€9 Billion Fine Possible

E.U. Charges Gazprom With Gas Market Violations

Russian President Vladimir Putin German Chancellor Angela Merkel and Ukrainian President Petro Poroshenko middle met during a 70-year D-Day commemoration ceremony in France June 6 2014 Source DPA
German Chancellor Angela Merkel, Ukrainian President Petro Poroshenko and Russian President Vladimir Putin, seen on the right, met during a 70-year D-Day commemoration ceremony in France on June 6 2014. Source DPA
  • Why it matters

    Why it matters

    • If the European Union curtails Gazprom’s dominance of Central and Eastern European markets, this could challenge the utility’s power and exacerbate the political conflict with Russia.
    •  
  • Facts

    Facts

    • Gazprom is the world’s largest energy provider and last year had revenues of €69.4 billion.
    • The European Union has been investigating Gazprom since 2012 for monopoly dominance.
    • The E.U. could fine Gazprom up to €6.9 billion based on the energy company’s annual revenue.
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After a two-year investigation, the European Union on Wednesday charged Russian energy giant Gazprom with illegally blocking access to eight natural gas markets in central and Eastern Europe.

The European Commission, the executive arm of the E.U., sent a statement of objections to Gazprom, the world’s biggest energy producer.

Under E.U. rules, the complaint could lead to a fine of up to 10 percent of the utility’s annual revenue, which based on its 2013 sales of 5.2 trillion Russian rubles, which is now the equivalent of roughly €91.5 billion ($98.6 billion), would amount to €9.2 billion.

The commission’s complaint followed a two-year investigation to determine whether Gazprom had monopoly control over E.U. markets, mostly in central and eastern Europe.

Lithuania’s president Dalia Grybauskaite responded by saying he welcomed, “the long-awaited decision of the European Commission to take up Gazprom for abuse of its dominant position in the E.U. gas market. The decision is a strong signal to consumers and the market that rules apply to everyone. The era of Kremlin-backed political and economic blackmail draws to a close.”

Brussels’ complaint comes as the E.U. continues to levy punishing economic sanctions against Russia for its support of separatist rebels in eastern Ukraine. Gazprom has 12 weeks to respond to the E.U. complaint.

Gazprom called the E.U. charges “unfounded,” saying it expected the situation to be resolved  within the framework of previous undertakings between the Kremlin and Brussels “on the intergovernmental level,” Reuters reported from Brussels.

A statement issued by Gazprom said that the company considered the charges to be unsubstantiated. “Gazprom strictly adheres to all the rules of international law,” the company wrote.

 

Gas Flows from Russia-01 map

 

For Russian President Vladimir Putin, the E.U.’s antitrust complaint is another sign of the growing political divide between Moscow and Brussels over the Ukraine.

Mr. Putin has shrugged off E.U. sanctions, and has sought to divide the 28-nation bloc by reportedly offering billions of euros to Greece, the struggling E.U. and euro member country, in exchange for allowing the construction of a new Russian pipeline to deliver natural gas into western Europe.

For Germany, the E.U. antitrust complaint represents a further ratcheting up of the pressure on Russia, which delivers most of the natural gas to Europe’s largest economy.

 

European Commissioner for Competition Margrethe Vestager gives a press conference relating to Russian gas giant Gazprom Source DPA
Margrethe Vestager, the European competition commissioner, said Gazprom was abusing its dominant position in central and European natural gas markets. Source: DPA

 

The E.U. accused Gazprom of blocking access to eight markets in Bulgaria, the Czech Republic, Hungary, Lithuania, Latvia, Estonia, Poland and Slovakia.

In announcing the charges in Brussels, the European Commission’s competition commissioner, Margrethe Vestager of Denmark, said: “Gas is an essential commodity in our daily life: it heats our homes, we use it for cooking and to produce electricity. Maintaining fair competition in European gas markets is therefore of utmost importance.”

According to the E.U., Gazprom has more than 50 percent share of the natural gas market, in most cases well above 50 percent, in most of the countries of central and eastern Europe.

“All companies that operate in the European market – no matter if they are European or not – have to play by our E.U. rules,” Ms. Vestager said.

The dominance has allowed Gazprom to charge more for its natural gas in Bulgaria, Estonia, Latvia, Lithuania and Poland, setting prices far higher than its actual costs.

Gazprom hindered competition territorially, through its pricing policy and by obtaining territorial commitments from wholesalers, Ms. Vestager said.

“I am concerned that Gazprom is breaking E.U. antitrust rules by abusing its dominant position on E.U. gas markets,” Ms. Vestager said. “We find that it may have built artificial barriers preventing gas from flowing from certain Central Eastern European countries to others, hindering cross-border competition.”

Keeping national gas markets separate also allowed Gazprom to charge prices that we at this stage consider to be unfair. If our concerns were confirmed, Gazprom would have to face the legal consequences of its behavior.”

 

Vladimir Putin and Gazprom CEO Alexei Miller attend a gas pipeline opening ceremony in Russia's far eastern city of Vladivostok Sept 8 2011 photo Source Reuters
Vladimir Putin and Gazprom CEO Alexey Miller attend a gas pipeline opening ceremony in Vladivostok. Source: Reuters

 

The company imposed territorial restrictions in supply agreements with wholesalers, including export bans, and clauses requiring that the gas they purchased could only be used in specific territories.

Gazprom also prevented the cross-border flow of gas, for example by requiring wholesalers to first obtain permission from Gazprom to export gas and by refusing in some situations to change the location to where the gas was delivered.

According to the European Commission, this prevented the free trade of gas within the European Economic Area (EEA).

In Poland and Bulgaria, Gazprom extended its position by only delivering supplies depending on commitments to invest in pipeline projects, or accepting Gazprom’s control over a pipeline.

 

Kevin O’Brien is editor in chief of Handelsblatt Global Edition; Allison Williams is deputy editor in chief. Till Hoppe and Gilbert Kreijger contributed to this article. To contact the authors: obrien@handelsblatt.com, williams@handelsblatt.com

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