In Oil & Companies News 08/05/2015
Gazprom is considering offering Europe new concessions, including on pricing, to settle its antitrust case and avoid a long legal battle which could result in billions of dollars in fines for the Russian gas producer.
The European Commission has accused Gazprom, which meets a third of EU gas needs and generates more than half its revenues there, of using its dominant position in eastern Europe to overcharge by up to 40 percent.
State-run Gazprom, which contributes about 8 percent of Russian GDP, denies the charges and says it has already made significant concessions. But it would rather avoid a costly court case that could further complicate relations between Moscow and Brussels, already strained by the crisis in Ukraine.
If it can settle the case by offering concessions, it will not be fined or get a finding of wrongdoing from EU regulators.
The EU wants Gazprom to calculate more of its contracts using European spot gas prices, rather than a formula it has historically used for most of its contracts based on the price of oil. Only around 16 percent of its contracts were based on spot gas as of the end of 2014.
European spot gas prices are based on major trading hubs in western Europe so using those prices for all contracts, including for eastern Europe would align prices across the EU. Also, spot gas prices have often been lower than oil and while the gap has narrowed as the oil price has fallen, it could widen again.
A Gazprom official said the company was considering including spot gas prices in more contracts, in what would be a major concession on the main sticking point between the two sides.
“We are working on it,” the official, who did not want to be named, told Reuters.
The Commission has given Gazprom 12 weeks to respond to the charges made last month by the EU’s new antitrust chief, Margrethe Vestager. The official said it was pouring over hundreds of pages of documents from the EU.
“We will work with the documents and the Commission,” Gazprom spokesman Sergei Kupriyanov said.
Another set of charges relates to pressure the EU says Gazprom put on Poland and Bulgaria, which is entirely dependent on Russian gas, to invest in pipelines according to priorities dictated by Gazprom.
Gazprom may ask for an extension before explaining why it does not consider itself to be guilty of the charges. The source said Gazprom will also argue that it does not deserve to be fined as it has already changed its behaviour by introducing more competitive pricing, selling assets to comply with EU regulations and allowing its gas to be resold by consumers.
“We deserve not to be penalised but to be commended because Gazprom, together with its partner BASF, created competition on the European market,” Alexander Medvedev, Gazprom’s deputy head told a conference call last week.
After Gazprom’s response, there may then be some legal back and forth between the two sides before Gazprom is expected to outline the concessions it is prepared to offer.
MUTUALLY BENEFICIAL
The Gazprom official said the Kremlin could soon be involved in the discussion about how to respond, a sign of the political significance of the case during a deep freeze in relations between the EU and Russian President Vladimir Putin over the conflict in Ukraine. A Kremlin spokesman did not immediately respond to a request for a comment.
Vestager has insisted that the case against Russia’s biggest company, which critics say Putin uses as a foreign policy tool, is “not political”.
She has been asked repeatedly whether she would prefer to settle with Gazprom or penalise the company by getting involved in a lengthy court battle.
“We will look carefully at all of Gazprom’s arguments before taking any decision. Gazprom can also request an oral hearing to present its position. All roads are open at this stage,” she told a news conference.
Gazprom will argue that it has already made significant concessions.
Gazprom and Wintershall, a fully-owned subsidiary of BASF, sell gas in Germany and Europe via their joint trading company Wingas. Gazprom has paid rebates to some European companies as a result of negotiations on new terms for supplies.
In 2013, for example, Gazprom returned around $1.5 billion to RWE in rebates on gas bought by the German utility since May 2010 as part of a wider row with European clients over gas pricing.
It also adapted the terms of its contract with E.ON Ruhrgas AG to suit European market regulations in July 2012, according to Gazprom’s exporting arm, Gazprom Export and allows Poland and others to sell gas on to Ukraine, at a low price.
Analysts are optimistic that an agreement will be reached without a long and expensive court case.
“I think that a deal will be reached,” said Valery Nesterov, an analyst at Sberbank CIB in Moscow, estimating that Gazprom could be fined up to 2 billion euros ($2.25 billion) if found to have breached the EU’s rules in court.
Mario Mariniello, a research fellow at the Bruegel think-tank, said a settlement would suit both sides.
“All in all, both parties have an interest in finding an agreement that would address the concerns without entering a long fight in court,” he said.
“Hence probably the odds are still in favour of a settlement, but I guess no options should be excluded at this stage.”
