Gazprom case lifts the lid on gas pricing

Suppliers of gas into the EU should be carefully analysing the implications of the European Commission’s provisional findings against Gazprom, issued last week. In its formal ‘statement of objections’ the Commission has formally accused Gazprom of operating a strategy of artificially partitioning EU markets in breach of EU competition rules. Central to that accusation are allegations of abusive practices include restricting the resale of gas within the EU through territorial restrictions and unfair pricing practices.

The issues around territorial restrictions, preventing customers from reselling gas across the EU, are well trodden. Much more complex and controversial are the pricing issues, and specifically the use (and alleged abuse) of pricing mechanisms when trading gas within the EU. Key to understanding these issues is the relationship between oil-linked long-term (take-or-pay) agreements and the increasing prevalence of hub-based pricing in the more liquid spot and derivative markets.

Add to that the complexities of successfully prosecuting an antitrust case based on excessive pricing, and one can easily begin to understand why it has taken several years for the Commission to put its charge sheet together.

While the Commission has said it does not have an issue with the industry practice of pegging gas prices to the oil price, the concern is how Gazprom applies pricing formulas in its contracts. Assessing the prices against different benchmarks, such as Gazprom’s costs or the German market, the Commission has concluded that the company is abusing its position in the market by charging excessive prices.

Under EU competition law, pricing by a dominant company can be considered to amount to an abuse where it is “excessive”. The questions to determine are whether the difference between the costs actually incurred and the price actually charged is excessive, and if it is, whether a price has been imposed which is either unfair in itself or when compared to competing products” (Case 27/76, United Brands). The fact that the price gives the supplier a high margin is not of itself conclusive. Key to a finding of abuse is whether the pricing behaviour can be said to distort competition on the wider market, and in this case whether it forecloses competition from competing suppliers and prevents or otherwise makes it more difficult for wholesalers to resell gas within the EU. This is likely to mean careful analysis of Gazprom’s pricing in the five countries under scrutiny — Bulgaria, Estonia, Latvia, Lithuania and Poland — with prices in Germany, which is seen as the only gas market in Europe that is competitive. It is also looking at prices on international spot markets, which are, in some instances, allegedly 40% cheaper than Gazprom’s contract prices.

Gazprom now has 12 weeks to respond to the Commission’s Statement of Objections.