Gazprom under competitive and regulatory pressure

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13 September 2012, Gas

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On the regulatory front, the European Commission has formally opened proceedings to investigate alleged anti-competitive behavior by Gazprom in Central and Eastern European upstream gas supply markets, including Bulgaria, the Czech Republic, Slovakia, Poland, Estonia, Lithuania, Latvia, and Hungary.

The commission is concerned that Gazprom may be causing harm to EU consumers by abusing its dominant market position. In particular, Gazprom is suspected of having restricted the free flow of gas across EU member states, of having prevented the diversification of supply, and of having charged relatively unfair prices by linking gas to oil prices.

Gazprom certainly has significant power, as it supplies over 25% of all gas consumed in Europe; however, the EU has tried to counter this power imbalance by investing in the Nabucco pipeline (an alternative supply route that would allow gas to be supplied to Europe from the Caspian region) and by creating a more integrated European gas market.

No deadline exists for this antitrust investigation, but if Gazprom is found guilty, the company could be liable for significant levels of financial compensation or could face a turbulent change in its business methods in Europe.

On the competitive front, Gazprom is under pressure from lower sales, both domestically due to falling demand, and in its export markets due to competition from independent suppliers and from LNG suppliers.

Of note is the competing firm Novatek, which has signed two new deals, thereby taking market share away from Gazprom. The first is a deal to supply E.ON Russia with a reported 180 billion cubic meters (bcm) over 15 years for use in the German-owned company's power plants. The second is a deal with Finnish utility Fortum, also for 15 years.

Gazprom's response has been to reaffirm its role as the main Russian gas exporter. It has announced its intention to cease buying from independent gas producers in Russia due to unstable domestic demand. This decision could include between one quarter and over half of the gas sales of independent producers like Novatek and Lukoil. While this posturing underscores Gazprom's increasing vulnerability, the company holds the Russian domestic market in its grip for now, and even contracts like that between E.ON and Novatek are relatively small compared to Gazprom's gas production level of 513bcm in 2011.

Further underpinning Gazprom's influence - and inflexibility regarding antitrust allegations - was a Kremlin-issued decree on September 11, 2012 stating that state-controlled firms must have permission to give information to overseas authorities or to change the prices of overseas contracts. While this was reportedly issued in order to protect the economic interests of the country, Gazprom will certainly benefit from such a directive.

Source: MarketLine

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