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Clouds are looming on Gazprom’s horizon

September 06, 2012, 15:24 UTC+3 Alexandrova Lyudmila

Clouds are looming on Gazprom’s horizon. The European Commission has launched a probe into whether the monopoly abused its dominating position on the market. The concern is fraught with a large fine. The Russian gas monopoly’s capitalization slumped by two billion dollars over one day, when the news broke out the anti-monopoly investigation had begun. That Gazprom should brace for no easy days has been the talk of the town for quite a while.

The Russian company is suspected of deliberately restricting competition and abusing its dominating position on the markets of Central and Eastern Europe. First and foremost, the European Commission is interested in long-term contracts between Gazprom and other economic entities that buy Russian gas. The European Commission said the investigation encompassed eight EU member-states – Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia and Lithuania, but it is not ruled out that other EU countries may be put on the same list, too.

Gazprom provides about a quarter of the overall amount of natural gas the European countries consume. The prices it charges are far above those on the spot market. Sporadic Russian-European gas wars, in particular, those on the eve of the heating seasons, are a natural side effect.

The probe follows the September 2011 check of 20 companies in Europe having connections with Gazprom. The Russian gas concern is suspected of three violations of anti-trust legislation: a split of the gas markets of Central and Eastern Europe, which might hinder the free traffic of fuel to the EU countries; obstructions to the diversification of gas supplies; and lastly, unfair pricing as a result of the peg of gas prices to those of oil.

The inquiry was launched and has been actively supported by the East European countries (Poland and Lithuania), which have long quarreled with the Russian company. Their worst complaint is about pricing – the price scissors between Western and Eastern Europe. Poland and Lithuania say that for 1,000 cubic meters of gas they have to pay 50-100 dollars more than Germany or Italy.

Earlier, the European Commission said that if the violations were proved, the abusers would be punished in accordance with the 2006 EU list of fines. The document envisages a penalty as large as ten percent of the annual turnover. In case the conditions of a competitive market were abused for several years in a row and caused harm to the industry, the abuser company would have to say goodbye to 30 percent of its annual revenues from the markets where the abuse had been committed.

According to various estimates, fines may range one billion dollars to four billion dollars.

“If one bears in mind Gazprom’s revenues from gas sales to the non-CIS countries, the fine may grow to four billion dollars,” the daily Novyie Izvestia quotes Investcafe analyst Grigory Birg as saying. Besides, as the expert says, there is the risk the company may have to reconsider the system of pricing used in its export contracts. Which would be also fraught with financial losses. The corporation has already sustained some, for it was forced to sell gas to many European consumers at a discount of late.

In the first half of the year Gazprom cut the export of gas to Europe by 17 percent to 71.9 billion cubic meters.

A partner of the RusEnergy consultancy, Mikhail Krutikhin, is quoted by the daily Nezavisimaya Gazeta as saying Gazprom should brace for a fine of one billion dollars to three billion dollars. “That would be the easiest outcome, because if the European Commission insists on the implementation of the most stringent rules of the EU’s third energy package, losses may be just colossal,” he warns. “Possibly, the concern will have to give away stakes in the energy companies running pipelines, distributing gas and selling it to the end consumers. These losses are hard to estimate, but the blow would be a crushing one, indeed.”

In his opinion, the Europeans’ interest soared as the autumn-winter season drew near. “This is largely the reason why their activity is growing. They will to have the maximum leverage to influence pricing,” says the head of the department of analysis at the National Energy Security Fund, Alexander Pasechnik. “And also to negotiate new discounts off the price of gas.”

Gazprom on Wednesday said that it had received no formal notification of an anti-trust investigation yet. It stated pretty clearly it was a Russian company and was abiding by Russian laws. “We expect that while the investigation proceeds our rights and legitimate interests will be properly observed. Also, we expect that it will be borne in mind that the OJSC Gazprom, established outside the EU jurisdiction, is a company which under Russian legislation is commissioned to perform socially important functions and enjoys the status of a strategic organization controlled by the state,” the statement runs.

Pasechnik believes that “Gazprom cannot be forced to pay anything to anyone that easily. The more so, since from the legal standpoint its positions are rather strong. Sanctions, should they follow, are unlikely to be critical for the concern. Europe will not survive without Russian gas, and the European Commission is well aware of that.”

“At this point the outcome of the probe into Gazprom’s activity looks not predetermined,” EU officials said, adding that the announcement of the investigation was just the beginning of a probe, and not its outcome.

In the meantime, the market has already responded negatively to the situation. On Wednesday Gazprom slumped on the MICEX by 2.2 percent, while the MICEX average fell by one percent. Gazprom’s capitalization lost more than 70 billion rubles (about 2.17 billion dollars) over just one day.

The Russian government had foreseen that the EU might take a harder line. Some officials were speculating that Gazprom should get ready for no easy days back last summer. They warned that the company might lose part of the export markets in Europe and experience pressures on the prices in long-term contracts. The root cause of this is growing share of liquefied natural gas (LNG), sold under spot contracts in the European market, and also the potential risk US companies producing shale gas may appear on that market in 2016.

The Economic Development Ministry in its socio-economic development forecast till 2015, according to the news agency Finmarket, is pessimistic about Gazprom’s short-term prospects. As early as next year the export of gas may fall below the level of 2011 with no chances of rising again up to 2016, when the United States is likely to begin the export of gas. Production will not reach 697 billion cubic meters (in reality it will stay at 676 billion cubic meters). Gas export, according to the Economic Development Ministry, will be a tiny 193.3 billion cubic meters, and not 211.8 billion cubic meters that had been forecast last May.

MOSCOW, September 6