Gazprom Firmly in EC’s Antitrust Sights as Pressure Mounts From Skyrocketing Energy Prices, War in Ukraine

Published on Apr 11, 2022

European Commission investigators are stepping up their ongoing probe into allegations Russia’s state-owned Gazprom (GAZP) has abused its dominance on the wholesale natural gas market as political pressure mounts to address surging energy prices in light of the war in Ukraine.

The commission is said to have raided the Russian company’s German offices at the end of March, indicating an escalation of the regulator’s preliminary investigation.

Competition lawyers told The Capitol Forum that the EC, which launched the probe in October, may require interim measures to quickly stop the company, Europe’s largest natural gas supplier, from allegedly withholding the fuel from EU countries as well as any other allegedly illegal conduct.

Gazprom reportedly is examining options for stopping natural gas supply to “unfriendly countries” as Russia endures increasingly harsh sanctions imposed by Europe, the U.S. and other countries after the Ukraine invasion.

Interim measures could include a cease-and-desist order to stop the company from causing serious harm to competition during the period of the EC’s investigation.

“It may very well be the case that the EC’s Directorate-General for Competition would be under strong political pressure to act as quickly as possible and, as such, interim measures – which probably are one of the most under-exploited instruments within the Commission’s antitrust toolkit – could be a very relevant response,” said Romain Maulin, an antitrust partner at Paris-based law firm Maulin Avocats.

“Interim measures are particularly relevant in the context of abuse of dominance proceedings, such as the Gazprom one,” he said.

The type of interim measures the EC could order Gazprom will depend on the competition law breaches it believes the company to have committed.

Judging from the current suspicions of anticompetitive behavior, EC orders could address distortions of competition, which could in turn help persuade Gazprom to increase its gas supplies; orders could also aim to minimize any manipulation of European gas markets. The EC could also force Gazprom to change certain clauses or provisions in its contractual agreements.

Russia’s February 24 invasion of Ukraine has disrupted gas and oil deliveries to the EU and countries around the world, adding to price increases that began occurring in the second half of last year due to pandemic-related supply chain issues.

EU energy chief Kadri Simson in February before the invasion confirmed gas supply issues caused by Gazprom. “Of all gas currently stored in the EU, about 5 percent is stored in facilities controlled by Gazprom,” she wrote in response to a question from Kosma Złotowski, a Polish member of the European Parliament. “Based on the information at its disposal, the commission also notes that the filling rate of Gazprom-owned EU underground storage facilities is significantly lower than the average.”

In response to questions about the Gazprom investigation, an EC spokesperson told The Capitol Forum that the agency usually can’t use EU competition law to make companies directly increase the natural gas supply or decrease wholesale prices of the fuel.

But “it can address possible distortions of competition by companies active in European gas markets in order to restore competitive market conditions,’ the spokesperson said. “This in turn can help ensure reliable and sustainable supply of energy at affordable prices.”

The Gazprom probe is part of a wider inquiry, or “fact-finding exercise,” into the wholesale gas market in Europe that started in October when the EC sent out questionnaires to several market participants, including Gazprom.

The agency is looking into “all allegations of possible anticompetitive conduct by companies producing and supplying natural gas to Europe with a view to verifying whether the current situation on the wholesale gas markets in Europe can be attributed to commercial conduct by market participants,” the commission spokesperson said.

The spokesperson said that the EC received a complaint from Ukraine’s state energy firm Naftogaz against Gazprom and that it’s analyzing information the Russian company submitted in response to the EC’s inquiries.

These developments were followed by dawn raids the EC carried out on March 29 at the offices of several companies in Germany active in the supply, transmission and storage of natural gas.

In a statement two days after the inspections, the Brussels-based enforcer, which didn’t disclose the companies whose offices it raided, said it was concerned that the targeted firms “may have violated EU competition rules that prohibit abuse of a dominant position.”

The EC told The Capitol Forum that the raids reflected its “ongoing work” to monitor “potential issues in the market for gas supply.”

Gazprom units Germania and Wingas are said to be among those whose facilities the EC raids targeted.

Gazprom didn’t respond to a request for comment. The company, which covers about 40 percent of the EU’s gas needs, has previously maintained that it has fulfilled its contractual obligations to countries.

