How Gazprom Could Threaten the Stability of Energy Supplies - Essay Example

 Introduction Modern economies are largely energy dependent, and any threat to energy supply is likely to engender serious concerns regarding the overall security of the economies. Hence, in relying on several dominant firms, and committing to import large volumes of gas, countries can be perceived as placing the security of their energy systems partly in the hands of entities that could threaten the stability of energy supplies or distort the competitive market within the Union (Chandra 2006, p.181). Europe as a significant energy consumer faces several challenges when responding to future energy needs. Some of the challenges encompass a speedily increasing global demand and competition within energy resources, persistent instability within energy producing regions, a rising need to shift fuels so as to address climate change, and an increasingly fragmented internal European energy market. As a result, energy security has gained prominence within European nations and EU. One of the prominent elements of the EU’s energy supply strategy centres on a shift to enhanced utilization of natural gas (Cameron 2002, p.3). Europe’s natural gas consumption continues to rise while the domestic natural gas production decline. If trends persist as projected, Europe’s dependence on Russia and large supplier of gas is likely to grow (Schenk 2007, p.1). Europe, as a whole, is a significant importer of natural gas, with Russia being one of Europe’s most powerful natural gas suppliers. Russia has been active in safeguarding its European gas market share through the state-controlled company, Gazprom, which has pursued to stymie European-backed alternatives to pipelines it controls by suggesting competing pipeline projects and availing European companies stakes within those projects. Moreover, the entity has endeavoured to dissuade possible suppliers (especially those within Central Asia) from participating in European-supported plans. Moreover, the dominant companies have raised their environmental concerns in an effort to impede other alternatives to its supplies, such as untraditional natural gas. This has made some European countries feel vulnerable to possible Russian energy supply manipulation that may frustrate diversification (Jonathan 2005, p.132). Energy security takes diverse forms and can be guaranteed by diverse mechanisms that can take the form of both regulatory and market-based. Nevertheless, there are various notions centring on energy security based on issues such as accessibility, availability, affordability, and social accessibility. In European perspective, energy is most commonly discussed in terms of security of supply with regard to the avoidance of sudden changes within the physical availability of energy relative to demand. Energy market liberalization has impacted significantly on the governments’ capability to react to security of supply challenges (Geradin 2001, p.285). Initially, the security of supply remained a national responsibility, but now the frame of reference has largely become the EU mandate whereby liberalization enhances the security of supply mainly by enhancing the number of market participants and enhancing the flexibility of the energy systems. Nevertheless, liberalization also poses new risks such as those linked to reserve capacity or alignment with environmental or economic objectives. The markets transform the costs of security of supply to be transparent, which, in turn, can yield to a situation where consumers are ready to pay a premium for enhanced security of supply or to embrace a minimized level of security in exchange for reduced prices (Talus 2011, p.213). Majority of the governments acknowledges the necessity of introducing competition into diverse sectors of the economy so as to serve the public needs with reduced prices charged for natural gas. This draws from the introduction of new players into the market through third party access, by allowing new players to get involved in competing undertakings while at the same time endeavouring to manage security of supply concerns (Schenk 2007, P.1). Gas market liberalization hinges on satisfying three core condition: awarding consumers the freedom to select their own supplier (opening up the market); in addition to the former national monopolies, there ought to be several other producers/suppliers on the market, who are free to establish their own market strategies (competition on the supply side); and, access to the networks ought to be transparent and non-discriminatory (which is essential if there is to be interaction between free demand and several suppliers. Presently, the EU energy policy must take into account three critical forms of constraints, namely: climate-related constraints, energy security constraints, and competitiveness. Nevertheless, the consistency among the three pillars (competitiveness, security of supply and sustainability) on which the European energy policy should be grounded are increasingly called into question (Cameron 2002, p.4). One of the overriding question details whether the incentives and economic rules and institutions linked with the network industry liberalization paradigm can alone be sufficient in guaranteeing the energy security of the EU. Benefits of the Gas Market Liberalization