Oil indexation – the practice of linking the price of natural gas in long-term contracts to oil and oil products – has long been a sore point for European buyers. On April 22, the issue exploded into the headlines as the European Commission (EC) issued a statement of objections in a long-running antitrust probe into Russian gas giant Gazprom.
The EC's statement outlined its preliminary view that Gazprom – the dominant supplier of gas to central and eastern Europe, with a 100% market share in some countries – is breaking European Union antitrust rules. Its main complaints were: Gazprom's use of territorial restrictions in its sales contracts, such as export ban and destination clauses; an allegedly unfair pricing policy that includes the use of oil indexation; and the alleged tying of natural gas supplies to deals on pipeline infrastructure.
In a statement released the same day, Gazprom denied the claims, saying it "strictly adheres to all the rules of international law and legislation in the countries where [it] operates". It also cited its status as a "strategic state-controlled entity", saying that it expected the matter to be resolved in intergovernmental talks.
For Gazprom, the matter is a political and not a legal one. While disappointing, this attitude might not be surprising, given that little in today's Russia seems to be truly isolated from politics.
Whether or not the company breached EU rules, questions are increasingly being asked about Europe's heavy reliance on Russian gas, especially given the conflict in Ukraine. The EC is eager to strengthen and secure Europe's energy market. To do so, it needs an ambitious plan for investing in energy infrastructure and diversifying supplies.
Questions are increasingly being asked about Europe's heavy reliance on Russian gas, especially given the conflict in Ukraine
This is a huge, expensive and time-consuming task. It will mean improving electricity and gas interconnections, promoting the expansion of renewables and fostering greater energy efficiency. It will also mean taking hard decisions about whether to exploit Europe's own fossil fuel resources – both conventional and unconventional – and whether to build new nuclear power stations.
As far as Gazprom is concerned, there is probably a deal to be done here. The company accepts that a move towards more market-based gas pricing is inevitable in Europe. It should step back from some of its most aggressive sales practices in return for a swift settlement from the EC. In return, the EC would tacitly recognise Gazprom's continued stranglehold over central and eastern Europe, which is unlikely to be broken any time soon.
The week in Risk.net, May 19-25 2017Receive this by email