“Plainly the raids represent a ramping up of the commission’s antitrust scrutiny of EU energy markets,” said Professor Suzanne Rab, a barrister at Serle Court Chambers specializing in energy and EU law. “It would be naïve to suggest that the timing of this is unrelated to recent events in Ukraine and that Gazprom is only incidental to the intensification of regulatory focus,” she said.

As it builds its case against Gazprom, the EC will need to think long and hard about how it could bring Gazprom in line with EU competition law.

Interim measures. The EC can flag its intention to impose interim measures as it formalizes its investigation. This option would be available if “at first sight (‘prima facie’) there is an infringement of competition law rules, as well as an urgent need for protective measures due to the risk of serious and irreparable harm to competition,” the Brussels enforcer has said in previous statements. If it deems it necessary, it can also reduce the time it normally takes the commission to proceed to a formal probe.

That was the case in June 2019 when the EC said in a statement it was opening a formal probe into San Jose-headquartered technology firm Broadcom (AVGO) to evaluate whether it was violating competition law through exclusivity practices. The agency also said in the same statement that it planned to impose interim measures during the investigation.

Just four months later, the EC imposed the interim measures, saying that the main investigation on the merits of the case would continue.

These measures consisted of the commission ordering Broadcom, the world’s top producer of systems-on-a-chip for set-top boxes as well as fiber and xDSL modems, to cease applying anticompetitive provisions in agreements with six customers. Those provisions included rebates and early access to technology in exchange for the customers exclusively using Broadcom’s systems-on-a-chip, which are considered the “brains” of the devices, the commission said.

Also under the interim measures, Broadcom couldn’t include these provisions in other agreements with the customers.

Broadcom appealed the decision but eventually withdrew that challenge before EU judges.

The Broadcom case is an example of how the EC could proceed in terms of timeline in the Gazprom case, if growing political pressure and other considerations lead it to that conclusion.

In any case, it would be something of a rarity if the EC decides to use interim measures on Gazprom, given that European antitrust authorities are normally reluctant to take such action before an infringement is proven.

“If supplies are, in fact, withheld in significant amounts, it may be asked whether the time has come to introduce interim measures,” Rab said.

But enforcing such measures won’t be easy.

“However, that still faces a practical question of how such measures would be enforced if an order came from the Kremlin to ignore them,” she said. “The test may well come down to the ‘realpolitik’ or, putting it differently, whether the EU as a destination for Russian gas is too valuable to lose.”

Maulin said that Gazprom could risk hefty fines if it failed to comply with any potential interim measures.

“In terms of enforcement, Gazprom’s offices located in EU countries would have no room to escape the implementation of the potential interim measures,” he said. “To do otherwise would expose Gazprom to a significant risk of financial penalty for not complying with interim measures.”

Maulin added that the use of interim measures may help the EU attain its goal of securing an energy mix, meaning natural gas from a number of suppliers that aren’t Gazprom, and reduce its dependence on Russian supplies.

The interim measures may be necessary because conducting a standard competition investigation into Gazprom may fail to deal quickly with the supply and price issues, the lawyer said. “Contentious proceedings can take three to four years and then an appeal four more years before the EU court,” he said. “You will have to wait for 10 years before knowing whether or not a contractual provision is compliant or not with competition law.”

Previous Gazprom investigation. Companies affected by Gazprom’s practices will likely welcome interim measures, arguing that waiting for the investigation’s conclusions would take too long and the Russian natural gas giant might not adhere to any remedy imposed by the commission. These companies could point to the commission’s 2018 investigation of Gazprom as a cautionary tale.

Following a six-year, high-profile probe, the Brussels enforcer got Gazprom to commit to providing abundant supply at competitive prices in Central and Eastern European gas markets. The agreement included no fine.

The EC found in 2018 that Gazprom partitioned gas markets along national borders in Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia, which may have enabled the supplier to charge higher gas prices in five of those countries.

Poland’s state-controlled gas wholesaler, Polskie Górnictwo Naftowe i Gazownictwo, better known as PGNiG (WSE: PGN), appealed the 2018 decision, saying the commitments were incomplete, insufficient and infringed the EU’s energy-policy goals.

But the EU’s lower-tier General Court in February upheld the EC’s decision, saying “the contested decision is not vitiated by any of the procedural or substantive errors raised by the applicant.”

