European Commission throws down gauntlet to Gazprom

By bne IntelliNews September 21, 2007

Derek Brower in London -

The EU's relationship with its biggest energy supplier entered a new and even more fractious stage Wednesday, September 19 when the European Commission published new proposals for the liberalisation of the continent's energy market that included a scarcely veiled threat to Gazprom's ambitions to expand across Europe.

In addition to renewing calls for "unbundling" some of the EU's largest energy companies, the Commission proposed that foreign companies be prohibited from buying control of energy assets in the EU unless they guarantee the rights of European companies to do the same in their own country.

Jose Manuel Barroso, president of the Commission, claimed that the clause, which was specially added to the new package, was not directed at any particular company or country. But the Russian subtext was clear. "The battle lines have been drawn with Russia," says Andrew Neff, an analyst at Global Insight.

Russia's reaction was to label the Commission's stance as protectionist. Konstantin Kosachev, head of the Duma's international affairs committee, was quoted in the local press as saying that Russia would, in response, have to limit the access of foreign companies to its own "strategic energy sectors."

Complicating Gazprom's expansionist aims in Europe could also have an impact on the markets in Central Europe. The Russian company is thought to be interested in a deal with Slovenia's Petrol, with a refinery among the assets that could be transferred. Lukoil is understood to be in the process of pulling out of a joint venture there. While the Commission's proposals said nothing of the downstream oil market, Slovenia's upcoming presidency of the EU would put Gazprom's role there in the spotlight. Slovenia also hopes to negotiate new gas supplies from the Russian gas giant.

Meanwhile, the Commission's focus will also be on winning approval for "unbundling" the EU's major energy suppliers. That means forcing companies like Germany's RWE and E.On and France's EdF and GdF to hive off distribution from generation assets. However, it's unlikely to happen.

Vertically stubborn

France's economy minister, Christine Lagarde, said her country would do "everything we can to oppose" the proposals. Germany's economy minister, Michael Glos, said he "strictly reject[ed]" the package, claiming it was "too bureaucratic" and would compromise the "high quality and security of German electrical power networks." And E.On said that unbundling "doesn't increase competition and doesn't lead to higher investment in networks and doesn't lead to lower prices."

The Commission knows it faces opposition. Katinka Barysh, deputy director of the Centre for European Reform, said its inclusion of the unbundling drive was "courageous" given the backlash it could now expect from the EU's biggest opponents of energy liberalisation - namely France and Germany. In an effort to preempt that, the Commission says that while it would prefer to see full unbundling, companies that do not agree to it could opt instead for stringent regulation of their activities, overseen by Brussels.

But the political opposition could also help to unravel the policy on Gazprom, too. Neff said that an "unholy alliance" between Gazprom, Germany and France could emerge to oppose the package. If the package is rejected outright by member states, the Gazprom reciprocity policy could suffer as collateral damage.

And in any case, points out Barysh, forcing the reciprocity the Commission wants vis-a-vis Russia could be difficult in practice. Gazprom's mode of operation in Europe so far has been to set up bilateral joint ventures with European companies. Some of them, like with Italy's Eni, have already won upstream assets in Russia in exchange for giving Gazprom access to downstream assets in their countries.

Furthermore, Gazprom has been able to expand its influence without gaining control of European downstream assets. At Austria's Baumgarten gas storage facility, for example, a recent deal with Austria's OMV will give Gazprom joint control over gas landing in the country. As they stand now, the Commission's proposals would not prevent that.

The likeliest outcome of the new package is to force a reaction from Russia, say analysts. With accusations in European capitals that the Kremlin uses its energy resources as a political weapon, the new package is Brussels' boldest attempt to fight back. Adding the clause demanding that foreign companies also obey European rules about the separation of generation and distribution assets was unnecessary in legal terms, says Barysh, and therefore deliberate. In Russia, it might be seen as deliberate provocation.

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European Commission throws down gauntlet to Gazprom

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