A response to a Gazprom response

My article in the European Energy Review starts with the analysis of recent antitrust cases launched by the EU authorities against the big Western companies such as Gaz de France and ENI. These cases reveal systematic patterns of behaviour that threaten supply security to national markets in Europe, such as underinvestment in import pipelines. It then analyses the market structure in Central and Eastern Europe, which is very monopolised, and notes that Gazprom is strongly invested there. Given the economies’ strong exposure to supply disruptions from  precisely the company that has posed the greatest challenges to supply security in Europe, it suspects that the local monopolies, in sync with Gazprom’s locally invested interests, are very likely to act in the same fashion as the Western European majors. The article therefore recommends antitrust action from Brussels there too, to shed light on the matter and to discipline the market players’ behaviour.

 Gazprom’s response boldly denies such behaviour. It is not because it is dominant in some local markets that it abuses its dominant position, Gazprom says. But the fact is that most gas monopolies simply do adopt such behaviour because all the incentives in the structure of the market favour this. It is hard to resist the temptation. The Western European gas giants have proven to do so. One would be surprised to find that Gazprom is more pro-competitive than Gaz de France.

Whereas indeed only a thorough investigation of the local companies could actually prove such behaviour, many facts in the markets of Central and Eastern Europe point to strong Gazprom influence in resisting and opening up to competition and alternative sources of supplies for its captive clients on the Eastern flanks of Europe. Two Baltic states where Gazprom is directly or indirectly the most important shareholder in the local gas monopoly have successfully been exempted from the 2009 EU Gas Directive’s unbundling provisions. These aimed at increasing competition in the gas markets there. Why is it so? Why is it the case that Slovakia and Bulgaria, with their choice of being friends of Gazprom and betting on this friendship to ensure secure supplies, had been completely unprepared for the 2009 gas crisis and left out in the cold for weeks? Why had they chosen not to apply a 2004 Gas Directive that already aimed at increasing competition? And why have they actively resisted the EU Commissions attempts to increase competition through unbundling in the last Gas Directive of 2009? Is it because their populations like to depend on Gazprom only for their heating? Or is it because the incumbents in the markets, with their policy of pleasing Gazprom, benefit from the status quo?

Gazprom further argues that it is now investing in storage facilities and in alternative supply routes. It certainly proposed to some Central and Eastern European markets to invest more in storage, in particular after the January 2009 gas crisis. Does no one notice that the aim is to ensure that these markets will continue to buy gas from Gazprom exclusively, and not, say, from a neighbour that imported its gas from yet another supplier, etc.?  What is more, the alternative supply routes it mentions in this letter - Nord Stream and South Stream - aim at maintaining control over exports to European markets. South Stream aims at keeping exclusive control over Central Asian gas exports to Europe so that Europe does not do it itself with the planned Nabucco pipeline. Nord Stream aims at bypassing difficult client and transit countries. It will only leave Ukraine, Belarus and the Central and Eastern European markets further down the pipeline route even more exposed to unpredictable behaviour from Gazprom.

If Russia wishes to make Belarus or Ukraine adopt fair transit country behaviour, it has one avenue: the Energy Charter Treaty, its Transit Protocol and its dispute settlement mechanism. But Russia doesn’t want to adher to the Energy Charter Treaty, and prefers to use hard commercial power politics by its pet monopoly exporter Gazprom. This indeed gives it the opportunity to engage in asset grabs in local companies and to score points in domestic gas politics. The rule of law is not what it seems to be interested in. Nor is Gazprom interested in the consequences the decision to cut the gas taps to Ukraine or Belarus has further down the pipeline route. The assertion Gazprom makes in this letter that it has always been a reliable supplier to the EU is dishonest. It simply has not. The 2006 and 2009 gas crises are only the most spectacular examples.

Gazprom further makes an argument in defense of long-term supply contracts: an incentive to engage in costly infrastructure and extraction investments. These contracts are currently discredited for both the excessive leverage they give to a supplier over its client, and the fact that clients cannot benefit from currently lower gas market prices on spot markets. Gazprom will need to learn to live with the relative decline of the long-term supply contract with the arrival of LNG, the discovery of shale gas, and lower energy prices. The rise of spot markets – it is not likely that these will make long-term contracts disappear in the near future - is a positive development that will balance out long term investment imperatives and short term gas supply needs. If only Gazprom had actually used its long term supply contracts to invest properly in gas extraction capacity in Russia, or in the renewal of its pipelines,  its arguments would be more authoritative. But it hasn’t.