Q&A: Gazprom accused

Brussels is charging Gazprom with abusing its dominant position in eastern Europe's upstream gas market.

The formal accusation levelled on Wednesday is the culmination of a four-year probe of Russia's state gas export monopoly that started with Europe's biggest ever antitrust raids in September 2011.

The European commission investigation has long threatened to badly damage EU-Moscow relations; indeed the decision to send formal charges was delayed by a year or more by the Ukraine crisis.

The dispatch of a so-called "statement of objections" triggers a formal process where Gazprom can make its defence. Margrethe Vestager, the EU's competition commissioner, will then decide whether to impose a fine and dictate changes to its business model. Gazprom denies wrongdoing. There is a danger issuing charges will provoke Moscow's ire.

How dominant is Gazprom in eastern Europe?

Russia's export monopoly supplies almost 30 per cent of Europe's gas. That reliance is concentrated in eastern Europe, where some countries are almost completely dependent on Gazprom supplies. National reliance on gas varies, but Russia is the source of more than 80 per cent of gas imports in Bulgaria, Lithuania, Estonia, the Czech Republic.

How has the state-controlled Russian group allegedly abused its power?

While the commission investigated concerns about eight national markets, it has served charges relating to Gazprom's practices in five countries. There are three main allegations in the case:

3 Gazprom carved up the market to its own advantage and hindered the free flow of gas. This boils down to terms in Gazprom's "take-or-pay" contracts that stop countries from reselling gas that they are obliged to buy but may not need.

3 Gazprom maintained a stranglehold on the market by muscling out potential competitors and preventing the emergence of alternative gas supplies. This relates to Gazprom linking its own pipeline projects to supply deals and prices, making it more costly to diversify.

3 Gazprom unfairly overcharges customers in some EU countries by dictating abusive terms in long term gas contracts, which link the price of gas to oil. The commission probe found prices in Lithuania, for instance, to have been at times more than a third higher than Germany's more developed energy market.

What is the most contentious charge?

Pricing. At stake is Gazprom's traditional business model indexing gas prices to oil in long term contracts, a Dutch practice called the Groningen formula that dates from the 1960s. Since the probe began, Norway's Statoil has largely stopped using the practice of oil indexation and the commission is pushing Gazprom to take a new approach, setting prices in a transparent, open market. Gazprom says the long term contracts provide reliability and certainty compared with volatile illiquid spot markets.

What is the next stage?

Gazprom will have 12 weeks to respond to the commission's charge sheet. It can call an oral hearing to make its defence. The commission can review and drop some of the allegations in light of the arguments. If it is still convinced there is a case it can move to an infringement decision. There is no set deadline: the process can take anywhere from 6 months to two years or more.

Could there be a fine?

Yes. The commission can levy penalties of up to 10 per cent of a company's global turnover. That means, in theory, the fine could be in excess of €10bn. But in practice the commission rarely hits that cap; the record fine in an abuse of dominance case stands at around €1.5bn.

Would Russia accept such a penalty?

Not readily. Russia does not recognise the authority of the commission and thinks the matter should be addressed in state to state political talks. As a last resort, the commission can enforce an infringement decision through Gazprom's partners in Europe.

Is Gazprom co-operating?

It has been. There were settlement talks early last year, which were effectively abandoned in the wake of the Ukraine crisis.

Gazprom had signalled a willingness to give ground on destination clauses, which prevent the resale of gas.

Brussels had also closed the gap with Moscow on practices perceived as excluding rival suppliers. Since Russia cancelled its landmark South Stream pipeline across the Black Sea at the end of last year, EU lawyers expect Gazprom to be more open to resolving this question of third-party access.

There is much less common ground on pricing.

So this case could still be settled?

Even after charges, the commission can settle the case. Gazprom would need to commit to legally binding constraints that addressed all the commissions concerns about its conduct. Such a settlement would allow Gazprom to avoid a fine and an infringement decision, reducing the risk of follow-on compensation claims. The problem is that Moscow does not recognise EU authority, and may balk at the thought of EU monitors checking compliance.

Is this just a technical matter?

A technical matter set against the war in Ukraine and the deepest low in Russia-EU relations since the Cold War. The commission insists it is pure law enforcement, carrying no more political significance than the decision to charge US tech champion Google last week. Russia sees the case as one of the many economic weapons brandished against it since the Ukraine crisis erupted. While some analysts fear the antitrust stand-off could escalate into a suspension of supply, Russia has yet to indicate how it will respond to the charges or an infringement decision.

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