Bulgaria Analytica: Vestager's play with Gazprom could prove lethal to EU's unity

Link to the original in Bulgaria Analytica
The contours of the leaked decision of the EC following commissioner Vestager's meetings with top managers of Gazprom and Russia's Deputy Minister of Energy spells new peaks of national energy egotism in the European Union.

At the end of October the news of another Gazprom friendly EC decision to free up to 80 per cent of the capacity of the Opal pipeline, that connects the Nord Stream from Germany to Czechia, broke out.  More than 10 billion cubic meter of natural gas will be added to the current Opal volumes, which will have in turn to be deducted from the transit flows  in the Yamal pipelines in Poland and the gas transit system of Ukraine. Benefits and income generated so far in Eastern Europe will be shifted westwards to Germany and West Europe, almost automatically leading to tensions between CEE governments and Berlin.

The decision-in-the-making of the EC antitrust body does not stand to any solid scrutiny for market logic, as it makes little sense for the EC as equidistant supranational institution to divert transit cash flows from one region of the EU just to substantiate a high cost bypass project without strong business fundamentals only to sell the same gas once moved west later to the same region in the east at a higher price. Competition between transit system operators for optimal transportation terms for land and sea routes is most welcome, however a decision of the EC to grant privileged out-of-the norm status to the Russian gas monopoly at the same time as an investigation for abuse with dominant position and overpricing is still on, is beyond the pale. 

The news coming out of Brussels these days speak volumes about the deep crisis and the yawning gap in the basic value set of the European Union. There is a complete mismatch between the hard talk and widening sanctions line against Russia and the race between members' to earn an extra buck in bilateral deals with Gazprom at the expense of other members, epitomized by the suggested or shared in public, intention of the Commissioner on Competition.

Worth the recall is that German business circles mostly those trading with Russia, have exerted a systemic pressure on Chancellor Merkel to abolish the sanctions and build Nord Stream - 2. Insofar as the implications of such direct moves against the Berlin government are too significant and difficult to factor in, the EC and some of its top officials have been desperately seeking a way around the current restrictions to allow Gazprom to sell more gas.

The German and West European companies, shareholders in Nord Stream-2, are actively discussing a damage control mechanism to the Polish regulator's decision, effectively blocking the development of a second line. The expansion of the available transit capacity in Opal above the 50 per cent legal limit would allow German companies to act as a Gazprom agent selling more Russian gas to East European customers at a price formula German border price plus premium plus transportation costs. 

Such an apparent favoritism goes on EC's side goes well beyond even the most minimalist reading of the notion of solidarity in the EU, where one member is being used by a non-member to inflict damage to another member. East European countries will not only lose some 4 billion dollars in transit revenues, but will also pay higher prices for natural gas, to cover transportation costs for shipping gas via the Nord Stream and then through the Opal gas pipeline and back to Eastern Europe undermining core market logic.

One of the key lines in the investigation launched by the EC against Gazprom has been to assess and penalize its overpricing policies (30% higher) that have sucked out of East European customers' pockets more than 7 billion dollars more than their German counterparts for gas supplies at a shorter distance. The purpose of the sanctions was to heal a wound and restore justice by returning the excess profits to the clients, at least in part. The recent decision outline simply ignores previous EC policy line and awards West European companies the right to share in Gazprom profits in gas sales to East Europe, while allowing the Russian gas monopoly to bypass them, sparing Moscow responsibility for its aggressiveness in the region.

The assurances of Commissioner Vestager that in return Gazprom would lift reexport ban do not hold much water as there will be little gas to trade with across borders as the main flows will traverse Germany and one way or another RWE and EoN have been long selling gas in Eastern Europe.

Integrating the different fragmented parts of the EU gas market while harmonizing terms of gas trade at a time of changing trade patterns from long term oil indexed to short term spot contracts has proven elusive so far for East Europe, bound by the legacy of its current contractual base for gas sales with Gazprom. East European gas markets will be spared the competition of passing large volumes of Russian gas that otherwise could have increased gas liquidity, allowing local traders to compete with German gas companies on their home market.

After receipt of the final offer of Gazprom, that will supposedly reflect the agreements reached during recent talks at the EC, the draft of the final documents will be sent for clearance with the governments of all EU member countries in Eastern Europe during the so called market test. The hot potato will be passed on from the EC to the East European member countries, some of which have already threatened to take the EC to court.