PGNiG did, however, notch a small victory after the General Court on the same day ordered the commission in a separate case to rethink the company’s 2017 complaint against Gazprom. In parallel to the main EU investigation that began in 2012 and resulted in the 2018 commitments, PGNIG had put forward claims about Gazprom’s behavior that overlapped with the concerns the EC had laid out in its own statement of objections.

PGNIG alleges that Gazprom is still infringing EU competition law.

“It should be stressed that most of Gazprom’s practices complained against by PGNiG have continued to this day and should be subject to an in-depth investigation by the commission because of their potential effect on the European gas market,” Paweł Majewski, president of the PGNiG Management Board, said after the General Court ruling.

Mounting pressure. EU members’ own competition agencies and lawmakers pressured the commission to open the current probe into the gas supplier.

In September, the Polish Office of Competition and Consumer Protection, UOKiK, urged EU antitrust chief Margrethe Vestager to investigate Gazprom for potentially anticompetitive practices.

“The problem of increasing gas prices affects the whole of Europe. The primary cause of this situation is the deliberate action of Gazprom,” UOKiK said in a statement.

“There is an observable restriction of gas transit to the European Union through the Yamal-Europe pipeline, which is co-owned by Gazprom,” the agency said.

UOKiK head Tomasz Chróstny added that “there are many indications that the unilateral actions of Gazprom, the main supplier of gas to Europe, may be a part of prohibited abuse of their dominant position in the internal market.”

In January, Vestager told a press conference that “it is indeed thought-provoking that a company, in view of increasing demand, limits supply.”

Last week, members of the European Parliament during a debate on trans-European energy infrastructure stressed the urgent need to reduce or end the EU’s dependence on Russian gas.

Challenges. Prior to the March dawn raids in Germany, some antitrust lawyers had voiced doubts that the commission could proceed with the probe in a timely way because the EC would struggle to gather hard evidence and lacked access to Gazprom headquarters in Russia. The EC got around that limitation by seeking evidence in EU member states.

But challenges with the investigation remain, attorneys said.

Even if the EC decides not to impose interim measures and prefers to first gather evidence to prove that Gazprom broke competition law, it will face the difficulty of building a case that could withstand an appeal.

That issue would arise if, for example, the agency decided to check whether Gazprom was respecting its 2018 commitments, Maulin said.

“Gazprom has changed its contractual provisions and commercial policies, and the commitments that were made legally binding in 2018 are no longer relevant in today’s world,” he said. “It shows that enforcers are confronted with a significant asymmetry of information, meaning that even if they consider that Gazprom is breaking its commitments, they will face hard time in building a strong case.”

Another antitrust expert told The Capitol Forum that it’s unusual for the EC to conduct a dawn raid after sending a request for information to the company under investigation. This suggests the EC still needs to build a case.

The EC’s decision on March 31 to close its 2018 probe into QatarEnergy shows that it’s not always possible to gather sufficient evidence and accuse companies of anticompetitive conduct.

The agency was investigating liquefied natural gas (LNG) supply agreements between QatarEnergy and several European gas importers but said the evidence didn’t confirm its original concerns.

The February judgment in PGNiG’s case shows the EC will need to pay more attention to any complaints against Gazprom. The Luxembourg-based General Court said in its ruling that EC had committed “a manifest error of assessment” in dismissing the Polish company’s concerns.

The agency declined to comment whether it will appeal the court’s decision in that case or reassess PGNiG’s complaint. The deadline for an appeal is in the coming days.

Some competition lawyers told The Capitol Forum they didn’t have high hopes that Gazprom will comply with any EC decision in the current case because of its history of non-compliance, including its decision to ignore a $3.5 billion sanction by Ukraine’s competition agency in 2016.

One competition lawyer in Brussels said that even if Gazprom eventually was left without legal representatives in Brussels because of Russia’s invasion of Ukraine, that probably won’t stop the EC from continuing with its investigation.

When reached by The Capitol Forum, a representative of law firm Dentons, which until recently represented Gazprom, declined to comment if the company is still a client.

Gazprom’s critics say the evidence in support of the company’s alleged dominance abuse is clear and revolves around economic data and its interpretation. They stress that Gazprom’s decisions are motivated by politics, not business needs. The EC would need to establish the company’s dominance in the European natural gas market and then prove there was a change in Gazprom’s pattern of behavior, they say.

The EC isn’t bound by a legal deadline to complete its antitrust investigations. But outside pressures and extraordinary circumstances might just persuade the agency to act quickly to resolve the Gazprom case.