Bloomberg News

Gazprom Gas Supply Contracts Are Focus of EU’s Antitrust Probe

September 28, 2011

Sept. 29 (Bloomberg) -- OAO Gazprom’s natural gas contracts are the focus of European Union antitrust investigators’ raids across central and eastern Europe that sought to uncover information on prices and supplies to customers.

The probe is looking at companies with long-term natural gas supply contracts with Gazprom and was “a way to circumvent confidentiality clauses” that prevent regulators from getting data on capacity, Bulgaria Energy Minister Traicho Traikov told reporters in Sofia.

Gazprom, which supplies about a quarter of European gas needs, has been looking to further expand in Europe, its biggest market by revenue. At the same time, Europe’s dependence on Russia’s state-owned gas monopoly has spurred the EU to try to diversify energy supplies and trade more gas within its borders by opening up markets and pipelines.

“We are on the verge of a battle between the cartel of consumers and the cartel of suppliers,” Alexander Rahr, an analyst at the Berlin-based German Council on Foreign Relations, said by phone yesterday. “The EU did a bit of muscle-flexing, as Gazprom is trying to reach separate agreements with companies behind Brussels’ back.”

Companies found to violate EU competition rules can be fined as much as 10 percent of annual revenue. Earlier EU probes led RWE AG to sell its gas-transmission network and E.ON AG to shed its German power grid in settlements that helped them avoid large penalties.

Watching Probe ‘Closely’

Gazprom said Sept. 27 that EU officials visited its German and Czech units to study documents and that the company was cooperating with regulators. The raid doesn’t mean that Gazprom breached any antitrust rules, both Gazprom and the EU said.

RWE AG, E.ON AG AG’s Ruhrgas and Hungary units, OMV AG and Poland’s Polskie Gornictwo Naftowe I Gazownictwo SA said Sept. 27 that they were also raided by the European Commission. As many as seven other companies in Bulgaria, Latvia, Estonia and Slovakia also said they were raided.

Russia expects the EU investigation to respect the rights of Russian investors and gas suppliers, the country’s energy ministry said in an e-mailed statement. Russia is watching the probe “closely,” Prime Minister Vladimir Putin’s spokesman Dmitry Peskov said by telephone.

Destination Clauses

EU regulators are likely to focus on so-called destination clauses in Gazprom contracts signed in the 1980s and 1990s that forbid customers from selling gas outside one country and now contravene EU rules that encourage gas to be sold across the 27- nation bloc, said Chris Rogers, an analyst at Bloomberg Industries.

“One of the problems with gas contracts is that they’re super-secret,” Rogers said in a telephone interview. The only way for regulators to secure information on gas prices or volumes “is if they go and grab them for themselves.”

A lengthy EU investigation “makes life more complex” and may slow down negotiations on new contracts between Gazprom and two of its biggest European customers RWE and E.ON, Rogers said.

Gazprom has been in arbitration with RWE, its main partner for supplying the Czech Republic, and E.ON, Germany’s biggest utility, about prices for gas under long-term contracts. E.ON and RWE are seeking to weaken the link between gas and oil prices in Gazprom’s supply contracts as oil costs surged. The companies lost hundreds of millions of dollars in the past year as they sold gas to customers at less than it cost to source.

Selective Discounts

The raids may pressure Gazprom to provide the same pricing to all European gas customers, Valery Nesterov, an oil and gas analyst at Troika Dialog in Moscow, said by phone. Gazprom has “selectively” provided discounts to some partners, he said.

While the raids are the first time Gazprom has been targeted by EU antitrust regulators, the company in June said that the European Commission set “unacceptable conditions” for the company’s planned purchase of a stake in Central European Gas Hub AG in Austria.

“Europe doesn’t want to give away control of the market to Gazprom fearing it may take roots there,” Rahr said. “The EU is making its position tougher while Gazprom just wants to make money in the EU.”

The EU approved legislation in 2009 to spur more competition and investment in the energy industry that would separate companies’ control over energy infrastructure and energy supplies. The EU separately plans to oversee energy contracts between European nations and suppliers such as Gazprom to make sure they respect competition rules.

Lithuania’s government in January asked the EU to investigate Gazprom for refusing to cut gas prices after it announced it would split ownership of gas sales and transmission. Overgas, Bulgaria’s biggest private natural gas distributor which is partly owned by Gazprom, also complained to the EU in November after state-owned Bulgartransgaz AD blocked access to a high-pressure pipeline, Overgas spokeswoman Nerry Terzieva said in a phone interview.

--With assistance from Elizabeth Konstantinova in Sofia, Ilya Arkhipov in Moscow, Milda Seputyte in Vilnius, Ilya Arkhipov in Moscow, Aaron Eglitis in Riga, Edith Balazs in Budapest, Ott Ummelas in Tallinn, Radoslav Tomek in Bratislava, Stefan Nicola in Berlin, Zoe Schneeweiss in Fuschl am See and Ben Farey in London. Editors: Anthony Aarons, Will Kennedy

To contact the reporters on this story: Aoife White in Brussels at awhite62@bloomberg.net. Anna Shiryaevskaya in Moscow at ashiryaevska@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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