Gazprom and the EU are Reaching a Deal - A Pyrrhic Victory for Central and Eastern Europe?

By Gijs Kreeft, PhD researcher at the Groningen Centre of Energy Law

Five and a half years after raiding Gazprom’s offices, the competition authorities of the European Union, namely Margrethe Vestager (Commissioner in charge of competition policy) announced on  13^th March that a deal with the Russian state-owned energy giant in an antitrust investigation was reached. The deal seems to usher in an era of détente between Gazprom and the European Commission and may constitute a next step towards the approval of the Nord Stream 2 pipeline project by the Commission later this year.

Antitrust Probe and Statement of Objections

Based on the evidence gathered during the raids in September 2011, the Commission initiated formal proceedings against Gazprom in August 2012. The investigation which followed was aimed at assessing whether or not Gazprom violated the prohibition on the abuse of market position, according to article 102 of the Treaty on the Functioning of the European Union (TFEU). According to the Commission, the dependence of Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Hungary and Slovakia on Gazprom for more than fifty (and in one case one hundred) percent of their gas supply enabled Gazprom to frustrate the development of competitive gas markets in Central and Eastern Europe. After three years of investigating suspected exclusionary behaviour by Gazprom, the Commission issued a Statement of Objections  in April 2015.[1] This Statement of Objections lists the preliminary findings and concerns of the Commission to which the addressee, Gazprom, can respond through writing and/or by requesting an oral hearing.

            The Commission centred its preliminary conclusions on abuse of power by Gazprom around three themes.[2] The first theme concerns the hindrance of cross-border sales in gas. By leveraging their position as dominant gas supplier, Gazprom forced territorial restrictions into the supply agreements with Central and Eastern European states. These included export ban clauses and destination clauses, both aiming to prevent the re-sale of gas by the importing states. The second category of allegations are brought under the headline ‘unfair pricing policy’. Instead of allowing the price of gas to fluctuate in the market, the Commission accuses Gazprom of ‘pegging’ the price of gas to oil products. Although such oil indexation is not illegal in itself, the preliminary finding of the Commission is that the formulas used by Gazprom to determine the individual price levels per country lacked competitive benchmarks and, thereby, unfairly favoured Gazprom over its customers in Bulgaria, Estonia, Latvia, Lithuania and Poland. The third category of objections targets the alleged practice by Gazprom of making gas supply conditional upon infrastructure-related commitments from wholesalers. As an example the Commission refers to the practice by Gazprom in Poland where it made gas supply conditional on control over investment decisions concerning the Yamal-Europe transit pipelines.  

The Art of the Deal

On March 13 of this year, Commissioner Vestager announced that she had received commitments from Gazprom in response to the concerns expressed in the Statement of Objections. She expressed: `We believe that Gazprom`s commitments will enable the free flow of gas in Central and Eastern Europe at competitive prices. They adress our competition concerns and provide for a forward looking solution in line with the EU rules. (...) We now want to hear the views of customers and stakeholders and will carefully consider them before taking action.`
From the moment of publication in the Official Journal of the European Union, all stakeholders will have seven weeks to submit their views before the Commission will make a final decision. The commitment proposal of Gazprom may be found  here. Similar to the concerns in the Statement of Objections by the Commission, it can be divided into three themes that relate to the free flow of gas. pricing and conditionality. The proposed commitments include:

• Lifting of contractual restrictions for the export and re-sale of gas;
• More access to gas infrastructure for customers who want to deliver gas to the Baltic States and Bulgaria;
• The introduction of competitive benchmarks into price review clauses;
• Gazprom will drop its claim for damages against Bulgaria following the termination of the South Stream project.

Commitment Decisions: Pragmatism versus Legitimacy

If, in an antitrust case,  the Commission concludes that the entity under investigation violated EU competition law, it has the choice of taking an infringement decision under Article 7 of Regulation 1/2003 or an commitment decision under Article 9 of the same Regulation.^[3] A decision under Article 7 is a formal finding of a violation and allows for behavioural and structural remedies such as fines. A commitment decision under Article 7 does, by contrast, not lead to a formal finding of guilt and the imposition of remedies, but makes binding upon the undertaking any voluntary commitments it has offered to the Commission in response to the expressed concerns by the latter in the Statement of Objections. In the event that an undertaking, subsequent to the commitment decision by the Commission, is found to be in breach of its commitments, the Commission has the possibility to impose a fine of up to 10 percent of the undertaking’s worldwide turnover. Such a fine may be imposed without the necessity of a separate infringement decision under Article 9. See for a highly recommended review of the Commission’s practice regarding commitment decisions: Dunne, N. (2014), ‘Commitment Decisions in EU Competition Law’, Journal of Competition Law and Economics 10(2), pp. 399-444.

The commitment procedure offers the Commission an effective and pragmatic tool for resolving market failures which are inadequately addressed by existing regulation. It allows the Commission to enter into a constructive dialogue with an undertaking in order to address past competition concerns while emphasizing to the Member States how the commitments contribute to better functioning markets in the future. This forward looking character of commitment decisions is, however, also its weakness. By proposing commitments, an undertaking aims to escape the imposition of a fine under an infringement decision and the determination of guilt. Consequently, the risk is that a too bureaucratic approach by the Commission, instead of a more administrative and judicial approach by taking an infringement decision, affects the legitimacy of the decision in the eyes of those who have been disadvantaged in the past. Furthermore, the commitment procedure allows for political considerations to get the better of retribution. This risk also seems to be acknowledged by Commissioner Vestager who stated: “You have to keep the law enforcement clear of politics”.[4]

            The deal between Gazprom and the Commission already attracted criticism from representatives of Central and Eastern European countries. Petras Austrevicius, a Lithuanian Member of the European Parliament and member of the ALDE Liberal group, asked the question: “but how about the past time period, when Gazprom was simply earning dozens of billions, if not hundreds of billions, using its monopoly on the gas markets?”[5]

Nord Stream 2

It is not unlikely that, besides the threat of a fine, Gazprom was willing to address the concerns by the Commission with the upcoming decision on the Nord Stream 2 in mind. Although according to a  report by the Russia Institute of King’s College London the Nord Stream 2 pipeline will “enhance the liquidity of Central European gas hubs in EU trading”, countries in the region fear the opposite. They are concerned that the pipeline will increase the dependency on Russian gas and prefer an European security of supply strategy aimed at a diversification of supply.

Shortly after the Commission announced the intended settlement with Gazprom in the antitrust probe, officials working at the Commission told the news website EURACTIV.com that it was ‘highly likely` that the pipeline project will be approved.[6] The lingering question is then whether the intended commitment decision by the Commission is not part of a larger geopolitical choreography between Russia, Gazprom and the Commission. If this is, indeed, the case,  commitments of Gazprom may be hailed by the Central and European countries as a pyrrhic victory.

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[1] http://europa.eu/rapid/press-release_IP-15-4828_en.htm.

[2] http://europa.eu/rapid/press-release_MEMO-15-4829_en.htm.

[3] Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty.

[4] See Financial Times article of 13 March 2017: https://www.ft.com/content/575f8d2e-07f2-11e7-ac5a-903b21361b43.

[5] http://www.politico.eu/article/gazprom-vestager-commission-gas-deal-news-antitrust-poland-russia/?utm_content=buffere848f&utm_medium=social&utm_source=facebook.com&utm_campaign=buffer.

[6] https://www.euractiv.com/section/energy/news/eu-commission-leaning-towards-nord-stream-2-approval/.