European Commission Cracking Down on Gazprom`s European Business - Case Comment AT 39816

The European Commission issued a legally binding antitrust decision (AT 39816) yesterday that imposes a number of conditions on Gazprom to continue its business operations in Europe. Amongst them is the obligation for Gazprom to remove the infamous prohibition for customers to re-sell gas cross-border from Gazprom`s delivery contracts. The measures shall force Gazprom to end the practice of selling gas to different EU Member States at different prices. However, there are issues with the dcision that Gazprom is likely to seize upon.

The decision is based on article 9 of the EU's antitrust Regulation 1/2003. It imposes four main obligations on Gazprom:

1) No more contractual barriers to the free flow of gas: Gazprom
  has to remove any restrictions placed on customers to re-sell gas

2) Obligation to facilitate gas flows to and from isolated
  markets: Gazprom will enable gas flows to and from parts of
  Central and Eastern Europe that are still isolated from other
  Member States due to the lack of interconnectors, namely the
  Baltic States and Bulgaria.

3) Structured process to ensure competitive gas prices: Relevant
  Gazprom customers are given an effective tool to make sure their
  gas price reflects the price level in competitive Western
  European gas markets, especially at liquid gas hubs.

4) No leveraging of dominance in gas supply: Gazprom cannot act on
  any advantages concerning gas infrastructure, which it may have
  obtained from customers by having leveraged its market position
  in gas supply.

The European Commission has been concerned about Gazprom`s dominant market position for some time. In 2015 a first statement of objection was sent to the company.
With yesterday´s measures the Commission is hoping to put an end to expensive gas prices in Eastern European countries. According to the new rules, the Commission can issue an obligation to Gazprom to adjust the gas prices in Bulgaria, Poland, Estland, Latvia and Lithuania to a `competitive Western-European benchmark.´ Moreover, Gazprom shall be obliged, upon request by the Commission, to deliver gas to isolated Eastern European countries that lack interconnections with other EU Member States.

These measures are, however, problematic. Gazprom is likely to argue that the European Commission is trying to fix its own house at the cost of the company:  for more than a decade now Europe has poorly delivered on its, constantly renewed, promise to build more gas-interconnector pipelines between its Member States or retrofit existing ones with so called reverse-flow capacity. The latest promise was made under the `Energy Union Strategy´ of 25 February 2015.[1]

Already back in 2010, the need to install bi-directional interconnection capacity (or reverse flow) for gas was highlighted in the old gas security Regulation (EU) 994/2010.[2] The share of bi – directional interconnections has increased from 24 per cent in 2009 to 40 per cent of total interconnections in 2014.[3] But the large number of exemptions granted under article 7 Regulation (EU) 994/2010 from the obligation to install reverse flow capacity leads to a situation where over 50 per cent of interconnectors still cannot have their gas flows reversed.

This poses a real threat that was recently highlighted, once again, in a new gas `stress test´ that ENTSOG had to conduct by November 2017.[4] In the event of a new major gas disruption South-Eastern Member States, namely Romania and Bulgaria, would need to source gas from Western Europe.[5]  ENTSOG found that in case of a 2 month disruption of all gas imports to the EU via Ukraine, Member States in South-Eastern Europe would need to curtail their gas demand significantly.[6]  The reason is that gas from Western markets (where diversification of gas supplies is traditionally more developed and LNG imports are starting to kick in) could not be transported to the Eastern European market (where Russia is the big supplier), due to a lack of gas interconnectors and / or the inability of exiting gas interconnectors to have their gas flows reversed from West to East.[7] In other words: Europe failed for years to significantly increase the number of its gas interconnectors and to retrofit exiting ones with reverse-flow capacity. This problem shall now be fixed by obliging the main foreign supplier of gas to deliver its gas to the resulting isolated markets. 
The measure could be in conflict with the principle of proportionality. An alternative to the decision for the EU would be to finally ramp up the building of interconnectors. The question, however, is whether or not such a measure would be similarly effective. Moreover, although it could be argued that this measure would be more costly, compared to imposing obligations on foreign companies, the latter action could be viewed as `outsourcing´ an internal, home-made EU problem.

[1] Commission Communication ` A Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy` COM(2015) 80 final at 4.
[3] Commission Staff Working Document `Report on the implementation of Regulation (EU) 994/2010 and its contribution to solidarity and preparedness for gas disruptions in the EU` SWD(2014) 325 final at 10.
[4] ENTSOG `Union-wide Security of Supply Simulation Report 2017´ available at: [accessed 12/December/2017] (hereinafter: 2017 Stress Test).
[5] 2017 Stress Test page 28.
[6] Ibid.

[7] 2017 Stress Test page 25.


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