[NGW Magazine] EC Settlement forces Change on Russia

Polish pressure over the European Commission's Statement of Objections leak fails to lead to harsh terms for Gazprom, but a fine might never have been paid and would only have worsened relations while this solution forces compliance.

Polish news website Biznes Alert went public April 10 with the European Commission's Statement of Objections against Gazprom, the Russian gas export monopoly. This caused much consternation within the European Commission's directorate-general for competition (DG Comp), under Margrethe Vestager, and Gazprom itself. 

Despite renewed outcry as the leak revealed that DG Comp was initially considering a much harder stance, the anti-trust case has been concluded along lines only somewhat tougher than Gazprom’s proposed terms – and with no fine.

This document was a result of the investigation into Gazprom that started in 2011, after a formal complaint by Lithuania. The statement was then presented – the text never published – in 2015, in the midst of an upsurge of anti-Russian political sentiment resulting from the annexation of Crimea from Ukraine, which also resulted in international sanctions on a number of Russian companies and individuals. 

The recent leak, though still heavily redacted in parts, inflamed the situation surrounding an impending settlement of the long-running anti-trust case. However, settlement proceeded as rumoured, with DG Comp releasing a conclusion on May 24 that avoided fining the Russian gas giant. 

Vestager sought to downplay the absence of a fine and emphasised that Gazprom will be required to ‘play fair’ from the European perspective, noting “these obligations will significantly change the way Gazprom operates in central and eastern Europe, to the benefit of millions of European consumers,” and that “Gazprom has accepted that it has to play by our common rules — at least if it wants to sell its gas in Europe.”

Speculation becomes reality 

While a complete analysis of the recent settlement is beyond this current discussion, some key points can be mentioned:

• On pricing, Gazprom agreed to allow customers the right to ask for a price review if they feel they are being overcharged compared with western gas hubs. If the situation is not resolved satisfactorily within 120 days, an arbitrator appointed by the EU can impose a fair price.
• Gazprom will drop all clauses restricting its customers’ ability to resell gas across borders.
• Gazprom will facilitate cross-border flows in the Baltics, which have limited connections.
• Gazprom cannot leverage its dominance in infrastructure to affect the gas market of a country.
• Gazprom will waive all claims against Bulgaria remaining from the failed South Stream project. 

These measures are valid for eight years, and the EC can impose a fine of up to 10% of the company’s annual turnover (around €6-7bn, or $7-8bn) for non-compliance.

Resolution shows softening tone

Tempers are flaring because the earlier leaked statement, at 271 pages long, with the table of contents alone running to nine pages, 24 chapter headings, and countless sub-headings, contains substantial documentation of complaints that detractors say are not adequately addressed by the (no fine) resolution.

It is, however, tougher than Gazprom’s proposed concessions (known as ‘commitments’) that were published in February 2017.Those commitments signalled Gazprom’s willingness to address a number of areas: 

• No more territorial restrictions in its contracts. Gazprom also made a limited offer to allow customers to change their delivery points, subject to ‘service fees’.
• The commitments also appeared to offer a price review once every two years, subject to certain conditions being met. Rather than an explicit reference to the TTF hub – the most liquid gas trading hub in Europe – Gazprom’s commitments refer to pricing levels with reference to the weighted average of import prices in Germany, France, and Italy and/or prices at liquid hubs in continental Europe.
• Finally, there was no mention of the Yamal-Europe pipeline in their proposed commitments. The pipeline runs from Russia to Germany via Belarus and Poland. In Belarus, Gazprom is the only shareholder. In Poland, Gazprom owns 48% of the pipeline, and its influence and outright control over infrastructure there and in neighbouring countries has long been a point of contention.

Some 20 companies, mostly from eastern Europe, in addition to some member states, made public criticisms of the proposed commitments in 2017. They typically suggested that the commitments were inadequate, and this feeling is now reinforced as stakeholders evaluate the final settlement compared with the full depth and detail of the leaked Statement of Objections.

The final settlement did, however, clearly come in tougher than what Gazprom was proposing. In multiple areas the settlement furthers something Gazprom had offered, but removes their attempted conditions: the price framework is substantially tougher, with the provision for resolution from an EU-appointed arbitrator instead of Gazprom retaining conditions to be met. Likewise, the provision to enhance the gas markets of the Baltics, with flexible delivery points, is stronger than Gazprom’s proposal that included service fees.

Poland leads criticism

Despite these tougher provisions, Poland, and their gas giant, PGNiG, have continued to be leading voices in the criticism of Gazprom’s practices. In an early May editorial, partly in response to the leak, PGNiG CEO Piotr Wozniak made a case that represents many in eastern Europe. He notes the many aggressive enforcement actions (and successes) of DG Comp against huge international companies, such as Facebook, Microsoft, and Google, and contrasts that to the case against Gazprom, which the EC settled without a fine at all.

PGNiG, he maintains, has been treated as more of a hostile entity than the Russian company, as the EC in 2016 demanded “virtually every document related to the sales contract with Gazprom…. The smallest details, including price formulas, amendments and exchanges of notes, were filed with the EC under the explicit threat of a financial penalty amounting to 5% of PGNiG’s income — about €1mn/day.” Some of these data are trade secrets not often disclosed in such cases.

