Gazprom’s surrender on EC antitrust concerns: Quick lessons for SEE and Turkey

On 13 March 2017 the European Commission published a communication stating that it invites comments from all interested parties on commitments submitted by Gazprom to address the Commission’s competition concerns regarding gas markets in Central and Eastern Europe, which include Bulgaria, Estonia, the Czech Republic, Hungary, Latvia, Lithuania, Poland and Slovakia.

Source: EC press release

The commitments which are summarised below show that Gazprom is no longer sticking by its traditional arguments like oil-indexation and destination clauses.

The commitments of Gazprom are summarised by the EC as follows:

1) Enabling the free flow of gas in Central and Eastern Europe

The Commission has concerns that Gazprom imposed territorial restrictions in its supply agreements with wholesalers and some industrial customers in eight Member States (Bulgaria, the Czech Republic, Estonia, Latvia, Lithuania, Poland, Hungary and Slovakia). These restrictions prevent the free trade of gas within Central and Eastern Europe.

Gazprom has committed to remove all contractual barriers to the free flow of gas in Central and Eastern European gas markets. In addition, it has committed to take active steps to enable their better integration:

• Remove market segmentation - Gazprom will remove all direct and indirect contractual restrictions that prevent its customers from re-selling gas they have bought across borders, or make it economically less attractive for customers to do so. This means that in addition to removing restrictions on gas re-sale (e.g. export bans, destination clauses), Gazprom will remove all clauses which reduce its customers' business incentives to re-sell gas (e.g. where Gazprom would get a share of the profit from re-selling). Gazprom will also not to reintroduce such clauses in the future.

• Facilitate market interconnections with Bulgaria – The provisions in Gazprom's contracts on the monitoring and metering of gas in Bulgaria have isolated the Bulgarian gas market from the neighbouring EU gas markets. Gazprom has committed to make changes to the relevant contracts. This will put the Bulgarian operator of the gas transmission infrastructure in control of the cross-border flows of gas and facilitate interconnection agreements between Bulgaria and its EU neighbours, in particular with Greece.

• Create opportunities for more gas flows to the Baltic States and Bulgaria – If customers want to re-sell gas across borders, they need access to gas infrastructure in order to ship the gas. Bulgaria and the Baltic States currently lack access to such interconnections with their EU neighbours. Gazprom has committed to give relevant customers in Hungary, Poland and Slovakia the possibility to ask for delivery of all or part of their contracted gas to entry points into the Baltic States and Bulgaria. This would enable customers to seek new business opportunities in the Baltic States and Bulgaria, even before the connecting gas infrastructure becomes available. Gazprom would be allowed to charge a fixed and transparent service fee, in line with what it would typically charge for such services in the market.

2) Ensuring competitive gas prices in Central and Eastern Europe

The Commission has been concerned that the territorial restrictions have allowed Gazprom to carve up the market, as a result of which it may have been able to pursue an excessive pricing policy in five Member States (Bulgaria, Estonia, Latvia, Lithuania and Poland).

Gazprom has committed to introduce a number of important changes to its contractual price revision clauses to ensure competitive gas prices in these gas markets:

• Gas prices linked to competitive benchmarks: Gazprom will introduce competitive benchmarks, including Western European hub prices, into its price review clauses in contracts with customers in the five Member States. Price review clauses enable customers to request changes to their gas price. The commitments will give the customers an explicit contractual right to trigger a price review when the prices they pay diverge from competitive price benchmarks. This would ensure competitive gas prices in these regions in the future.

• More frequent and efficient price reviews: Gazprom will increase the frequency and speed of price revisions. For those contracts, for instance in the Baltic States, where price revision clauses do not currently exist, Gazprom will introduce clauses reflecting the above elements.

3) Removing demands obtained through its dominant market position

Finally, the Commission has concerns that Gazprom leveraged its dominant market position on the gas supply market to obtain advantages relating to access to or control of gas infrastructure. The Statement of Objections raised concerns in relation to the South Stream project in Bulgaria and the Yamal pipeline in Poland.

• Removes Gazprom's demands - As regards South Stream, Gazprom has committed not to seek any damages from its Bulgarian partners following the termination of the South Stream project. This is without prejudice to whether such claims would have been valid in the first place.

Many of the above-mentioned commitments were already granted to Gazprom’s western European customers by way of contract re-negotiations and/or arbitration cases in recent 4-5 years indeed.

These commitmets of Gazprom in fact reveals the change in marketing strategy of Gazprom from profit maximisation to keeping its market share against rising LNG supplies especially the prospective US sources.

Gazprom’s commitments for the CEE countries constitute a strong benchmark for the Southeastern European gas markets and Turkey, if the similar changes in the Western European markets failed to be a sufficient benchmark for contract re-negotiations in the recent years.

Most of the SEE countries and Turkey suffer from destination clauses, and only a few of them, if not none, are fan of oil-indexed pricing. In many long term supply contracts there are contract re-negotiation and price review clauses, having triggering mechanisms referring to the changes in the European gas markets.

This last development should be taken into account by the long term gas buyers in Turkey and SEE as an opportunity to re-negotiate pricing structures and remove the barriers on re-sales of the gas.

These further steps will not only provide individual benefits for the buyers but also facilitate the process along a long-waited balkan gas hub in the region.