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    Posted March 7, 2014 by

    Gazprom and 3rd Energy package: is there any justification for exceptions?

    During recent decade European gas market underwent drastic changes that influenced both consumers and suppliers. Appearance of new sources of supply in form of US shale gas and increase of LNG flows to Europe led to significant pressure on traditional oil-indexed gas pricing system that prevailed on European market since the 1960s. Such a system was initially designed with the purpose to stimulate high investments in gas production and supply infrastructure but simultaneously led to monopolies on national gas markets. New EU legislation cracked these monopolies through separation of production and sale from transit, opened the market to newcomers through third-party access to pipelines and enforced these provisions through antitrust probes.
    Gazprom, the largest Russian gas producer, is the subject of special interest of the European Commission. During recent years the company’s strategy was to build-up its market power by control of gas production fields in Russia and gas transit and supply infrastructure in CIS countries and Europe. Gazprom usually performed acquisitions (fully or partially) of national gas companies according to different types of agreements in separate countries. Since 2012 such a strategy has been opposed by the European Commission which opened an antitrust investigation against Gazprom into charges of the company was thwarting competition and pushing up prices in Central and Eastern Europe where there is lack of access for alternative supplies. This situation allows Gazprom to gain from price arbitrage and increase its dominance on the European gas market. According to the EU DG Competition the problem is not that Gazprom prices are set according to oil-indexed formula but the problem is in setting abusive prices without connection to market economics. As a result, Western countries that have access to alternative supplies often pay much less than some countries in Eastern Europe. Therefore, the European Commission is eager to set the general rules of competition that will not permit Gazprom to use its carefully built value chains on European gas market.
    This also raises an important question whether new huge Gazprom pipeline projects like South Stream are viable under 3rd Energy Package provisions. Gazprom asks for exceptions from new EU energy legislation but the European Commission is truly doubtful about the need for increase of monopolistic power of Russia and dependence of the EU on Russian gas supplies.
    The conflict between the EU and Russia on gas matters deepened even more this year after Kremlin actively used gas pricing for expanding its economic and political presence in Europe. Despite the position of the European Commission on common rules for ownership and operation for gas supplying infrastructure Gazprom tends to negotiate individual agreements with separate EU member states offering gas price discounts or other preferences thus violating competition on European gas market. This is the policy of Gazprom not only for getting access to existing infrastructure but also for new pipeline projects (like South Stream) that were designed for preserving of Russian monopolistic dominance in Europe. But it’s obvious to EU mind this situation contradicts to EU energy policy goals, which target in particular on diversification of gas supplies and switching from non-transparent oil-indexed contracts to spot gas market that will deal with common rules and is expected to ensure transparent gas trade and prices.
    Moreover, recent political conflict in Ukraine demonstrated that Russia could sacrifice of stability in the region and break the sustainability of Ukrainian gas market that is vital for transition of bulk of Russian gas to Europe in favor of own political interests. Despite the fact that Russia is likely to remain one of the core suppliers on EU gas market, the EU has to remember that reliance on Russia as a gas supplier and increasing of its role on European gas market would bring a number of risks for gas supply security, which are to be minimized by application to Gazprom the provisions of 3rd Energy Package without any exceptions.
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