Taking on the gas Goliath

Frozen out: competitors still struggle to break into some member states' gas markets. Photograph: Reuters

The time has come for Brussels to launch the same antitrust proceedings on Europe’s eastern rim as it has pursued against Eni, E.On Ruhrgas and GDF Suez in the west. Doing so would both improve Europe’s security of gas supplies and discipline Russia’s decisions to turn off the gas taps in the future. If the EU is ever to push a “reset button” on its relations with Russia, it must first complete the single market in gas.

The EU is exposed to Russian energy interests because the country’s gas export monopoly Gazprom, the main source of recent gas supply disruptions, has acquired excessive economic power in national gas markets in central and eastern Europe that are monopolised and isolated. The Achilles Heel of Europe’s dependency on Russian gas, these markets must once and for all be integrated with the rest of the EU, so that they are no longer effectively exempted from single market rules.

The current structure of European gas markets fosters underinvestment in infrastructure and weakens security of supply. National monopolies or oligopolies abuse their dominant positions to shut out competitors, preventing them from accessing their transport and transmission grids. They also have insufficient incentives to multiply and diversify supply sources.

The European Commission has investigated GDF Suez for denying competitors access to gas import capacity into France, and the Italian gas major Eni for capacity hoarding in Italy and strategic underinvestment in its international pipeline system. As a result, these players have been exposed to greater competition. Brussels should do the same with local operators in countries such as Bulgaria, Slovakia or the Baltic states, where Gazprom is a major player.

The presence of the Russian giant in these markets is not a problem per se. But the absence of adequate competition has reinforced the countries’ one-way energy relationships with Russia. Gazprom not only supplies up to 100 percent of their gas, it is also a shareholder in many of their national gas distribution monopolies, or in the intermediary gas trading entities.

Bulgaria, for instance, has a state-controlled gas sector that is 100 percent dependent on imports from Russia. The intermediary in the market, Topenergo, is a subsidiary of Gazprom. In Slovakia, also entirely dependent on imports of Russian gas, the market is dominated by the distributor SPP, a joint venture between the Slovak government and Slovak Gas Holding, a Netherlands-based consortium co-owned by GDF Suez and E.On Ruhrgas, in which Gazprom owns shares. Is it surprising to find that Bulgaria and Slovakia were the two EU members worst-placed to cope with the three-week-long gas cuts of January 2009? Gazprom also holds a 37 percent stake in Estonia’s Eesti Gaas, which is part-owned by E.On Ruhrgas too.

An antitrust case for abuse of market dominance against a local monopoly or gas trader would help break Gazprom’s grip. It would also discourage turning off the gas tap as a means of putting pressure on vulnerable countries, for such behaviour is illegal under EU law. A dependent customer which has not breached its obligations towards the dominant supplier, such as a gas intermediary, should have recourse if the latter suddenly decides to breach its contract by not delivering gas.

Furthermore, local national monopolies in which Gazprom has a stake could be forced to grant competitors access to import pipelines or national distribution grids. This would provide a country with more alternatives to Gazprom as gas supplier. Such changes would force the Russian giant to make an effort to satisfy its customers. And with the threat of fines likely to affect its own investments, it might think twice before it shuts the gas taps again.

Why the Commission has not addressed the eastern markets remains a mystery. Nothing in EU law stops it from doing so. The time has come to implement the idea once put forward by German Chancellor Angela Merkel and “treat Gazprom like Microsoft”. But the place to start is not St Petersburg, where the company is headquartered, but Bratislava.