Europe's Case Against Gazprom Will Damage Russian Influence

By Oilprice.com  MAY 12, 2014 2:39 PM

By offering a price cut to Lithuania, the Russian gas giant is beginning to show cracks.

 


As Russian President Vladimir Putin tries to maintain its grip over Eastern Europe with its vast web of natural gas pipelines, one small European country gained a bit of leverage over Russia. Lithuania announced on May 8 that it has successfully pressured Russian gas giant Gazprom into lowering its price for natural gas through 2015, according to Reuters.

Lithuania isn't the first country that comes to mind when thinking of who may be able to stand up to Russia. But the deal came as Lithuania made some aggressive moves to seek global suppliers of liquefied natural gas (LNG). The small Baltic nation was in talks with Norway and Qatar and was trying to sign a deal as quickly as possible.

To be sure, it's not as if Lithuania has achieved energy independence from Russia. In fact, it relies on Russia for 92 percent of its imported natural gas supplies. But Lietuvos Dujos - the Lithuanian utility that accounts for 40% of the domestic market -- forced Gazprom to slash its price of gas. Although the details of the agreement weren't disclosed, Lithuanian Prime Minister Algirdas Butkevicius previously said that he expected Gazprom to agree to a 20% price reduction.

"Lietuvos Dujos has entered into an agreement with Gazprom that involves a significant reduction in the price of natural gas," the company said in a statement.

By seeking alternative supplies of energy, Lithuania forced Russia into price concessions for fear of losing market share. In the coming months and years, as Europe continues to diversify its sources of energy, it will enhance its leverage of Russia in a similar manner.

But perhaps more important than Lithuania seeking LNG suitors is the ongoing case on behalf of the European Commission against Gazprom for price manipulation and antitrust violations. Europe has argued that Gazprom manipulates prices for political gain, and the European Commission is set to release the results of a two-year investigation this month that's expected to demonstrate substantial evidence that Gazprom is breaking European laws. After that report is released, the EC could take action relatively quickly.

"I think we are going to see, first of all, a spectacular lump of bad publicity for Gazprom, because the complaints will list all of the bad things that Gazprom has been doing," Edward Lucas, the editor of The Economist, told Radio Free Europe in an interview. "Then we will have fines, which may be very substantial, and there will also be the opportunity for the companies that have been overcharged for gas to launch lawsuits against Gazprom over the extortionary prices that they have been charging."

The European Commission could seek fines against Gazprom and/or a change in pricing structure. Gazprom has long linked its prices to the price of crude oil and has signed up countries to long-term contracts, which are often expensive.

But as the spot market in Europe has grown as a result of a flood of Qatari LNG -- which was once destined for the US until shale gas came about -- Russian gas is no longer the only game in town. Purchases of natural gas on the spot market have shot up from just 15% in 2008 to 44% in 2012. This has Gazprom's gas contracts looking more and more expensive and even extortionary, as Lucas points out. Eastern European countries often pay one-and-a-half times more for natural gas than does Western Europe.

That has Gazprom scrambling to preempt any actions by the European Commission. By granting price cuts, it hopes to disarm the complaints by many EU member countries. It has maintained near-monopoly control over Europe's energy for years, but its influence could be on the wane. The discount it just gave to Lithuania is a sign that cracks in Russia's grip over Europe are beginning to show.

This article was written by Nick Cunningham of Oilprice.com.
No positions in stocks mentioned.

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