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Gazprom’s Surrender. What Does The Compromise In Antimonopoly Dispute With EU Mean?


Mykola Aleksyuk, attorney at Ilyashev & Partners Law Firm
Source: European Pravda

The great antimonopoly dispute between the European Commission and Gazprom comes to an end. Om March 13 the European Commission published Gazprom’s offer regarding the solution to the competition issues in the gas market of Central and Eastern Europe.

It is worth to mention that this is one of the largest antimonopoly disputes of the EU that directly influences Ukraine either.

In September 2011 the European Commission inspected the offices of a number of companies in Central and Eastern Europe, which operate on gas supply, transportation and storage markets. The inspections were conducted in view of the investigation of the potential anticompetitive concerted actions and the violations of competition rules envisaged by the Articles 101 and 102 of the Treaty on the Functioning of the European Union (2010/Sec 83/01).

Gazprom was accused of conducting antimonopoly activities in Eastern European countries where the share of the Russian gas amounts to 50-100%.

It is quite natural that in the course of investigation the EU officials assessed the agreements concluded with the Russian Gazprom being the main supplier of gas to Central and Eastern European states (Gazprom holds the share in gas supply markets of these countries).

In 2015 the preliminary findings were published concerning Gazprom’s violations of the EU laws in the field of economic competition protection on gas supply markets of Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia.

The European Commission divided the violations of competition laws into three blocks:

– Application of territorial limitations by Gazprom, which were envisaged in supply agreements for natural gas: Gazprom at its own discretion determines natural gas supply points in the importing country, and the importer does not have the rights to re-export gas to the third countries at its own discretion;
Unfair pricing: in five states (Bulgaria, Estonia, Latvia, Lithuania and Poland) Gazprom unilaterally set up the prices for natural gas in the amount that unreasonably exceeds the prime cost of its production and the average price for other consumers;
– Establishment of additional stipulations for buyers in the agreements for natural gas supply. These stipulations as follows from their contents do not relate to the corresponding legal relations (in two states – Bulgaria and Poland).

For example, the price and supply volume of natural gas were contingent on the implementation of investments into the projects of Gazprom’s gas transportation infrastructure, transfer to the Russian monopolist of the control over the national gas transportation system.

The violations limited the free trade of natural gas and led to the implementation of unreasonably high prices – for gas companies as well as for the end consumer.

At the same time it is worth to mention that the EU legislation sets forth the strict sanctions for the violation of economic competition rules – the maximum amount of penalty may reach 10% of annual turnover of the company. In Gazprom’s case the penalty may tremendously amount to $10 bln.

Apparently, the leadership of the Russian’s gas monopolist decided that it will be economically expedient to make certain concessions with Western partners in exchange for the loyalty on behalf of the European regulator.

On February 14, 2017, Gazprom forwarded its proposals to the European Commission regarding the dispute resolution. In particular, Gazprom undertook the following:

To allow gas re-export, by terminating the corresponding clauses in the concluded agreements.
To improve the pricing procedures for natural gas – if the party justifies the substantial price changes in natural gas market in comparison to other prices that existed at the moment of agreement signing, the party shall be liable to demand the revision of gas price; in addition, there will be an opportunity to initiate the price revision procedure in case this price substantially exceeds the average price of natural gas importer in Germany, France and Italy.
To improve the revision procedure for gas price, the parties shall have the right to initiate the revision of prices every two years, as well as the right of unscheduled price revision once in five years (currently the price may be revised once in three years, and in certain contracts this right is not stipulated at all).
– To provide buyers with an opportunity to determine convenient supply points for natural gas that shall further simplify the procedure of gas re-export to other countries.
To waive a claim against Bulgaria regarding the recovery of damages for the withdrawal from the project on South Stream construction.
To introduce the institute of the authorized officer for the monitoring of the proper execution of obligations undertaken by the parties – the official that will exercise the impartial control over the parties undertakings (primarily Gazprom).

The European Commission accepted Gazprom’s proposals recognizing them as sufficient remedies for competition laws. Currently they are considered by the buyers of natural gas – the consumers may present their comments and objections to the European Commission. The final decision of the regulator will primarily depend on these comments and objections.

The unbiased analysis of the proposed adjustments actually attests the possible development of competitive environment in the European market of energy supplies.

Although the principal position of Gazprom’s Western partners may significantly complicate the implementation of these proposals, even the partial implementation by Gazprom of its obligations shall reverse the situation in the European gas market. First of all, the market will become more competitive making it impossible to use gas as a geopolitical weapon.

Should it influence Ukraine? Although Ukraine is not the EU member, the partial effects of these changes shall influence even our country. And this potential effect may be carefully deemed as positive.

Naftogaz shall be provided with the opportunity to purchase the Russian gas cheaper, but the final gas price shall depend on the competitive prices and terms set forth in the new agreements between Gazprom and its partners in Eastern and Central Europe.

However, it is not the end! The right for re-export will serve as additional safety measure for Ukraine in case the trade relations with the Russian Federation are ultimately terminated. Kiev shall have the opportunity to choose the reliable and predictable supplier of natural gas.

At the same time, the improved procedures for the development or revision of prices for Gazprom partners may serve as the precaution for the proportional decrease of natural gas price for Ukraine in case of its re-export.

Finally, business entities may use the findings of the European Commission in Gazprom case as the reference of inadmissible anticompetitive behavior in that or another product market.

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