Written on 11 April 2020 by Nicholas Newman
Russian-owned Gazprom is the EU’s largest foreign supplier of gas accounting for around 30 per cent of Europe’s total gas consumption of 543 bcm (billion cubic metres) in 2013 reports the IEA 2014. Until summer 2014, buoyed by the rising price of gas alongside oil, Gazprom consolidated its market position, with a shopping spree across Europe for assets of energy companies and pipeline construction such as Nordstream, linking Russian gas fields with major European markets such as Germany, Holland and France.
In the face of Gazprom’s market behaviour over price and even stoppages of gas supplies to Ukraine in 2005, 2008-2009 and 2015 many central and eastern European countries have sought to diversify their gas suppliers. For example, during the 2008- 2009 Russia–Ukraine gas dispute, supplies were reduced not only to Ukraine but also to Hungary, Romania, Bulgaria and Poland (since all were supplied by the Brotherhood pipeline network) resulting in many factory closures to save gas for heating and power during an especially cold winter, reported the BBC in January 2009. And it was perhaps these demonstrations of market power that galvanised Brussel’s (European Commission’s) fightback in the form of market liberalisation reforms, increased gas storage facilities and interconnections to secure greater market integration and energy security.
The impact of the EU’s Third Energy Package
The implementation of the EU’s Third Energy Package in 2009 marked the beginning of the end of Gazprom’s overwhelming market dominance. The unbundling or separation of ownership of gas pipelines from ownership of the gas that is transmitted, established a principle of competition that initiated the erosion of Gazprom’s market power. In consequence, in 2012 Gazprom sold its gas network in Lithuania reports EUobserver June 2013. Moreover, in December 2014 Gazprom abandoned its plans for the South Stream pipeline designed to supply Russian gas directly to the Balkan states since European energy laws now required open access by third parties, thereby further weakening the economic case for this investment. Gazprom’s subsequent alternative proposal, the Turkish Stream pipeline, is on hold following the shooting down of a Russian plane in Turkish airspace in December 2015, reports Euroactive December 2015.
Another source of erosion of Gazprom’s market dominance comes from the impact of the EU’s energy policies encouraging the construction of additional gas storage capacity as well as cross-border bi-directional pipelines. This in effect proliferated and deepened gas storage facilities whilst, at the same time, allowed gas flow to be switched from market- to- market, whenever and wherever, it was needed. A case in point is that these interconnections have allowed Germany to deliver gas to Ukraine and thereby mitigate Gazprom’s reductions in supply, reports the Wall Street Journal April 2014.
Work on new interconnectors and storage facilities is ongoing in order to complete the single unified market in gas. For example, new gas interconnectors are being constructed linking Greece with Bulgaria, Turkey and Italy, whilst pipeline builders await final approval to construct a pipeline linking the proposed LNG port of Krk in Croatia with Hungary. These investments are a necessary pre-requisite to the creation of a single European market in gas, which embraces former energy islands such as Iberia, the Baltic states and central and eastern Europe. This, alongside the collapse in the oil price and the development of a spot market in Norwegian and Dutch gas, where price is determined by supply and demand has further eroded Gazprom’s pricing power and prompted it to offer discounts to utilities in major markets such as Germany and France.
Brussels anti-trust case against Gazprom
The European Commission has carried through its determination to enforce competition by bringing an antitrust case against Gazprom. In an April 2015 press release, EU Commission chief, Vestager noted, “all companies that operate in the European market – no matter if they are European or not – have to play by our EU rules.” The central charge, that Gazprom has abused its dominant position by overcharging its customers in Poland, Hungary and six other countries by up to 40 percent, could lead to fines of as much as $7.6 billion, equal to 10 per cent of 2014 revenues, as well as concessions in settlement of the charges, if talks with Commission President, Jean-Claude Juncker, fail reports Euroactive, April 2016 .
The rise of liquid natural gas imports
The effects of market liberalisation have been reinforced by competition in supply. Today, nearly every European country with access to the sea has at least one or more LNG import terminals to receive gas from north Africa, Qatar, Australia and, starting this year, from north America. In spring 2016, the first of eight LNG tankers, commissioned by Ineos the chemical company, from Cheniere Energy’s Sabine Pass LNG terminal in Louisiana, will arrive at company facilities in Europe. In 2015, Lithuania, started receiving LNG tankers from the United Arab Emirates and Norway at the port of Klaipeda. “Because of such competition, Gazprom was forced to cut it gas prices to the country by 20 per cent said Polish MEP, Jacek Saryusz-Wolski. To further increase diversity of its supply and at the best price, Lithuania has signed a deal to import supplies of new exports of American LNG, reports Reuters, January 2016.
Newly on-stream North American LNG supplies could potentially become a serious competitor in Europe since, the U.S. government has authorized exports of around 100 bcm a year, an amount which is roughly two-thirds of current Russian gas sales to Europe. In addition, in years to come, new suppliers from Azerbaijan, Cyprus, Egypt, Israel and Iran could augment gas supplies to Europe.
It is clear that Gazprom’s position in the European gas market is weakening and that it’s long-held business model of being a price-maker rather than a price-taker is coming to an end, forced by a combination of EU unbundling regulations, enforcement of competition rules and the advent of new sources of gas in the form of LNG. Nevertheless, despite these significant market developments, Gazprom will remain a major supplier of gas to Europe for many years to come.