The Beginning Of The End For Europe’s Natural Gas War
(Oilprice.com – Nick Cunningham – October 27, 2016)
Russia’s Gazprom is on the verge of striking a deal with EU regulators to settle a half-decade old dispute over natural gas pricing, and the resolution could change the way Gazprom does business and lead to lower gas prices for much of Eastern Europe.
The conflict began back in 2011 when EU antitrust regulators began investigating Gazprom for anticompetitive behavior, citing Gazprom’s practice of pricing natural gas differently to different countries depending on how compliant they were to Moscow. The EU Commission launched a formal investigation that ultimately led to negotiations, which were temporarily put on ice after Russia’s takeover of Crimea.
The details are arcane, but Gazprom is about to offer concessions to the EU in order to avoid potentially having to pay billions of dollars in fines. These include allowing recipients of Russian gas to resell that gas. Gazprom has opposed that practice because it undercuts their ability to demand certain prices from individual customers and countries. Gazprom and Russia were much happier under the old system, in which they could sign an array of bilateral deals on an individual basis, rather than negotiating with European countries collectively. That allowed the company to tie gas contracts to political aims – should a European country lend its support to a Russian cause, such as a pipeline, they would receive better terms.
That leads to the second concession that Gazprom will have to grant Europe: they will have to charge customers similar rates for natural gas. But the agreement stops short of entirely breaking Gazprom’s practice of linking gas prices to oil prices.
“We are now putting the final touch to our commitment proposal. It will be sent to the European Commission shortly,” Alexander Medvedev, Gazprom’s deputy chairman, said this week after meeting with the EU’s top antitrust official, Margrethe Vestager. The deal is not yet secured – it still needs to be reviewed by European countries – but if it is, Gazprom will avoid having to pay billions of dollars in fines. However, the agreement could then become legally binding, subjecting Gazprom to European law, something it has objected to up until now. Gazprom would have to pay fines if it violates the terms of the agreement.
The settlement would seem to bolster relations between Russia and Europe, which had become strained in recent years after the conflict in Ukraine. Some countries in Eastern Europe are wary of such a thaw and have demanded a much tougher line from European officials. Others in Europe that are at odds with Russia’s actions in Ukraine and Syria are not eager to soften the tone either. To be sure, the settlement over the antitrust charges still needs to survive input from European governments. Poland, in particular, is not happy with the deal. “These decisions pose a real threat to the stability of gas supplies to central and eastern Europe,” the Polish state-owned oil and gas company PGNiG said in a statement.
Resolving the conflict could also lead to more Russian gas flowing into Europe, which already depends on Russia for about one-third of its gas needs. Russia is hoping to double the gas flows through the Nord Stream pipeline, hoping to gain some market share in a market that is no longer growing. Again, European officials, especially in Eastern Europe, are not keen to see a greater reliance on Russian gas. But the business interests involved in building the expansion of the Nord Stream pipeline, as well as German officials who feel comfortable with Russia as a reliable source of energy, are pushing the deal forward.
“Another missing point of these puzzles is the future of Nord Stream 2,” a Polish official told the FT. “Now, it looks like they give the Russians too much.”
Overall, though, the deal would solidify some changes already underway. Gazprom has already begun to link its gas prices closer to hub prices. It needs to do that anyway because it is seeing increased competition from other sources of natural gas, particularly LNG. The U.S. began sending LNG to Europe, and several new LNG ships and import terminals are allowing a few European countries, such as Lithuania, to gain leverage over Gazprom. No longer at the mercy of one supplier, parts of Europe are becoming emboldened to demand lower gas prices from Russia. Whether EU officials will force Gazprom’s hand or not, the Russian gas giant will be forced to keep a lid on its gas prices if it wants to avoid losing market share.
[featured image is file photo]