Antitrust muscle

EU flexes antitrust muscle to counter Putin’s gas gamesmanship

Brussels has used competition law to force Gazprom to change its business methods in the past.

BY AMERICA HERNANDEZ, PIETRO LOMBARDI AND SIMON VAN DORPE

Threatening Russian President Vladimir Putin with a massive antitrust fine has worked in the past as a way to improve the behavior of his export monopoly Gazprom in the EU, so why not try it again?

EU Energy Commissioner Kadri Simson told European energy ministers on Tuesday that Brussels' competition police had started gathering evidence on whether soaring energy prices can be blamed on illegal activity by any of the bloc's main gas suppliers. The European Commission confirmed that questionnaires had been sent to all the parties who could help piece together a case on this fall's most pressing economic crisis.

Brussels' competition investigators avoided mentioning Gazprom by name, but the company is an old sparring partner. Gazprom supplies more than 40 percent of EU gas imports and was the subject of one of the most high-profile antitrust cases Brussels has ever undertaken, from 2012 to 2018. Although that probe did not result in the eye-watering fine that Russia's leading critics like Poland and Lithuania had wanted, it did push Gazprom to radically alter its business model across Central and Eastern Europe.

Still unhappy that Moscow wasn't heavily fined in 2018, Poland is now leading the charge for EU enforcers to take fresh action over what it sees as market manipulation from the Russians, who are accused of driving up prices this year by undershooting on expected deliveries.

Putin himself is delivering mixed messages over Russia's motives. On the one hand, he is denying that Russia is using the world's biggest gas reserves as a geopolitical weapon. On the other, he is simultaneously suggesting that flows could pick up significantly if legal clearance were given to the highly contentious Nord Stream 2 pipeline that is designed to pump Russian gas straight to Germany. Gazprom did not respond to a request for comment.

No longer content to leave all the posturing (and potential bluffs) to Russia, Simson on Tuesday vowed Brussels would look into "widespread concern about market manipulation or speculation." That will be music to the ears of Polish Prime Minister Mateusz Morawiecki, who said a probe could "sober up Gazprom."

Pipeline penalties

Lawyers agreed it made sense to turn to competition law, the European Commission's single most powerful policy weapon. “While the probe may be politically triggered by the energy price crisis, it does not seem unreasonable to study the current market dynamics through the lens of competition law,” said Natura Gracia, a competition lawyer at Linklaters.

“Brussels could be looking into an abuse of dominance by Gazprom, trying to collect evidence of the company withholding supply to increase prices, or of anti-competitive restrictions in contracts between wholesale gas suppliers like Gazprom and European retail gas suppliers,” Gracia added.

Alan Riley, an academic lawyer specializing in EU antitrust, trade and energy law, who has previously advised Polish and Ukrainian energy companies, said there was sufficient evidence to open an investigation into abuse of dominance by Gazprom.

"You’ve got a dominant provider seeking to deliberately refuse to supply gas without any commercial reasons, they are directly using their market power to limit supply,” Riley said.

A full Commission antitrust probe would, of course, be too slow to be a silver bullet for Europe's gas woes this winter. The case that the EU settled in 2018 began with dawn raids across Europe in 2011. But that may not be the immediate objective. Merely talking about a probe — which may never lead to formal charges, let alone a fine — could simply be intended to sharpen minds in Moscow.

Riley said the Commission's threat of an investigation "raises pressure on Russia and Gazprom" to make more gas available.

The European Commission can issue a fine of up to 10 percent of a company's turnover in a financial year. Although Gazprom was spared anything so severe in 2018, it was forced to stop divide-and-rule tactics in Eastern Europe, where it could dictate prices country-by-country. The EU case pushed it to stop writing contracts in which Eastern Europeans could not resell gas to neighbors and struck out clauses in which Gazprom's rivals were excluded.

U.S. Senior Adviser for Global Energy Security Amos Hochstein said on Monday that Russia had the gas required to keep supplies flowing.

"If Russia has the gas to supply [Europe] through Nord Stream 2, as they suggest, that means that they have the gas to supply it through the Ukrainian [system] or other pipelines as well ... that is what we expect and what I think any open, free market should expect." 

One foot on the hose

One of the more immediate concerns for Gazprom is that buyers with long-term contracts have clauses that link prices to the cost of gas on the openly traded spot market. If Gazprom puts more gas into the market, it will depress prices not only in the open market but in its longer term contracts too.

Any new case against Gazprom could indeed be made more complex by the various types of gas sales and contracts in question. The 2012-2018 case focused on the way Gazprom trapped countries into unfair contracts. The current objections hinge more on limits to open market supply, which could prove harder territory in which to prove abuse of a dominant position. As European Commission President Ursula von der Leyen put it: "While Gazprom has honored its long-term contracts with us, it did not respond to higher demand as it did in previous years."

Explaining Gazprom's predicament, Jack Sharples, a research fellow at the Oxford Institute of Energy Studies, noted the boot had been on the other foot last year when prices were at rock bottom, and argued there was no contractual obligation for the Russian company to offer more gas.

"The contrast between 2020 and 2021 could not be more stark: Last year, when European demand declined and hub prices were at record lows, Europe had no problem with its long-term contract supplies from Gazprom being hub-indexed, and European companies were happy to make full use of their contractual flexibility to take less gas from Gazprom. A year later, with hub prices at record highs, although we would like to see Gazprom offer more volumes to the European market, we have to remember that they are not actually obliged to do so."

Russia argues that its deliveries are falling short of previous years because it is still filling domestic storage, but an energy economist who regularly consults for European gas market participants stressed the potential antitrust concerns.

The economist said that "it seems likely that what Gazprom is doing right now is profit maximization — if it delivered more it would likely reduce its profits, and that's sort of the definition of market power abuse. Withholding supplies to keep prices high is de facto anti-competitive."

"Gazprom: They didn’t start the fire, but they are standing over the hose pipe," he added.