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European Gas Market: Russia is returning?

Despite structural problems on the gas market in the European Union and the ongoing crisis in the Eurozone, Gazprom’s standing in 2013 strengthened substantially. The reason is problems of other suppliers, depletion of reserves at European underground gas storages and discounts to major clients made by Gazprom.

Meanwhile, by the end of 2013 the European Commission planned to complete antimonopoly investigation against Gazprom suspecting the Russian gas giant of abuse of its dominating position in markets in Eastern Europe, limiting competition and overstating prices. The procedure was overly politicized. It was initiated by Lithuania that, instead of a constructive dialogue, openly confronted the only supplier making radical decisions aimed against Gazprom as bona-fide investor and co-owner of the national holding. Moreover, since initial searches the process has been invisibly linked to efforts of Brussels on developing the Southern Gas Corridor, especially with pressure on Moscow regarding the unimpeded laying of a trans-Caspian gas pipeline from Turkmenistan to Azerbaijan and further to the EU.

With the investigation entering the final straight it turns out that Europe strongly needs substantial additional gas imports from Russia, especially on the eve of the winter season. The desire to go through the upcoming heating season calmly and not to sharpen relations with the largest supplier during the period of peak demand probably is the main hidden motive for postponing announcement of the investigation results until next spring at least.

On the other side, the mandate of the current European Commission expires next autumn, and the new commission will be approved by the European Parliament and formed as a result of the May elections. Thus, the team of Jose Manuel Barroso has an incentive to slam the door before they leave by presenting claims against Gazprom, which may somehow distract attention from the failed energy and ecological policy of the EU during Barosso’s two terms. But this will obviously reinforce distrust between Russia and the EU and create additional risks for partnership development and even for maintaining and implementing the current mutual obligations.

As far as the third energy package implementation and functioning of the common gas market that is to be launched in 2014 are concerned, it is rather problematic in reality. Out of 12 necessary network codes that are obligatory for adoption to form a stable normative and regulatory base of new organization of the market, only two documents were passed at the end of 2013, and only one entered into force. This concerns the network code on regulating the use of contracted but unutilized capacities (congestion management) that was approved in late 2012, as well as on the network code on transit capacity at non-discriminatory auctions. The EC approved it in October 2013, but it will come into force only in November 2015, which again shows that there will be no common gas market established in the EU in the declared period.

From the point of view of fundamental parameters in the next few years Gazprom’s standing in the European market will be strong or very strong. The EU seems to be running out of possibilities to restrain the share of gas in the energy balance, as well as to reduce gross energy consumption amid gradual recovery of the Eurozone after the economic downturn. Decline in domestic consumption, problems with resources in Norway and Algeria, political instability in Libya, as well as the LNG deficit on the market caused by a small number of new projects will lead to stable and high imports of Russian gas under long-term projects. Discounts provided to European partners will also contribute to the demand for Russian gas imports.

These are ideal conditions to use soft power to settle the antimonopoly investigation launched by the EU against Gazprom. In Europe everybody seems to understand that producing real penalties to Gazprom will lead to worsening of relations with Russia and will deteriorate energy security of the European Union. Whatever big the desire of the European Commission headed by Barroso leaving next year is, objective reasons for sharp moves are weak currently. No wonder European commissioner for competition Joaquin Almunia who conducted the antimonopoly investigation at first declared about postponing promulgation of the claims from the end of 2013 to spring 2014, but in early December said that a possibility of peaceful settlement of the problem with Gazprom was considered. Besides, that day, long before the deadline, the European Commission issued a permit to an asset swap deal of Gazprom and Wintershall that will significantly reinforce positions of the Russian gas giant on the sales market and increase its competitive advantages due to availability of storing capacities.

Gazprom being ready to skim the cream off and try to strengthen its positions on the EU market, while the conjuncture is favorable for the Russian gas, seems to be prepared for a compromise. Now the question is about the conditions the sides will withdraw from the process saving the face and not causing significant financial damage.

Lithuania may play the role of token money for Gazprom and the EU; Vilnius will probably get the long-awaited 15% to 25% discount off gas prices; another option is the sale of gas transportation assets of the concern in Europe (e.g. stakes in Gascade and gas transportation companies in the Baltic States), as well as some minor issues regarding adjustment of long-term contracts that can be portrayed as success of the European energy policy.

Moreover, the process of settling antimonopoly claims, as we believe, may facilitate removal of disagreements on infrastructural projects of gas deliveries to Europe. The mechanism of releasing the OPAL gas pipeline is already finalized with European regulators and it will probably be verified by the European Commission soon. The fate of South Stream will largely depend on developments in the Russia-Ukraine-EU triangle. Brussels may stop pretending there is a necessity to protect Kiev from Moscow’s pressure, and the Russian side will not have to implement the South Stream project in the shortest time possible and at its full designed capacity.



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