Bulgaria Analytica: Behind's Vestager's appeasement of Gazprom

Margrethe Vestager, the EU Commissioner for Competition, made a long-awaited announcement May 24th, outlining the final decision on the anti-trust investigation against Gazprom. The media headlines picked different angles, some cheered the move for defending CEE customers, others pointed to a more pessimistic and pragmatic read - no fine for Gazprom. The press release alluded to the main achievement in the eye of the watchdog – the Russian gas giant had finally agreed to play ball. At a closer look, feelings are mixed and certainly a far cry from unqualified praise for the DG COMP’s work as the expectations in the CEE countries that Gazprom will be disciplined and punished for abusing its monopoly status were naturally greater.

The decision would undoubtedly raise eyebrows, when compared with a similar agreement between Gazprom and the Turkish Botas, where the Russian company agreed to an out-of-arbitration-court settlement to compensate Turkish customers with $1 billion for overpriced gas sales in 2015 and 2016. The timing of the announcement in Turkey was carefully picked not to precede Mrs. Vestager’s press conference.

Let’s return to the basics – considering the impact on Bulgaria, which by most accounts is the worst affected EU country by Gazprom’s abuse of its monopoly status.

A rough cumulative estimate of the overpaid gas since 2012 would bring the markup to $1 billion. Bulgaria, though, has never dared to trigger the price review clause fearing reprisals from the Russian gas company on transit flows. Now that the first line of Turkish Stream has been laid there is little evidence that this restraint has generated any benefits.

At the same time, the Ukrainian gas company Naftogaz took Gazprom to Stockholm arbitration court and won sizably – over $2 billion in compensation for overpaid gas.

The eight CEE EU members - Bulgaria, Hungary, Slovakia, Czechia, Estonia, Latvia and Lithuania - chose to appeal and solicit the EC's support and protection instead of pursuing their rights in court versus Gazprom. The DG COMP’s decision means their choice has been wrong as it has not translated into tangible results, allowing Gazprom to claim victory.

The ruling of the EC on the Gazprom case serves a eulogy to the common EU energy policy. It comes at the right time as Germany expects to green-light the start of the Nord Stream-2 pipeline project. In his turn, French President Macron lobbied hard in Saint Petersburg on behalf of French companies’ interests in Novatek's Arctic LNG-2 project. He got in return a lecture on EU security needs from President Putin, winning a vague promise from the Kremlin that, one day, Gazprom’s export monopoly would come to an end.

Speculating on the Kremlin's will to revoke the pipeline export monopoly of Gazprom might be a lifelong job – always seemingly close, but as distant as ever in reality. Whatever lever the EC anti-trust body had against Gazprom as a counterweight - it is gone after the final verdict.

Bulgarian Prime Minister Borissov did not waste any time joining the rush to Moscow, seeking to grab a piece of the energy pie and offering to cooperate with Putin on the extension of the Turkish Stream into the EU.

Exhibiting a queer sense of ‘energy solidarity’, the leading nations in the EU, preferred to pursue their national agendas at the expense of their neighbors and fellow member states. No wonder, at the end of the road, there is less enthusiasm for ‘more Europe’ and a wave of nationalism spreading across the continent. Fewer leaders in the CEE are willing to stick to a common EU energy agenda, where the interests of Germany and France dominate. The EU Energy Union thus is doomed, unable to bring in new converts.

The EC’s anti-trust body has put a sizeable effort in presenting its work as a bold, comprehensive and far-reaching step, fomenting fresh skepticism in the future of EU gas market liberalization against persevering Gazprom. The EC’s new ‘rulebook’ claims to impose a new set of obligations that would change the Russian monopoly’s behavior, yet this is more of a hope and wishful thinking.

When one discounts the hype, and the verbiage is distilled for content, few of the DG COMP achievements represent anything novel departing from established legal practices. Most of the "gains' for CEE customers reflect market standards for Russian gas sales in the EU, codified in 3-5-year-old contracts with West European gas traders. These upgrades closely track precedents in arbitration court rulings lost by the Russian gas giant, including but not limited to the lifting of the re-export ban, the softening of the 'take or pay' clause, the benchmarking to hub prices and the mandatory capacity release in transit contracts, that have already contributed to some degree to enhance competition in the CEE market. But few if anything should be specifically attributed to the DG COMP ruling in the Gazprom’s case.

Mrs. Margrethe Vestager’s assertion that the "decision puts an end to this behavior by Gazprom", removing obstacles that have stood in the way of the free flow of gas in Central and Eastern Europe is a clear overstatement. What stifles competition in the CEE gas market is the lack of credible competitors to Gazprom and Moscow’s aggressive play in blocking serious alternatives, raising entry cost to prohibitively high level. At the same times, the Russian gas monopoly continues to enjoy exclusive privileged access to the customers and transport infrastructure. 

