(The author is a Reuters market analyst. The views expressed
are his own.)
By Gerard Wynn
LONDON, Sept 18 The European Commission's
antitrust case against Gazprom will force the Russian company to
divest shares in gas infrastructure and shift towards shorter
term supply contracts, precedent from European energy companies
The case adds to structural shifts in the European gas
market to erode the pricing power of Gazprom, which is
more than 50 percent owned by the Russian state.
That pressure can only strengthen the hand of China, as
Russia tries to diversify its markets away from Europe and ship
gas to the world's fastest growing energy consumer, in
negotiations that have stalled on price.
The EU investigation centres on excessive market power
including long-term contracts that have locked gas customers for
up to 30 years into more expensive oil-indexed prices in Poland,
the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia
East European countries have benefited least from imports of
liquefied natural gas (LNG) into west European ports and the
associated rise in cheaper spot pricing in north and west
European market hubs.
UK hub prices were 68 percent of a theoretical price
calculated using a traditional oil-indexed formula, the EU's
quarterly gas market review reported earlier this year.
Rising energy dependence is driving the EU's efforts to
diversify supplies and liberalise prices, through its
competitive markets drive and the shift towards renewable
The EU imported 62.4 percent of its natural gas consumption
in 2011, up from 60.3 percent in 2007, according to the EU's
"Statistical Pocketbook 2012".
EU domestic production of natural gas continued its long
term decline in 2011, at below 1,788 terrawatt hours (TWh),
about 30 percent below production levels in 2003, the quarterly
Chart 1: link.reuters.com/puf72t
Chart 2: link.reuters.com/duf72t
The EU's push for a competitive energy market has helped
drive alternative supplies, by boosting cross-border
interconnector pipelines, LNG port facilities and gas storage.
Chart 1 shows Russia's declining share of EU gas imports,
down to 34.2 percent as of 2009, the latest year Eurostat data
are available, from 47.7 percent in 2001.
More diversified supplies and interconnections have also
pressured prices by boosting spot exchange hubs in north-western
Europe, offering an alternative to more expensive, oil-indexed
contracts where rapid growth of the Netherlands' TTF (Title
Transfer Facility) exchange alongside Britain's more established
NBP (National Balancing Point) is illustrative.
To widen those benefits to eastern Europe, the European
Commission has prioritised a north-south gas pipeline to link
the Baltic and Black Sea, and stronger interconnections between
Finland, Sweden and Poland, as related last year in a discussion
paper, "The internal energy market - time to switch into higher
Compounding Gazprom's problems, EU gas consumption has
fallen in two of the past three years on the back of the
financial crisis and rising prices. In the meantime, coal
consumption is rising faster than at any time since 1985,
alongside renewable energy.
Chart 2 shows that EU gas consumption in 2011 was at its
lowest level in 11 years.
Meanwhile, Australia and East Africa are emerging as new
suppliers of LNG, and potentially in the future so will the
That is a dangerous mix for Gazprom, Russia's biggest
company, given the EU accounts for most of its gas exports.
The Commission's antitrust steps will provide an extra push
to erode Gazprom's power in eastern Europe, given its successes
against Europe's biggest energy companies in similar probes.
Regarding supply dominance, in 2007 the Commission forced
Belgian wholesale gas supplier Distrigas to reduce the volumes
it tied up in long-term contracts, after concerns that the
company could set prices, with the threat of a fine equivalent
to up to 10 percent of annual sales.
That is relevant to Poland's complaints about Gazprom's
excessively expensive, long-term contracts.
The Commission says it is presently investigating whether
"Gazprom may have imposed unfair prices on its customers by
linking the price of gas to oil prices", in long-term contracts.
In a distribution case, the Commission in 2009 forced RWE
to divest its entire western German high-pressure gas
transmission network after concerns the German utility was
restricting competitive access.
That could equally apply to Gazprom's dual ownership of
distribution and supply businesses in Lithuania.
And regarding cross-border capacity, in 2009 and 2010 the
Commission forced GDF Suez to scale back its long-term
reservation of French gas import capacity, Germany's E.ON
to stop hoarding import capacity into the German gas
grid, and ENI to divest shares in international
transport pipelines to Italy.
In its Gazprom probe, the Commission is investigating
whether the company "may have divided gas markets by hindering
the free flow of gas across Member States".
While the notion of energy security normally attaches to
customers, Gazprom will have to find alternative markets to
preserve its own security in the face of EU pricing pressure
while its efforts to contract gas sales to China have so far
(Reporting by Gerard Wynn; Editing by Anthony Barker)