Effectively addressing Gazprom’s market segmentation in CEE

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of EURACTIV Media network.

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More competition would benefit consumers in Central and Eastern Europe. [skimin0k/Shutterstock]

Gazprom’s actions to address its pricing and market segmentation issues in Central and Eastern Europe do not go far enough. PGNiG here proposes measures the Commission could take to restore fair competition, permanently.

This op-ed was submitted by the Polish Oil and Gas Company (PGNiG).

In its commitments, submitted to the EU Commission in March 2017, Gazprom proposed two measures that – in its opinion – should address concerns regarding market segmentation. However, as in case of excessive pricing, neither do these proposals solve any of the competition problems caused by Gazprom on Central and Eastern European (CEE) markets, nor do they prevent Gazprom from continuing practices aimed at market segmentation in future. Therefore, any decision of the Commission addressing this issue should provide comprehensive and effective measures that could bring about a real change in Gazprom’s practice on CEE gas markets.

Due to historical reasons, Gazprom holds a dominant position in CEE gas markets that de facto allows it to control gas imports to most CEE countries. CEE countries have very limited ability to trade between each other and with countries of Western Europe.

For many years, this ability has been hampered by Gazprom, as it is able to restrict or even cut off supplies to CEE countries. It can achieve that not only by applying destination clauses or by refusing the requests to change the delivery point (which would allow CEE countries to gain additional supplies), but also by controlling or influencing infrastructure operators and taking advantage of its historical contracts. Due to Gazprom’s long history of economic blackmails against Ukraine and Belarus, which also had an impact on CEE and Western Europe, this factor cannot be underestimated and should be addressed in the Commission decision. In contrast, Gazprom offered only two commitments that do not address this issue in any way. Moreover, these proposals have extremely limited (if any) practical significance for gas companies operating in CEE.

Gazprom’s commitment – removal of destination clauses

Gazprom offered to remove destination clauses from contracts – but only with its CEE customers. This commitment sounds somewhat familiar – over a decade ago, the Commission already questioned such clauses in Gazprom’s contracts (with ENI, OMV, E.On). The removal of those clauses did not prevent Gazprom’s obstruction of supplying gas to CEE in the 2009 gas crisis. Moreover, trade among CEE countries and with other states is also very vulnerable to other means of indirect obstruction by Gazprom. Gazprom’s practices introduced against CEE Countries, such as:

  1. the introduction of network codes aimed at preventing Poland from being supplied through Germany in case of crisis, by Gazprom’s subsidiaries like Gascade, or
  2. the refusal to grant Slovakia with shippers codes in 2014/15,
  3. obstruction to open a virtual reverse flow between Ukraine and Poland, was never scrutinised nor questioned by the Commission,

aim at market segmentation as well and are not based on destination clauses.

Gazprom’s commitment – swap operations

Gazprom has offered selected customers in CEE the possibility of swapping some of their supplies to the Baltic States (customers from Poland and Slovakia) or Bulgaria (customers from Slovakia and Hungary). This will be possible only if the customers apply for this option six months before the planned commencement of the swap operation and will pay a very high service fee (from €8 to €24,40) – higher than difference between prices for final customers in CEE countries in most of the possible configurations of swap operations. Therefore, this commitment is of no real value for Gazprom’s CEE customers.

PGNiG’s counterproposal – divestment measure

In order to secure undisturbed competition in CEE countries, Gazprom needs to be deprived from a significant economic incentive to abuse its dominant position – the control over infrastructure. As long as the Russian company has possibilities to obstruct trade by infrastructural means, it will use them (like in 2009 and 2014/2015). Therefore, Gazprom should sell, at the very least, its shares in companies controlling key infrastructure in Europe – EuRoPol Gaz S.A. (owner of the Yamal Pipeline) () and WIGA (owner of Gascade and OPAL), as well as shares in Underground Gas Storage Catherina. Due to the network code of Gascade (indirectly influenced by Gazprom through parent company WIGA), if a certain company (Gazprom Germania, for instance) asks to supply gas to UGS Katharina (co-owned by Gazprom), such a request can disturb or even cut off supplies to Mallnow – the most significant interconnection point between Poland and Germany. Having also full control over supplies from the East and the Nord Stream – which allow Gazprom to cut off thee CEE from gas supplies without harming Western customers – Gazprom can effectively manipulate the European gas market and cut the CEE member states from gas supplies, whenever it wants to. In such a case, even the expanded capacities of the LNG terminal in Swinoujscie, Klajpeda or Krk will not be sufficient to secure supplies for neither Polish nor CEE customers. Looking back at the history of the Russian company’s anti-competitive abuses, such a scenario is more than probable, and that is why it should be addressed in the Commission decision.

PGNiG’s Counterproposal – decrease of the minimal annual quantity of gas that customers have to off-take (take-or-pay clauses)

Apart from control over infrastructure, Gazprom has another tool to enforce market segmentation which in the same time reinforces the effect of excessive prices applied by the Russian company. Due to historical reasons (contracts concluded before accession to EU and the infrastructure bottlenecks), customers in CEE have a very high threshold of the minimal annual quantity of gas that they have to off – take from Gazprom (if a customer fails to off take that quantity, it has to pay for it nonetheless). Decreasing this level below the threshold of 75% would allow alternative, more competitive suppliers from other EU member states to compete for a bigger share in the demand of CEE customers. Customers, in return, would be able to enjoy increased price competition as the alternative supplier should be willing to offer them better terms than Gazprom. Eventually, this will prevent Gazprom’s unequal treatment of CEE versus Western Europe.


PGNiG’s counterproposals – in opposition to Gazprom’s commitments – allow to effectively end market segmentation, ensuring that such a violation will not be repeated in future. Together with remedies addressing pricing policy and other, more detailed measures (see here), this will allow to create a real competition in CEE Countries, which is the goal of the Commission in the antitrust proceedings against Gazprom.

The text of PGNiG reply to the market test can be found here.

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