Monday 17 September 2012

Ganging up on Gazprom

Here's an amusing turn of events.  At the end of last month, Russia - after 18 years of trying - was admitted to the WTO.

Welcome to the world of free trade !  Within days, the EC announced proceedings against Gazprom under Competition law, on three counts, focusing on Gazprom's activities in Eastern Europe:
  • hindering the free flow of gas by use of 'no-resale' clauses in contracts;
  • preventing diversification of supply by frustrating third-party access to, and development of, gas infrastructure;
  • insisting on pricing gas using oil-indexed pricing formulae.
One hopes the EC doesn't waste too much of our money on their investigation and I can assist them in this regard.  On count 1, a cursory examination of the relevant contracts will do the trick: guilty as charged.  (And while you are at it, check the big gas sales contracts made by Algerian state company Sonatrach to France, Spain and Italy - you'll find the same there, too.)

On the second you may have a bit more trouble because there will be less of a paper-trail, and some of the European companies who could spill the beans are strongly inclined not to.  Nil desperandum, because to establish charge no.3 you need only read the collected public works of Gazprom speakers at energy conferences over the past 5 years.

Putin seems to be sweating a little over this (wonder why ?) and has rushed to hinder the process.  As well he might because there is no telling where this could eventually lead.  (Hint to EC: broaden your scope to Italy ...)

What has triggered this action ?  You may recall that, of the two big German energy companies that have been bleeding white from importing oil-indexed Russian gas, E.on - always much closer to Gazprom - settled earlier this year but RWE was hanging in for much bigger concessions, and they gave fair warning.  This is RWE's ace: they have made several large acquisitions in the Eastern European energy sector, thorough which they obtained all the paperwork necessary to prove the case.



Blue Eyes said...


Nick Drew said...

well glad someone thinks so !

Elby the Beserk said...

I guess the discovery of huge reserves of Shale has & oil in Eastern Europe will force Gazprom to change their tack?

Or will it? I defer to the expert!

Elby the Beserk said...

Link to above re Shale & Eastern Yurp

Blue Eyes said...

One question about the German (and other) contracts. Why did the customers agree to them??

Foolishness or is this where the abuse of a dominant position comes in?

rwendland said...

Blue Eyes, I thought the Germans agreed the contracts to get the pipelines from the Soviet Union built to supply them. If someone is to build a $billion-ish of infrastructure, I don't think it is unusual to pre-sign up customers on long contracts to ensure the expensive capital will make a return. So there is some logic to it, though maybe the Germans etc cut a very poor deal.

ND will probably put me right on this!

Nick Drew said...

Elby - yes, but even more so the discoveries of astronomic quantities of shale in China

in total with US shale reserves, not only does this queer Gazprom's pitch but eventually also OPEC's

BE, Mr W is right, up to a point; there is good reason why Gazprom needed secure, long-term contracts before building the infrastructure - but that alone doesn't justify oil-price indexation

originally there was (in the 70's) a passable rationale for oil indexation - I could bore for England on this - but this was gone by the late 90's and has only survived because (a) Gazprom insisted - and they are 'quite forceful' - and (b) until the start of the current serious economic downturn (= 4th qtr 2008, as far as gas demand is concerned) there wasn't any significant downside for E.on, RWE, GdF et al

(and they have a habit of going along with whatever Gazprom wants ...)

but as the recession- and shale-driven gas glut hit the markets in 2008-09, and the spot-market price of gas cratered, anyone buying large quantities at oil-indexed prices started suffering badly

now here's the rub: our continental friends buy this gas under Civil Code contracts, which at least means they can demand a renegotiation of the price, (on pain of going to court where a judge will be willing to reset the price, under Civil Code principles of 'balance of economic advantage')

it's symmetrical - if Gazprom was suffering unduly, they could appeal to the courts too

now it's very rare for either of the parties to press the red button and actually go to court, because what a judge decides can be pretty quirky; so first they get into protracted session in the smoke-filled room and/or arbitration, in an attempt to thrash things out

this can sometimes take years

it seems E.on are satisfied with their negotiated outcome - but they have always been the closest to Gazprom, and the most emollient

RWE have been suffering more, and have less attachment to Gp

the whole Civil Code thing is of course anathema to businessmen brought up on Common Law: aside from these big gas contracts I don't know of any really large-scale international business that isn't done under either English jurisdiction, New York, or (for specialised oil deals) Harris County Texas (= Houston)

of course the continentals hate this; tough shit !