Russia says EU pressure over gas prices politically driven


Russia says EU pressure over gas prices politically driven

James Marson, Dow Jones Newswires

MOSCOW--Russia responded angrily to the European Union's probe into gas giant OAO Gazprom's alleged breaches of antitrust rules, with a government minister denouncing longstanding European pressure on Gazprom over its gas contracts as driven by "political factors."

The European Commission, the EU executive in Brussels, Tuesday launched an investigation into whether state-run Gazprom had broken antimonopoly rules by hindering the free flow of natural gas across European Union states, preventing countries from diversifying their gas supplies and imposing unfair prices on its customers by insisting in contracts that the price of its gas be linked to oil prices.

The investigation threatens to undermine the foundations of Gazprom's export strategy in its most lucrative market and could force it to offer discounts to European buyers, analysts said. The world's biggest producer of natural gas, Gazprom supplies Europe with around one third of its needs.

"This may end up with stricter operating rules for Gazprom," said Mikhail Korchemkin of East European Gas Analysis. "Gazprom may be forced to break the relationship with oil in the gas-price formula, and the difference between the price of Russian gas and spot prices will narrow."

European buyers have long been at odds with Gazprom over oil-linked contracts that analysts say have become expensive after the increase in unconventional gas production in the United States pushed down natural gas prices on the world market.

Wim Vandenberghe, a lawyer and energy expert at Dechert LLP in Brussels, said the commission could fine Gazprom up to 10% of its annual global revenue--around $15 billion--and force it to revise clauses in contracts that breach EU rules. Alternatively, Mr. Vandenberghe said, it could try to negotiate a solution where the company agrees on some actions that would solve the concerns to avoid a sometimes politically embarrassing showdown and lengthy legal processes. Gazprom said Wednesday that it is prepared to continue dialogue with the European Commission.

Even if no fine is levied, any changes to pricing could prove costly to Gazprom. A handful of European buyers, such as Germany's E.ON AG and France's GDF Suez SA, have already negotiated discounts, but the contracts remained linked to the oil price.

Analysts at UBS in Moscow estimate that the price cuts Gazprom has already made will cost the company $4.5 billion this year.

Some European customers and officials--including Poland's oil and gas company PGNiG SA and Lithuanian Energy Minister Arvydas Sekmokas--welcomed the investigation Wednesday as a way to force Gazprom to change how it sells gas to Europe.

But speaking to Dow Jones Newswires, Russian Economy Minister Andrei Belousov criticized European buyers of Gazprom's gas for "trying various means, not always proper, to create better conditions for themselves."

"There is no alternative to Russian gas in Europe," Mr. Belousov said.

Gazprom hit back at the commission's investigation, insisting that it abides by international law and national legislation in the countries where it operates. The company pointedly said that it is run by the Russian state and outside the commission's jurisdiction, and said its activities on the EU market "are in full conformity with the legal standards applied by other natural gas producers and exporters, including price-formation mechanisms."

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