Gazprom's proposed commitments are insufficient to address distortions to the gas market

Date

2017 05 04

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Malte_Sorensen.jpg
Photo: Malte Sorensen

The Ministry of Energy submits to the European Commission its position on commitments assumed by Gazprom in respect of the Central and Eastern European gas markets. The Ministry supports the Commission’s efforts to deal with gas market distortion issues faced by Lithuania and other Baltic countries and caused by anti-competitive actions by Gazprom. The commitments assumed by the Russian gas company are however no longer in line with the current market conditions and in the long run fail to ensure that Gazprom would not continue to abuse its dominant position and to restrict competition.

Gazprom’s commitments, which, according to the Commission, would enable free gas supply in the Baltics and competitive prices, are put forward with a view to bringing to an end the anti-trust investigation of Gazprom launched by the Commission at Lithuania’s initiative and going on for five years.

’Firstly, these commitments of Gazprom’s do not ensure that Lithuanian companies will be able to purchase gas freely and at a fair price because the market situation is completely different from before. What helps us to ensure a competitive price along with energy security today is the liquefied natural gas terminal in Klaipėda offering an alternative to the Russian gas. Secondly, Gazprom’s commitments do not compensate for, nor repays those billions in damages incurred by consumers in Lithuania and the entire region because Gazprom’s past abuse of its monopolistic position‘, the Minister for Energy Žygimantas Vaičiūnas says.

Commitments important to Lithuania relating to gas exchanges and possibilities to change gas delivery points and possibilities to renegotiate gas prices are in principle ineffective because of numerous unreasonable and superfluous additional conditions put forward by Gazprom. For example, Gazprom undertakes to create opportunities for renegotiating gas prices if they are different from Western European ones only for customers with long-term contracts (exceeding 4 years) and only for existing customers, not new ones, and prices may only be revised once every two years. Moreover, unreasonably long periods of time are envisaged for renegotiating contract terms and conditions, thus leaving too much leeway for Gazprom to delay those procedures even longer. The price revision commitment is no longer relevant to Lithuania as Lithuanian companies do not have a single long-term contract with Gazprom, and those flexible conditions would not apply to any short-term contracts.

What is important to Lithuania among the things currently on the table is gas exchange transactions and possibilities to change gas delivery points, which would also be permitted only subject to certain conditions under which customers must bring it up no later than 6 months in advance, have a contract with Gazprom lasting for more than two years and seek to divert large volumes of gas. What is more, Gazprom would undertake to establish only a limited number of delivery points throughout Europe, only five, thus still maintaining artificial barriers to cross-border gas trade. Also, unreasonably high service fees for gas exchange transactions are to be imposed making that gas uncompetitive.

’All those restrictions only mean that no Gazprom’s commitments could actually be practically feasible.  So there would be no real benefit for Lithuanian and other Baltic consumers while Gazprom would still be able to use that in order to boost its reputation. We believe that the Commission should demand that all unreasonable and superfluous restrictions be done away with and that account be taken of the current market essentially functioning based on short-term contracts‘, the Minister for Energy says.  

The Ministry of Energy has drawn up a package of proposals to the European Commission in respect of the expansion of Gazprom’s commitments and the elimination of superfluous conditions. It includes a suggestion that Gazprom be obliged to apply an automated contract price revision mechanism based on gas price fluctuations on Western European gas trading platforms. Given that because of Gazprom’s geographical proximity the cost of gas transportation to Lithuania is lower than to Western European markets, the price of gas supplied to Lithuania should be reduced accordingly. Another suggestion is to oblige Gazprom to create conditions for changing the gas delivery points to any delivery point in Europe where gas is supplied by Gazprom. This however must apply to long-term and short-term contracts alike.

Should Gazprom succeed in agreeing on its commitments with the Commission, they would eventually become legally binding, and the Russian company would manage to avoid a possible fine of up to EUR 8 billion for abusing its monopolistic position in the European Union gas markets. Estimated losses incurred by Lithuania because of Gazprom’s unfair pricing behaviour amount to about EUR 1,5 billion. The commitments currently put forward by Gazprom would not enable Lithuania to compensate for those significant losses.

At Lithuania’s initiative in 2012 the Commission launched an investigation into Gazprom’s abuse of its dominant position in Central and Eastern European gas markets. The investigation started in respect of possible infringements in eight countries. In April 2015 the Commission stated that the Russian gas company might have set unfair gas prices and abused its position.