Could Gazprom antitrust case redraw gas industry?

A tanker is filled at a Gazprom refinery. Getty

Could the conflict between Gazprom and the European Union become the antitrust case of the decade?

The answer is yes and the argument is spelt out in an excellent paper just published by the Centre for European Policy Studies.

The case could not only make legal history and provide a very timely reminder that the EU is alive and kicking, it could also transform the international gas market, pushing on the fall in prices already underway and undermining to the point of extinction the linkage between the prices of crude oil and natural gas.

The case, brought by Lithuania – a country that pays noticeably more for its gas than Gazprom’s customers in other countries in western Europe – involves a series of challenges and allegations. These include a challenge to the restrictive nature of contracts that allegedly impose take or pay conditions but do not allow onward sale of any surplus gas; the lack of third party access to what are, in effect, monopoly supply channels; and the long-term contractual arrangements that link gas prices to the price of oil. Those contractual links go back decades, but in the view of many observers are now outdated by the development of gas-to-gas competition.

It is easy to assume that any problems between Europe and Russia will be cosily settled in a meeting between Vladimir Putin and Russia’s best friend in Europe, Angela Merkel. But such closed deals may be a thing of the past. Europe is a place where the rule of law prevails and is taken seriously. The EU’s Competition Directorate is fiercely independent and the prime facie case against Gazprom looks strong. To any rational observer this is not a competitive market.

Gazprom’s offices have been raided and it is unlikely to succeed since the company’s business in Europe is handled through associate companies formally located in EU member states and clearly subject to EU law.

The paper by Professor Alan Riley from the City Law School in London sets out the clear arguments. It describes Gazprom’s choices. They can resist, which could lead to large fines followed by civil claims for overcharging and a loss of confidence among consumers at a time when gas supplies from elsewhere are readily available. This could unravel the company’s whole business model . A contested case would of course take a long time to come to final judgement, but the loss of confidence coupled with an unwillingness by consumers to sign new contracts would come very quickly. Arguably that process has already begun.

Then the challenge could multiply. Other countries from central and eastern Europe could start their own regulatory and civil law procedures.

Resistance is one choice. The alternative is for Gazprom to seek a settlement . That would probably involve not just price reductions (and even conceivably repayment of some past receipts) but also a rewriting of all existing contracts. Only Mr Putin could take such a decision. Mr Putin is a realist, which is why he is promoting an alternative source of economic power for Russia through Rosneft, but to ditch Gazprom would be a very bold move indeed.

For the energy market the real importance of the case is likely to be the formal ending of the contractual link between oil and gas prices. That link is breaking anyway but if the court concludes that oil price based contracts are illegal because they ignore what Professor Riley calls the “ realities of the modern gas market” the effect will be profound and global.

Every existing gas contract could be reopened and the value of all existing gas production and reserves would be at the mercy of what would be in effect a global spot market. This is big stuff and the value of a number of major gas producers could be undermined overnight.

Such a move would indeed make this the most important antitrust case of the decade. It would also make it the single most important antitrust case to affect the energy business since the case of Standard Oil co of New Jersey versus the United States [1] - a case which led to the break up of the Standard oil monopoly just over a century ago.


[1] http://en.wikisource.org/wiki/Standard_Oil_Co._of_New_Jersey_v._United_States