The European Commission last week set out its provisional findings against Gazprom, formally accusing it of operating a strategy of artificially partitioning EU markets in breach of EU competition rules.
Central to that accusation are allegations of abusive practices include restricting the resale of gas within the EU through territorial restrictions and unfair pricing practices.
The issues around territorial restrictions, preventing customers from reselling gas across the EU, are well trodden. Much more complex and controversial are the pricing issues, and specifically the pricing mechanisms for trading gas within the EU.
Key to understanding these issues is the combination of oil-linked long-term supply agreements and increasingly more hub-based price setting mechanisms and the more liquid spot and derivative markets.
Add to that the complexities of successfully prosecuting an antitrust case based on excessive pricing, and one can easily begin to understand why it has taken several years for the Commission to put its charge sheet together.
The Commission has made it clear it doesn’t have an issue with the industry practice of pegging gas prices to the oil price. What the Commission is concerned about is Gazprom’s use of pricing formulas in its contracts, which are often related to that index. Assessing the prices against other benchmarks, such as Gazprom’s costs or the German market, the Commission seems to have concluded that the company was charging too much.
Under EU competition law, pricing by a dominant company can be considered to amount to an abuse where it is “excessive”. The questions to determine are whether the difference between the costs actually incurred and the price actually charged is excessive, and if it is whether a price has been imposed which is either unfair in itself or when compared to competing products.”
The fact that the price gives the supplier a high margin is not of itself conclusive. Key to a finding of abuse is whether the pricing behaviour can be said to distort competition on the wider market, and in this case whether it forecloses competition from competing suppliers and prevents or otherwise makes it more difficult for wholesalers to resell gas within the EU.
This is likely to mean careful analysis of Gazprom’s pricing in the five countries under scrutiny — Bulgaria, Estonia, Latvia, Lithuania and Poland — with prices in Germany, which is seen as the only gas market in Europe that is competitive. It is also looking at prices on international spot markets, which are, in some instances, 40 per cent cheaper than Gazprom’s contract prices.
Gazprom now has 12 weeks to respond to the Commission’s Statement of Objections.