Large suppliers of gas within the EU bear the capability to threaten the stability of energy supplies or distort a competitive market within the Union. Large suppliers of gas do not stir competition among the producers and can yield to an increase in cartel power. Devoid of a well articulated regulation, the dominance of few firms could erode the protection of vulnerable consumers given that the final energy prices for consumers may continue rising. In the long-term, the dominance of a few firms runs against the market and can be regarded as not only unrealistic, unsustainable, and ineffective but may also impair the competitiveness of the energy sector. The benefits of liberalization can be outlined as: opening up of former captive markets and availing customers with a choice anticipated yielding to enhanced efficiency; reduced prices charged for natural gas (liberalization yielded to a minimization in the prices charged for natural gas); gas to gas price competition that necessitates renegotiation of take-or-pay contracts, as well as other gas release programmes that avail “free” gas into the competitive market; the liberalization process stimulates market liquidity via the emergence of the shorter term, ‘spot’ form of gas contracts. The emergence of gas and electricity markets is likely to present opportunities for price arbitrage between the commodities (Jonathan 2005, p.132). Nevertheless, the process of liberalization links to a number of shortcomings: complications to finance fresh pipelines that require long-term contracts; the rise of stranded contracts as present suppliers purchase old gas at old contract prices; liberalizing the downstream gas market is likely to heighten power and minimize security of supply as trading arrangement becomes shorter; the liberalization is likely to benefit large consumers compared to small ones; and, the liberalization will reinstate commercial contractual relationships with intrusive and burdensome regulatory oversight. The most dominant drawback of market liberalization is likely to distort long-term planning by national and regional transporters generating increased uncertainty for the players. Long term Gas Sales Contracts Long term contracts or Gas Sales Agreement (Take-or-pay Contracts) link sellers and buyers for a significant period into a bilateral monopoly (15-20 years) during which the parties bear strictly defined obligations. The EC has not been keen on the operation of long-term contracts within a liberalized economy as envisaged “the conventional practice of electricity and gas suppliers to terminate exclusive long-term contracts with their customers can bear the impact of a private barrier to the free choice of consumers (OECD/IEA 2004, p.92). Competition rules may be contravened owing to the presence of an exclusive purchasing agreement on a long-term basis where the supplier enjoys market power, or if a prominent supplier compels customers to purchase exclusively on a long-term basis from it, which impeding competition from actual and potential competitors (Cahill 2005, p.11). As dominant firm, such as Gazprom or Sonatrach, bear a distinctive obligation not to weaken emerging competition. The contravention of this provision comprises a violation of a prominent position as provided by Art. 82 Energy Charter Treaty (ECT) in the event that it ties a considerable proportion of demand, unless the dominant firm can independently justify such practice (Creti 2004, p.93). Nevertheless, since exclusive long-term contracts can be considered as the exception instead of the norm on competitive markets with adequate liquidity as manifested by successfully liberalized markets, this commercial practice represents prima Facie not objectively justified (Gao 2010, p.185). European Union Competition Law European Union Competition law emanated from the desire to guarantee that the efforts of governments could not be twisted by Dominant Corporation abusing their market power. Therefore, under the treaties are provisions to guarantee that free competition triumph, instead of cartels and monopolies sharing out the market and setting the prices. Competition law within the EU mirrors the U.S. antitrust law, although, some prominent differences are evident (Greenwald 1987, p.1). One of the dominant differences details that the U.S. Law pursues safeguarding competitors from the power of monopolies while the EU competition law fashioned at safeguarding consumers from anti-competitive behaviour (Newbery 2001, p.381). The four critical policy areas encompass (1) cartels, or capping of collusion and other anti-competitive practices that influence the EU as directed by article 101 of the Treaty on the Functioning of the European Union (TFEU). (2) Market dominance or safeguarding the abuse of firms’ dominant market position. The EU competition Law applies to dominant market players such as Gazprom or Sonatrach with as minimal as 38% market share, compared to the U.S. where a market of above 60% required to invited intervention. This is directed by Article 102 of the TFEU that draws the EC’s authority. (3) The other sphere revolves around directing or controlling of proposed mergers, joint ventures, and acquisitions incorporating companies that bear a certain, defined amount turnover within EU as directed by the Council Regulation 139/2004 EC. (4) State