Brussels must look deeper into whether its current regulatory system can provide energy security and fair competition across European gas markets, writes Chi-Kong Chyong.
Dr Chi-Kong Chyong is a research associate & director of the EPRG Energy Policy Forum at the University of Cambridge. Follow this link to the EPRG study on which this editorial is based.
In April 2015, the European Commission Directorate-General for Competition (DG COMP) began a formal investigation into Gazprom’s suspected violations of EU antitrust rules by issuing its statement of objections. The Commission was concerned that Gazprom was impeding competition in the gas supply markets of Central and Eastern European member states – Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, and Slovakia. On 13 March 2017, DG COMP published Gazprom’s proposed commitments to address the Commission’s concerns.
The results from my research show that in principle, Gazprom’s proposed commitments and in particular possibilities for buyers of its gas from Central Europe (Slovakia, Poland, and Hungary) to change delivery points (‘swap deals’) to new locations in the Baltics and Bulgaria may limit Gazprom’s potential market power in these markets. They allow for price convergence of Russian gas in the region while connecting these markets to more liquid markets in north-western Europe.
The option of having these swap deals and hence potential market entry by other suppliers into the Baltic markets and Bulgaria may (positively) affect price negotiations and arbitration (if needed) between existing buyers in the Baltics and in Bulgaria with Gazprom. For these positive effects to take place, there may be a need to request gas release programmes further downstream in the Baltic and Bulgarian markets because if gas users are tied to some form of long-term purchase agreements with existing importers, then new suppliers from Central Europe that would be willing to change delivery points and enter these captive markets would not be able to do so.
One should acknowledge that this ‘virtual’ link between these markets and other more competitive markets rely on Gazprom and its service charges. In particular, it is not clear from the proposed commitments what factors affect those service charges – are they dependent on how the upstream transmission system in Russia works? Are they dependent on transit fees to be paid by Gazprom to other parties along the way to Slovakia, Bulgaria, and Lithuania?
Regarding companies from Slovakia, Poland, and Hungary that could now enter the gas markets of the Baltic states and Bulgaria, legitimate questions arise. First, since Gazprom has long-term gas contracts with existing buyers, would the company be willing to cancel or substantially reduce minimum take-or-pay volumes to allow swap volumes to take up market share in Poland, the Baltics, and Bulgaria? If not, then what are the mechanisms that would allow the proposed swaps to take place and hence constrain Gazprom’s potential market power?
Although the ability to change delivery points may have a positive impact on market efficiency, it also poses a number of policy challenges. Namely, gas diversification and energy security of the five member states (Bulgaria, Poland, Lithuania, Latvia, and Estonia). The swap operations seem to increase the market share of Russian gas in Lithuania and Poland while the other markets see no improvement in diversification (Bulgaria, Latvia, and Estonia would still be mainly relying on Russian gas). However, swap deals may in fact decrease Gazprom’s market share at the expense of its other buyers entering the markets of the Baltic states and Bulgaria. This is ‘contractual’ diversification rather than physical because swap volumes are still Russian gas.
Further, the swap deals could negatively affect the utilisation of strategic gas infrastructure assets such as the Poland-Lithuania gas interconnector (GILP), the Klaipeda and Świnoujście LNG terminals, the Greece-Bulgaria interconnector (IGB), and more generally, Bulgaria’s gas contract with Azerbaijan. These assets aim to break Gazprom’s potential monopoly power in those markets.
Finally, the swap deal may have ‘unintended’ consequences in terms of disintegrating the Baltic markets and Bulgaria from the rest of Europe. In particular, it was shown that Klaipeda LNG terminal usage is roughly nil when swap deals are allowed. This means an increasing cost of using the gas system in the Baltics and Bulgaria (IGB faces a fate similar to that of Klaipeda LNG) because of the adopted regulatory model in Europe whereby the costs of all gas assets are socialised. Thus, cross-border trading between these small markets and the rest of Europe would then be hampered by these additional costs.
The only positive factor is the certainty of competitive prices of Russian gas in the five EU countries, which should be priced against north-west European competitive benchmarks, and the socialised cost of gas systems (which would then include all strategic assets deployed against Gazprom’s monopoly power). It is a vicious circle in the sense that these projects would be publically financed for security reasons, and they would be used should Gazprom exercise its market power in these countries. Now that Gazprom has proposed changes to its contractual and sales practice to ensure competitive prices in these five countries, these assets, if built, will not be utilised, and their costs should be allocated to all users of their gas systems.
More generally, in light of declining gas demand and the different competitive landscape across European markets, the results reveal fundamental challenges for the current regulatory model in Europe to complete the project of a single market for gas. DG COMP should launch a comprehensive study on the impact and the suitability of the current regulatory regime in supporting and further facilitating competition in and across European gas markets taking into account energy security concerns.