September 5, 2012 / 10:41 AM / 5 years ago

UPDATE 3-Gazprom gears up to fight EU gas investigation

* Gazprom says it was set up beyond EU jurisdiction

* Reminds EU it is of strategic importance to Russia

* Says pricing practices in accordance with standards

* European sales over half of Gazprom’s gas revenue

By Vladimir Soldatkin and Foo Yun Chee

MOSCOW/BRUSSELS, Sept 5 (Reuters) - Russia’s Gazprom said on Wednesday it was ready to talk with the European Union after Brussels began a competition investigation into its gas sales, but stressed it was armed with legal and political reasons why the EU should back off.

The European Commission started the inquiry on Tuesday into suspicions that Gazprom, which is more than 50 percent owned by the Russian state, was hindering the free flow of gas across the EU and imposing unfair prices on its customers by linking the cost of gas to oil prices.

Gazprom, which makes most of its 3.2 trillion roubles ($99 billion) of gas sales in Europe, said it abided by all appropriate laws in the EU and everywhere it operated, including price mechanisms, and prepared the ground for a fight by stressing its strategic importance to Russia.

“We hope that during the investigation ... the fact that Gazprom, set up beyond the EU jurisdiction, is a company, bestowed ... in accordance with the Russian law, with a status of a strategic organisation controlled by the state, would be taken into account,” Gazprom said.

Political tensions between the EU and Russia over gas supply are nothing new. Gazprom supplies over a quarter of Europe’s gas consumption, and several EU states rely on it for most of their needs and are locked into long-term contracts, in some cases of up to 30 years.

“We are in particular interested in long-term contracts between Gazprom and the businesses to whom they supply natural gas,” Antoine Colombani, a spokesman for competition policy at the European Commission, told a briefing.

Colombani said the investigation covered Poland, the Czech Republic, Slovakia, Hungary, Bulgaria, Estonia, Latvia and Lithuania. “It doesn’t mean that we are excluding other member states. If the investigation reveals new information, then we will extend the investigation,” he added.

Last year, the Commission raided the offices of several Gazprom units in Europe to investigate their involvement in the supply, transmission and storage of natural gas. A Commission official said at the time that the raids were part of an EU effort to wean itself off reliance on Russian gas.


Moscow diplomats expressed surprise at the renewed conflict between Brussels and Gazprom, which bowed to clients’ demands for softer contractual terms earlier this year and put an end to protracted arbitration proceedings with some consumers. “It really came out of nowhere,” one said.

The Russian gas export monopoly accepted price cuts of 10 percent, on average, and started retroactive payments in the first quarter to reflect changes to the deals.

“Poland’s PGNiG is one of the two remaining major Gazprom customers still in a pricing dispute with Gazprom, as the company is seeking not a 10 percent discount, but 20 percent, and the Commission’s actions are likely improve its negotiating position with Gazprom,” Citi analysts said in a research note.

Citi cited media reports that Gazprom’s oil-linked contract prices were higher for countries closer to the Russian border, which tend to be former Communist states with higher structural dependence on Russian gas.

“If that is indeed the case, the Commission is likely to frown upon that practice, and may try to force pricing to be comparable among the various countries after accounting for shipping costs,” Citi said.

“Beyond that, we fail to see the grounds upon which the Commission could have an issue with the gas-oil link, as that is a long-standing industry practice going back to the 1970s.”

Lithuania, which has fought with Gazprom over the company’s resistance to separating the transport infrastructure and supply business in that country, welcomed the inquiry.

Gazprom argues that this demand for “unbundling” would mean a forced sale that amounted to expropriation and sees its Lithuanian business as a test case for other parts of Europe.


The stakes are high. Gazprom may end up paying fines of up to 10 percent of revenues in the relevant markets, which could see it stumping up between $4 billion and $5 billion.

A Brussels-based lawyer, who practises anti-trust law and declined to be identified, said the Commission could also declare the contracts void and unenforceable.

Gazprom is struggling to hold on to European markets as it is. It officially expects to export 150 billion cubic metres of gas to the EU this year, unchanged from 2011, though analysts are sceptical about its ability to sustain such volumes.

In the face of sluggish demand and an influx of alternative fuel such as liquefied natural gas, data showed a fall in Gazprom’s export volumes to Europe in January-August of 10 percent year-on-year, according to a Gazprom source.

Last year, Gazprom sold gas to Europe and other countries outside the former Soviet Union worth $55 billion. The revenues are expected to be lower this year after it offered the price cuts on long-term gas supplies after pressure from customers.

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