One does not need to be a prophet to grasp that in order to avoid paying heavy penalties sooner rather than later Gazprom will need to accept and accommodate most if not all of the objections raised in the anti-trust case, brought by the Commission. The total amount of the fines will probably not exceed $4 billion which is a bite Gazrpom could probably live with, but this will definitely cut deep into its market share and most importantly into the corporate income and the revenues in Russia's state budget. The total gas sales revenues for the Jan-Mar 2015 exceed $11 billion, which is a steep decline over previous years both in traded volumes and revenues.
But the deepest drop in revenues are ahead of us.
Taken year on year and judged against reshuffles in the EU gas market with Statoil volumes exceeding 100 billion cubic meters - and if current trends persist it will not be long before Gazprom loses its crown as top gas provider for Europe.
The most logical step under the circumstances for the Russian gas giant to take would be to abandon the routine long term oil indexed contracts and join the world of spot traded gas. The significant underutilized production capacities of Gazprom and rising competition against stagnant demand will further reduce prices in Central and Eastern Europe at or below $250
per tcm levels.
While the share of gas contracted at spot market in the EU is approaching 60%, it holds a meager 16% in Gazprom's own portfolio. The respective share of LNG traded gas is in the single digits while most of the new gas production capacities coming online worldwide will affect the global LNG market, where Russia has few cards to play. Gazprom's reliance on pipelines is turning into a liability in the light of the persistent failures to diversify supply routes through different "streams" - South, Turk, Greek etc.
The most significant fiscal and financial impact such developments are likely to have is in the countries of Central and Eastern Europe, that were subject to years of bullying and overpricing. The potential retroactive claims in overpaid gas and underpaid transit fees might if consolidated on a regional base potentially outweigh or par with the anti-trust penalties.
The critical geo-economic repercussion of spot trade dominance in EU gas relations with Russia is that Moscow will be deprived of the privilege of factoring in "political premiums" in gas prices determined by acts of the Russian government. The importers will be also relieved of the need to accommodate Russia energy interests in other sphere - the infamous foreign policy linkages.
One more perceived conundrum - the single EU Energy Union gas price, that was extensively used to dissuade politically privileged buyers from sharing into the energy solidarity bill of the Union - will be naturally resolved. The common gas prices will evolve from spot prices in different trading spots of the integrated and regulated EU gas market. Thus gas price will start reflecting market realities and the specifics in the regional and national segments of the EU gas market.
As Gazprom will have 12 weeks to respond to the statement of objectives, i.e. until mid-July (a term that could be extended), the time until then will be seen by CEE gas companies as a window of opportunity for bilateral last minute arrangements, price reductions and gas contract reviews. Most of the companies in the region are likely to explore different options to seek compensation for overpaid gas and unreceived transit fees due to lower than market transit tariffs.
Arbitration procedures will be a natural part of the overall process.
The dilemma whether to use Ukraine transit infrastructure or to bypass it will cease to stir trouble as Gazprom will have to recognize the limits of its ability to influence energy decisions - at EU borders. EU's energy sovereignty will allow its members to take economically justified routes of gas supply. Henceforth the decision whether to use or bypass Ukraine will ultimately be taken in Brussels with the likelihood of Russian gas being traded at Russian-Ukrainian trading pltaform.
Gazprom's response to the EC Statement of objections will ultimately put to rest all "stream" projects and will allow for a safe return of pragmatism and economic sense to the decision making board in energy relations.
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