Commission squares up to Gazprom

'There are "suspicions" that [Gazprom] has prevented alternative sources of natural gas from and into European countries, applying inappropriate practices, exploiting its position as the dominant supplier of natural gas to Europe.'

It took time but it eventually happened. The European Commission announced in September that it is launching an investigation of Russian mammoth monopoly Gazprom. The probe, insinuated the obvious, that Gazprom has been hurting competition in Europe, keeping prices up, at times capriciously. The company faces potential charges of price fixing and unfair competition. The Commission's announcement stated: ‘Such behavior, if established, may constitute a restriction of competition and lead to higher prices and deterioration of security of supply. Ultimately, such behavior would harm EU consumers.' EU competition rules provide for a fine for up to 10% of sales which in the case of Gazprom could be a $1.1 to $1.4 billion.

The action, probably delayed because of the ‘special relationship' between Germany and Russia (former German Chancellor Gerhard Schroeder runs Gazprom's European operation) is likely to find widespread support among EU members. Many draw more than 75% of their natural gas from Russia, at prices sometimes topping $12 per million btu.

According to the Commission's circumspect language, there are ‘suspicions' that the Russian company has prevented alternative sources of natural gas from and into European countries, applying inappropriate practices, exploiting its position as the dominant supplier of natural gas to Europe. This has maintained unnaturally high prices. Furthermore, while natural gas prices throughout the world have followed a unique and different path, Gazprom has tried to peg the prices of the gas it sells to Europe with world oil prices.

Such practices are considered by Europeans to cause a further deterioration of the European economy and development, keeping energy prices high, not allowing European economies to re-enter economic growth rates and claw their way back from arguably the toughest economic situation experienced by the continent in decades.

In a public response Gazprom rejected any suggestion of unfair competition, adding that it is ready to cooperate totally with the Commission to shed light on the controversy. But the company added: ‘Gazprom pays great attention to observing international law, and legislation in the countries where Gazprom operates. Gazprom's activities in the EU market, including the formulation of the gas price, is in line with standards used by other producers and exporters of gas. Gazprom is incorporated beyond EU jurisdiction, and is a company which under Russian law exercises functions of public importance and has the status of a strategic organization controlled by the state.'


Particular attention must be paid to the last sentence.

It is not Gazprom under scrutiny. It is the entire Russian government and its policy.

Gazprom has been President Vladimir Putin's battering ram, breaking down European defenses and splitting European countries in their energy posture. He found willing partners in none other than Germany. The recently completed Nord Stream offshore pipeline under the Baltic Sea had a specific aim: to provide Germany with gas not burdened by the nuisance of the transit countries Ukraine and Belarus.

It was in Libya, a couple of years before Muammar Gaddafi's demise that, fearing alternative natural gas sources, Gazprom's CEO Alexei Miller offered to ‘buy all' oil and gas to be exported to Europe. Similar suggestions have surfaced recently in, of all places, Israel.

Development of the eastern Mediterranean's newfound natural gas wealth could well end up reaching the European market. But Gazprom's monopoly politics may trump geopolitics. There has been a noticeable lull in Russian supporting statements for Iran and during Vladimir Putin's recent visit to Israel, the press there widely speculated that an energy-related agreement could be in the works. One notion was that Putin and Prime Minister Netanyahu agreed on a deal to form a junior company to Gazprom that would help develop Israel's Leviathan gas field in the eastern Mediterranean. Of course another interpretation would be that Gazprom would be the Trojan Horse, preventing Israeli exports to the much coveted Russian protectorate of Europe.

The carrot for Israel? Throw Iran ‘off the Russian bus'. Predictably, when questioned by journalists after the Gazprom probe was announced, Putin said that Russia is an ‘energy partner' of the EU and there is no energy war or an effort by Russia to control the European natural gas market.

But, legal proceedings aside, it is clear that the economic and energy security of the EU – and its sovereignty – depends on the diversification of energy resources and the reduction on the dependence of Russian natural gas.

Domestic resources, such as shale gas, will have to be marshaled.

But imports from Europe's southern flank such as the eastern Mediterranean become compelling. It is hard for Russia to sugarcoat what is perhaps the biggest natural gas monopoly in the world today.OE

  • Michael J Economides is a professor at the Cullen College of Engineering, University of Houston, and editor-in-chief of the Energy Tribune. The views expressed in this column do not necessarily reflect OE's position.
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