Report: Brussels nears settlement with Gazprom after 5-year probe

MOSCOW, Oct 24 (PRIME) -- Brussels is nearing a draft settlement with Russian gas giant Gazprom to end a 5-year antitrust probe into alleged overcharging, a move that risks a backlash from eastern European states angered by the Russian energy giant sidestepping a fine, the Financial Times reported on Monday citing people familiar with the matter.

Although the European Commission and Gazprom have worked out technical details of a deal to end the competition probe, the case is heavily complicated by politics and deteriorating EU-Russia relations over Syria and Ukraine.

Margrethe Vestager, EU competition commissioner, and Alexander Medvedev, deputy chairman of Gazprom, are expected to meet later this week and potentially agree draft terms, or signal they are close. “This could at least be the beginning of the end,” said one person familiar with the case. Another warned, though, that a political intervention from the Kremlin in particular could still scupper talks.

Under the deal, state-controlled Gazprom would enter legally-binding commitments to adjust its business practices but would face no financial penalty. Crucially, according to two people briefed on the terms, the draft deal includes a relatively light intervention on the most sensitive and commercially significant issue: Gazprom’s alleged abuse of its dominant position through long-term contracts linking gas to oil prices.

If agreed, any draft settlement must then face a potentially fraught “market test”, which gives critics the chance to weigh in on the deal terms before the commission takes a final decision.

The Gazprom case is totemic for some former-communist EU member states, who see it as the test of whether the bloc’s powerful antitrust arm will protect their interests against a Russian monopoly with a stranglehold over their energy supplies. Poland and Lithuania in particular see Russia as using gas as a political tool and have been critical of Brussels for not tackling the unfair prices. A major gripe is that Poland pays more for its gas than Germany despite it being closer to the source.

“If there is no fine, this will politically be a very bad signal,” said one EU ambassador liaising with Brussels about the case. “We expected this. But even if the company agrees to change behavior, why should it not pay for breaking the law?”

First launched in 2011 with the commission’s biggest ever round of surprise raids, the charges eventually focused on three main issues: contract terms preventing cross-border gas sales; tying gas supply to pipeline investment; and unfair gas pricing to Bulgaria, Estonia, Latvia, Lithuania and Poland.

Broad terms have been agreed to address the first two issues, which are largely remedied with contractual changes. Addressing the pricing concern has proved more complex, not least with the precipitous drop in oil prices that came shortly before the commission served charges against Gazprom last year.

The settlement would seek to offer customers a guaranteed route to challenge Gazprom prices that they see as unfair, including through arbitration. Although the details have yet to emerge, critics see little improvement on the current situation; Gazprom has already been subject to price arbitration with customers such as RWE, Eni and others in various national jurisdictions since 2011.

Those arbitrations and growing competition in the European gas market have pushed Gazprom to adapt its long-term, oil-linked contracts to track so-called “hub prices” more closely. Nonetheless, the commission had originally pushed the Russian company to abandon oil-linked pricing altogether — something Gazprom has argued against with almost religious fervor.

While some hoped for stronger remedies in the settlement, Jonathan Stern at the Oxford Institute for Energy Studies argues that the key shift in the commission position came in June when Gazprom won its price-arbitration case with Lithuania. Stern noted that “the tribunal was unable to interpret what was meant by the term ‘fair prices’ in the long-term contract”.

While the commission does not have to abide by that tribunal’s decision, it raised “the nub of the issue: how to interpret the term fair/unfair prices”, Stern said. “And this may have been influential in [the commission’s] thinking to settle the issue, as long as it can gain an undertaking from Gazprom that its prices will be based on a competitive mechanism (i.e. hubs) from now on.”

Since the issuance of antitrust charges, both Gazprom and the commission have sought to avoid the case being usurped by politics and have tried to cast it as a technical business matter.

“This is narrow technical stuff. It doesn’t impact on the problems in the relationship in general; it doesn’t commit Europe to suddenly being much nicer to Russia and Putin. This is basically for gas nerds like me,” said Stern.

However, a settlement with the state-controlled energy producer implies a thaw in relations with Russia that runs counter to rising tensions over sanctions and actions in Syria. It also requires Russia to effectively recognize the EU’s legal jurisdiction; something it has to date refused to do. The EU has in the past fined companies who failed to abide by their settlement terms.

“What we really want in this case is for Gazprom as well as other gas suppliers to play by the EU rules,” said Vaclav Bartuska, special ambassador to the Czech Republic for Energy Security. “For the Czech Republic it worked to have full access to the western gas market and we believe the same could be for the rest of the region.”

Gazprom said it had this month broken records for gas supply to Europe. “We will supply Europe with as much gas as it needs, and our European consumers can feel relaxed when they look out of the window at the thermometer,” said Alexei Miller, Gazprom chief executive.

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