baltics but all eastern and central European countries will benefit from. And another milestone for all is the fact that “that long-term contracts (for Gazprom gas supplies) are not required any more,” Jankauskas told NGW. These contracts, often with oil-indexed pricing clauses, had base prices set higher in some countries as Gazprom had no competition. But now the challenge will be to find an alternative price, in the absence of market hubs in those regions.

Lithuania’s energy minister Zygimantas Vaiciunas said that the EC investigation into Gazprom's operations will help to “better” control the Russian gas giant's behaviour in the European gas market.

“For the eight years that the commitments will be in place, it will be monitored whether Gazprom complies with these obligations. If Gazprom fails to comply, the Russian company will be fined without any further investigations,” he said. He says Lithuania will continue to look for ways of compensating for the losses incurred by Lithuanian gas consumers.

Estonia expects gas prices to drop 

Meanwhile, Estonia’s ministry of economic affairs and communications says that “a better price” for the Estonian gas consumer can be expected following the EU decision. 

“As Gazprom has brought its activity in compliance with EU law and rules on competition… it may be assumed that there will be greater competition on the market and thus also a better price for the end consumer, including in Estonia,” the ministry told NGW

According to Estonian natural gas and electricity seller Eesti Gaas, the obligations that address the EC's competition concerns and enable the free flow of gas at competitive prices in central and eastern European gas markets will not have great impact in the near future as Gazprom has already started fulfilling those terms.

“Gazprom has started fulfilling these commitments. At the current moment, contracts in the Baltic states are already linked with the market prices of the gas exchange and are formed on the same basis across countries. There are no differences in the Baltic countries anymore,” Ants Noot, member of the management Board of Eesti Gaas, told Estonian press.

According to the Estonian justice ministry, Estonian gas consumers can file a claim against the Russian energy giant Gazprom for exploiting its monopolistic position and enforcing a gas price that is too high.

“According to Estonian laws only the injured party can file a claim. The state is not the injured party, therefore the state would not be able to file a claim, but the consumers could,“ a ministry spokesman was quoted saying.  

Latvia sees competition

Meanwhile, Latvia expects that the settlement will bolster competition in natural gas trade. “It is a major step that proves the efficiency of the EU common energy policy and is a significant pre-condition for further development of the EU single energy market and improved competition in the natural gas supply in the EU,” said Latvia’s economics ministry. It said Latvia's main gains from the deal will be a “more active” competition in natural gas trade and more flexible trade terms in the markets in central and eastern Europe. 

Latvia, however, resisted the temptation to sue the EC over the settlement. “It is not surprising at all. Gazprom’s footprint in the local gas market is still strong – Gazprom holds slightly over a third of the shares in Latvijas Gaaze and Conexus, Latvia’s gas supply and transmission companies,” Aboltins said.

Linas Jegelevicius