aid that entails the control of direct and indirect aid awarded by EU’s Member states to companies as directed by Article 107 of the TFEU (Nazzini 2011, p.30). The EC has pursued enhanced liberalization of energy markets via the incorporation of a sector-specific regulatory regime. The liberalization that was launched in the early 1990s has heralded the progressive introduction of regulations directed at ensuring attainment of the benefits of an integrated and competitive market for gas consumer. On 4th September, 2012, the European Commission (EC) antitrust department opened formal proceedings against Russia’s gas giant Gazprom on the basis of violating European Union competition rules. From EU’s perspective, the probe into Gazprom entail a legally due action directed at guaranteeing fair competition within the EU gas market, which traditionally has been typified by national monopolistic regimes and powerful incumbent companies (Nazzini 2011, p.30). Gazprom was accused of market partitioning by hampering the free flow of gas across EU member states through the introduction of “destination clauses” within its supply contracts. The other charge detailed instituting barriers to supply diversification by denying access to its pipeline network to third-party gas suppliers, which is a contravention of Third Party Access regime as directed by energy law packages (Directives 2003/55/EC and 2009/73/EC) (Nazzini 2011, p.29). Gazprom was also accused of unfair pricing for imposing unfair prices on customers by selling its gas, via long-term take or pay contracts that connect the price of gas to the price of oil. Nevertheless, such proceedings potentially have a significant impact on EU-Russia relations and the probe can potentially contribute to consolidating Russia’s evident zero-sum game approach to foreign policy, which, ultimately, may undermine the long-established energy relationship with EU (Riley, 2012). Gazprom accused EC of employing antitrust probe to compel the company to reduce prices and reveal the formula linked to oil price that directs its supply contracts to Europe where it supplies close to 25% of the continent’s needs. Conclusion The European Union requires an internal energy market that is competitive, interconnected, and fluid, which can only be attained by guaranteeing that the internal European energy market is capable of operating efficiently and flexibly. Markets can serve as effective and efficient tools for attaining policy goals and governments should establish the rules that allow firms to attain the set objectives, which, in turn, facilitate security of supply as a shared responsibility. The core impact of liberalization has been facilitating the shift of prime responsibility for attaining security of supply from government towards the inclusion of market participants. The competition law pursues guaranteeing that there is free and fair competition within EU and guides taking action against business practice that constrain competition, probe mergers to evaluate whether they minimize competition, open up competition in places initially controlled by state rune monopolies, and vet financial support awarded to companies by EU national governments. Compliance with EU’s antitrust rules is anticipated to herald the establishment of concise business framework that paradoxically reinforces the confidence between the parties. References List Cahill, D. (2005). The modernisation of EU competition law enforcement in the European Union: FIDE 2004 national reports. Cambridge, Cambridge Univ. Press. pp.11. Cameron, P. (2002). Competition in Energy Markets; Law and Regulation in the European Union, New York, Oxford University Press. pp.3-5. Chandra, V. (2006). Fundamentals of natural gas, Tulsa, Okla, PennWell Corp. Pp.181. Creti, A., (2004). Long-term contracts and take-or-pay clauses in natural gas markets, Energy Studies Review 13 (1), pp. 93. Gao, A. M. Z. (2010). Regulating gas liberalization: a comparative study on unbundling and open access regimes in the US, Europe, Japan, South Korea, and Taiwan, Alphen Aan Den Rijn, Kluwer Law International. pp.185. Geradin, D. (2001). The liberalization of electricity and natural gas in the European Union, Boston, Kluwer Law International. pp.284. Greenwald, B. G. (1987). Natural Gas Contracts Under Stress: Price, Quantity and Take or Pay, Journal of Energy and Natural Resources Law 5(1), p.1. Jonathan, P. S. (2005). The Future of Russian Gas and Gazprom, Oxford and New York, Oxford University Press. Pp.132-133. Nazzini, R. (2011). The Foundations of European Union Competition Law The Objective and Principles of Article 102, Oxford, OUP Oxford. Pp.29-30. Newbery, D. M. (2001). Privatization, restructuring, and regulation of network utilities, Cambridge, MIT Press. Pp.381. OECD/IEA (2004). Security of Gas Supply in Open Markets: LNG and Power at a Turning Point, Paris, OECD/ IEA. pp.92. Riley, A. (2012). Commission v. Gazprom: The Antitrust Clash of the Decade, in CEPS Policy Briefs, No. 285 [Online] Accessed 12 April 2013. Available at: http://www.ceps.eu/node/7433 Schenk, T. (2007). EU Competition Law and Policy, München, GRIN Verlag GmbH. pp.1-4. Talus, K. (2011). Longterm Natural Gas Contracts and Antritrust Law in the European Union and the United States, Journal of World Energy Law and Business 4 (3), pp.213. Read More