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Brussels Blames Gazprom for its own Failings

May 5th, 2015 by Pierre Noël, University of Cambridge

It is hard to think of an antitrust case as geopolitically charged as the one announced in Brussels last week against Gazprom. The Russian state-owned company stands accused of anti-competitive practices allowing it to charge “unfair prices” in several EU countries.

A year ago Gunther Oettinger, then EU energy commissioner, appeared before an audience in Poland to decry what he called a “game of divide and rule proposed by Moscow [which] cannot be and will not be accepted by EU member states.” Brussels’ aim, he added, was “a uniform gas price in the European common market”.

Yet if there were a European common market, there would already be a uniform price.

The resale restrictions that the commission says it found in some of Gazprom’s contracts in central Europe would clearly be illegal under EU law. But they cannot explain why competition did not spread to this part of Europe. When the commission first decided to shake up the continent’s gas markets in the late 1990s, it took a leaf out of the British rule book and asked member states to create national pipeline monopoly companies, regulated by national agencies and funded by national gas consumers. In the UK, a large market with several suppliers in the North Sea, such as system had allowed competition to emerge. Yet in most EU countries it was competition in name only.

What Europe needed was a market for pan-European gas transport, ignoring national borders, which would do three things: bring about efficient use of existing long-distance pipelines; reveal what additional infrastructure was needed; and allow independent investors to raise finance to build it. Such a system exists in the US, and properly designed reforms could have created one in Europe. Instead, we have a patchwork of national pipeline systems and regulatory agencies, which fails to deliver a proper European market.

The exception is northwest Europe, where an integrated market has indeed emerged. This success owes a lot to the existence of facilities for receiving liquefied natural gas in several countries, and a large pipeline between Britain and Belgium which was built and operated outside EU regulations. The result: when LNG prices plummeted relative to Russian gas from 2008 onwards, Gazprom came under pressure to adapt its pricing model in northwest Europe, and eventually yielded.

The main reason this never happened in central and eastern Europe has little to do with Gazprom’s business practices and a lot to do with European rules — which make long-distance trading all but impossible, obscure market signals about the infrastructure that is needed, and make it hard to finance cross-border pipelines. If it had to decide today, it is unlikely that the European Commission would allow Britain’s pipeline to Europe to be built. Yet it has not put in place a workable alternative model.

Gazprom benefits from weak competition in the gas markets of eastern Europe. But its pricing policies primarily reflect Europe’s dysfunctional gas market. When Poland signed a long-term contract to buy LNG from Qatar, it accepted a pricing formula that is among the most expensive in the world even though companies in the UK buy the same stuff for much less. So far, Brussels has said nothing to indicate that it considers the Qataris culpable of any breach of competition law, or that they are proposing a game of divide and rule.

The main reason Gazprom’s pricing power is not checked by competition in central and eastern Europe is not that it cheats, but that Europe’s gas policy has not worked. The commission seems to think that, since it has declared that a common market exists, companies are obliged to behave as if it did. This is fanciful. Brussels should not blame Gazprom for its own policy failures.

Pierre Noël, Sultan Hassanal Bolkiah Senior Fellow for Economic and Energy Security, IISS Singapore

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