There is little doubt about the nature of the reaction of the countries in the CEE. From Bratislava and Warsaw some tough talk is already coming. Without the consent of East Europeans there is no decision and no final ruling on Gazprom's case along the leaked lines - obligations in the future with no sanctions for sins in the past. 

The conjoining of the two tracks of policy pursuit - the strategy to grant privileges or exemptions from EU law for German company deals with Gazprom,  while everyone else is asked to comply with the EU legal standards, leads into a dead end street.  This is not simply Europe moving at different speeds, but different types of Europe. Germany will inevitable have to face a moment of truth and decide what is more important - the unity of the EU or deals with Russia.

Should the decision go ahead, the European Commission will confess that Germany's interests to distribute and receive gas at lowest price levels, take precedence over the interest of other member countries. In other words - the proposed arrangements shaping the range of compromises reached between the EC and Gazprom, trace the future of sustainable price differentials between privileged and underprivileged members. Until significant LNG volumes start reaching the EU gas markets in the second half of 2017, the gas flows of Russian gas into Europe via the Nord Stream will reach new peak levels, regardless of the fate of Nord Stream-2. 

Both decisions - on Opal and the final ruling on the EC anti-trust case against Gazprom - reveal a hypocritical line in EC's treatment of identical cases reminiscent of state aid - the difference being that it is granted by the supervising institution or the guardian of the seal to companies and customers in one members country at the expense of other EU members dooming them to second rate status in competition rules. 

Such a conduct of the main competition watchdog in the EU is difficult to explain, given the fact. that at present the Russian state gas monopoly is in no position to issue ultimatums, even less so to stress clients in the EU with the threat of sudden and unwarranted interruption of gas supplies. All member states, Bulgaria including, have managed to secure emergency alternative supplies and routes – sufficient to cover mid-term deficits, related to potential Gazprom supply cut offs. In addition, it is highly unlikely that Moscow would ever contemplate such a move, beyond the usual rhetoric, as it would only accelerate the process of clients diversion to other suppliers. 

The Russian gas company has lost virtually all recent case in arbitration court against companies operating in East Europe on charges of overpricing. Totally unexpectedly, in the middle of a losing streak Commissioner Vestager throws Gazprom a life vest forgiving past sins.

In the course of the EC investigation Gazprom has managed to comply with some of the requirements in the Third Energy package, and to lower prices for CEE clients, in order to avoid penalties and sanctions, but there is still a long road ahead.

The European Commission is certainly aware, that Gazrpom continues to deny the primacy of European Law choosing instead to refer to intergovernmental agreements, that gas supply contracts are based on, rendering them difficult to impossible to change, when EU based importers try plead EU norms.  The limitations imposed on Bulgaria, for example, under the current gas supply contract, that expires at the end of 2022, and the gas transit contract, expiring in 2030, significantly hinder the diversification attempts and the liberalization of the gas market. Bulgargas, the state gas trader, finds it an uphill job to identify niches in the contract that would allow safe trade with new suppliers without the risk of paying penalties for non-compliance under the 'take or pay' clause. 
The national TSO Bulgartransgaz is laboring through the labyrinth of its transit contract with Gazexport to free unused capacity to other shippers. 
Bulgargas has been unable to sell excess gas abroad that would reduce cost for balancing gas demand in the country, which is a challenge with unpredictable peak demand levels and 97 per cent dependence on a single supplier. Gazprom imposed restrictions always result in over costs for short term purchases and capacity booking, that ultimately have to be shared among all clients of Bulgargas as supplier of last resort. 
The message, that Commissioner Vestager sends, encourages Gazprom to pursue further abuse of its monopoly status and policies of divide and rule among EU member states.

Gazprom treats its partners in West Europe preferentially offering them better terms and lower prices, enticing them into strategic partnership arrangements in the hope of bringing them on its side in the forthcoming battle with LNG suppliers, including US shale gas. The strategy is rather successful as the handful of instances of import of US shale LNG to the EC terminals carefully avoid competition with Gazprom. 

Commissioner Vestager undermines the efforts of CEE countries to secure equal terms of trade for individual and industrial clients to those offered in West Europe. Failure to achieve that grants competitive advantages to gas consumers in Germany that could further multiply along the whole production chain of goods and services, that use natural gas in one form or another. 

Mrs Vestager's approach seems extremely one sided and lacking principle when compared to her hard line in pushing to the limits similar cases against US companies - Google and Microsoft.

This might tell us all what lies ahead for member states in an European Union without the United Kingdom to balance off single peer Germany, that enforces unilaterally its interests. 
This a street with no exit, a certain predicament of the end of the EU as we know it.