Pricewise, PGNiG and Polish sources may be heartened by the neutral arbitrator provision to resolve pricing disputes, but they still estimate that central European customers lost €19bn over 2004 to 2012. Likewise, Lithuania authorities report that they had substantial losses over the same period due to what they consider to be unfair pricing practices. The country’s energy minister, Zygimantas Vaiciunas, maintained: “We cannot write off estimated losses of about €1.5bn to our gas consumers, created by Gazprom abusing its dominant position on the market.”

Polish sources maintain their critical position. A Polish diplomat stated: "We are disappointed that the years-long proceedings have ended with no fine for Gazprom, no compensation for affected companies, and with hardly any meaningful concessions on Gazprom’s side. This is particularly worrying in the context of the aggressive Russian policy against the EU and its member states. Today’s decision sends a clear signal that the EU is coming to terms with years of Russian tactics of using Gazprom as an external policy tool against the [central and eastern European] region.

Long term prognosis

But even Polish sources concede the difficult position Vestager and DG Comp are in. Gazprom and Russia’s strong relationship with Germany and other western European establishment figures has been well discussed, even at the height of tensions around 2014-2015. Gazprom is smart to get ample buy-in from German companies such as BASF and Uniper as part of the Nord Stream II project, and one cannot blame those companies for looking out for their best financial interest.

Nordic authorities are in the final stages of deciding to issue permits for construction in their territories. One can make the argument that Gazprom has given in to some of these demands in order to weaken their monopolist position in eastern Europe – giving up their use of infrastructure to control gas markets, and the end of rigid enforcement of destination and non-export clauses will substantially liberate eastern markets and may sway policymakers towards approving Nord Stream 2.

PGNiG's chief executive Piotr Wozniak (Credit: PGNiG) 

Furthermore, Vestager’s choice to not pursue heavy fines, such as they imposed on US tech companies, may be proven to be the best decision for the future of EU markets. While Gazprom has long been an antagonistic presence for certain EU countries and circles, they also must have good access to EU customers to sell to.  This settlement uses their reliance on EU gas demand to extract substantial practical concessions, whereas a heavy fine, while it may have been preferable to Poles, would have been contested for years and not guaranteed behavioural changes. 

Ben McPherson

Poland wanted a fine

Polish gas company PGNiG's chief executive Piotr Wozniak told NGW mid-May this year that he would not be happy if the European Commission accepted Gazprom's proposed anti-trust settlement proposals without imposing a fine. It was a consistent position of the CEO: he called on the EC to impose such a fine a year ago.

PGNiG claims that, because of the duration of the EC probe, Gazprom has continued to profit from its ability to charge higher prices for its gas in some parts of Europe. It had seven fat years, he said, from the start to finish of the probe. Now he wants Gazprom to have seven lean years. If Gazprom had been fined, the money would not go to PGNiG, but into the European Union budget, he said.

PGNiG is separately locked in a gas price dispute with Gazprom over a take-or-pay contract that does not expire until 2022 and is much higher priced than hub gas. The Stockholm arbitration ruling has already been postponed by many months owing to an illness on the Russian side, he said. All the evidence has been presented but there is no deadline for a ruling. 

The minimum annual take or pay is 9.3bn Russian m³ (measured at 20 degrees Celsius), or 8.7bn Polish m³ (measured at 0 degrees Celsius). The maximum annual contracted volume is 11bn Russian m³, or 10.2bn Polish m³. European cubic metres are measured at 15 degrees Celsius. 

Some of this gas it was able to sell to neighbouring Ukraine, and has managed to export 1.1bn m³ between July 2016 and the end of 2017. It has since then sold a little more: when Russian gas deliveries did not start as agreed on March 1, Naftogaz Ukrainy rang up in desperation to arrange a quick deal, as it could not mobilise its underground storage fast enough to meet demand. Wozniak said the deal was done, but it was business, he said, not an act of charity. It was for a small volume though, only amounting to 60mn m³/month.

PGNiG had a monopoly on gas supply within the country, but six or seven years ago it was fined for anti-trust behaviour. Since then, gas and power exchanges have facilitated a market development.

Nevertheless the country has not implemented the gas directive as it was intended, and it has imposed strict requirements on gas importers to book storage capacity that have made it uneconomic to enter the market while some of those present have shut up shop.  

This problem, raised by the European Federation of Energy Traders, is being examined by the EC which has also picked the brains of some European gas consultancies that NGW has spoken to, as it conducts its investigation.

Wozniak also said that Gazprom was not always a reliable supplier, delivering gas that was off-specification last July. It paid compensation for that, but Wozniak said PGNiG would rather have had the gas than the money. For three days, PGNiG had to meet demand from its underground storage.

In March 2018, PGNiG said that, whereas 90% of total gas imports to Poland in 2015 were supplied by Gazprom, preliminary data for 2017 showed that had declined to about 70% as more LNG was imported.

William Powell