The DG COMP’s ruling on this anti-trust case does little to change the status quo. LNG suppliers can hardly compete with Gazprom's pipeline gas – not so much pricewise at EU maritime borders, say the LNG terminal in Greece – but at end customer level. By the time LNG reaches the Bulgarian or Romanian borders, they add €4–5 per MWh to the end price, which kills its competitive edge. Gazexport in the meantime is spared the need to compete in gas supply tenders, profiting from past bilateral long-term supply and transit contracts. For every 1000 cubic meters of gas, Gazexport pays in the range of $6 to cross Bulgaria, whereby everyone else, including state Bulgarian companies, pay three times more, which is a thinly veiled case of unlawful state aid and unfair trade practices.

It is not exactly clear how DG COMP will be able to convince the public that it will succeed in translating the new rules into amendments to Gazprom's gas sale contracts in the region - there are no binding deadlines, no monitoring and compliance mechanisms. With or without the ruling of the EC - Bulgaria will keep on relying almost 100% on Russian gas deliveries, virtually sealed of competitive gas supplies, Both Bulgargas and Bulgartransgas are likely to stick to existing contract arrangements, seeking to secure Russian gas supplies and shipments, regardless of the ‘rulebook’ written and promoted by the EC as a game changer. 

The expectations for future more competitive spot prices, replacing oil indexed prices, benchmarked on hubs, will not cure the evil. Gazrpom will be free to reward 'friendly' behavior with larger discounts based on volumes and political/business expediency, as was the case with the latest 10.25% discount offered to Botas. To ascertain that Gazprom will help integrate CEE gas markets implies a degree of cognitive dissonance.

It sounds like little consolation that every two years CEE importers will be able to trigger price reviews and adjust price levels, instead of the current practice – twice for the duration of the contract, usually 10 years. It is worth measuring up the optimism of the DG COMP to the recent history of legal disputes over prices Gazprom – it is hard to recall instances of Bulgarian importers successfully initiating and closing price reviews. There is not much leverage when things boil down to a single supplier over a single route. 

The claim of the DG COMP that Bulgaria has been spared penalties over the winding up of the South Stream project is also misplaced. Whereas Gazprom stands no chance of suing the Bulgarian Energy Holding over lost revenues or future profits, following the project's early closure, it has every right to challenge in court the EC’s role in the process. Gazprom can recover transferred funds in the equity capital of the joint venture company. It is therefore unclear what exactly constitutes the specific added value of the anti-trust ruling against Gazprom for Bulgaria, explicitly mentioned in the press release.

Also worth recounting is the right to change delivery points, presented as another virtue of the settlement in Gazprom’s case. This was initially requested by Gazprom in attempt to swap delivery points for gas to Bulgargas from the Ukrainian-Romanian to Turkish-Bulgarian border. It was only after some groaning and moaning from respective national gas companies in Bulgaria and Romania that the Commission recognized the need for reciprocal right to change delivery points for EU gas importers. It is true that, if applied, this right to change delivery points at a short notice would add maneuvering space to CEE gas importers.

The swap deals that Gazprom has agreed not to block, in accordance with the ‘rulebook’ of the DG COMP, feature a hidden caveat - swaps would be possible only in case transmission capacities are available. This potential power tool to enforce liberalization of the gas market has been considerably tamed, making business sense only if Gazprom is obliged to free unconditionally unused capacity in transit lines, take part in capacity awarding tenders and pay standard exit and entry tariffs.

Most of the net gains depend on circumstances and processes in some unspecified future, with the Damocles sword, the same old threat of a 10% fine of turnover, having lost credibility. There is no guarantee that the EC will not keep on with its lax attitude in future infringements of Gazprom.

Judged against the tough line of DG COMP against US high-tech leaders - Google (a fine of €2.42 billion), Microsoft (a barrage of fines and aggressive action - € 497 million (2004), € 260 million (2006), € 849 million (2008) with escalating daily charges reaching € 3 million per day - the largest penalty in  the 50-year history of the EU and € 561 million in 2013) and Intel - € 1.06 billion (2009) - the evidently lenient approach of the EC towards Russia and Gazprom makes one wonder – who is the EU’s ally – Russia or the US?. 

To add insult to injury – the DG COMP sets a dangerous precedent for future litigation against Gazprom for overpriced gas sales in the past.

No wonder the Kremlin and Gazprom were quick to commend and endorse the new line of understanding with the DG COMP – which settles the 6-year-old case, as they concede little or nothing that has not been already conceded, just in time for the grand openings on Nord Stream-2 and Turkish Stream.

The European Commission, which had to teach Gazprom a lesson, looked into its ugly backyard and chose to remain mute