EU vs Gazprom: The Substance and Implications of the Antitrust Clash

1. EU vs Gazprom: The Substance and Implications of the Antitrust Clash Dr.AndreyA.Konoplyanik, Advisor to Director General, Gazprom export LLC, Professor, Chair “International Oil & Gas Business”, Russian State Gubkin Oil & Gas University www.konoplyanik.ru Introductory Remarks at Expert Roundtable at Chatham House’s Russia and Eurasia Programme,London, UK,27November 2013

2. Disclaimer • This presentation reflects personal position of this author. It does not (re)present official position (if any) of the Gazprom Group, its management bodies, shareholders, and/or its affiliated companies, nor of the Russian state on the issues in question. A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

3. The 04.09.2013 DG COMP claim, lines of action, economic dimension A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

4. CEC vs Gazprom: three ways of action =>three lines of debate RF Presidential Decree 1825 (11.09.2012) as an immediate reaction to CEC claim (“domino” & “senior brother” effects) => to switch from diagonal to horizontal character of “debate” (to adjust/to put on equal level “political weight” of parties in debate) => official RF reaction Political EU Investigation against Gazprom, 04.09.2012 Economic To (try to) understand the economic development (background, pre-requisites) that led to situation which creates conflict of interests and thus stipulated CEC claim against Gazprom => author’s line of proposed debate Legalistic Official DG COMP procedure (dominance of legal over economic considerations)? => (most probable) continued EU action? A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

5. DG COMP 04.09.2012 Summary: “Gazprom may be abusing its dominant market position in upstream gas supply markets in Central and Eastern European Member States” • Three claims: • tworefers to CEE capacity market functioning, • “First, Gazprom may have divided gas markets by hindering the free flow of gas across Member States” • “Second, Gazprom may have prevented the diversification of supply of gas” • one refer to CEE commodity market functioning • “Finally, Gazprom may have imposed unfair prices on its customers by linking the price of gas to oil prices” A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

6. DG COMP 04.09.2012: “Gazprom may be abusing its dominant market position in upstream gas supply markets in Central and Eastern European Member States” – AK view • Right facts, but incorrect reasoning: there is a lot of things Gazprom can be criticized for, but don’t claim it for what it is not responsible (USSR/COMECON/GOSPLAN) • Gazprom as commercial state-owned entity tries to maximize economic benefits (non-renewable resource rent) from situation which it has inherited from the past (EU gas system since 1962; USSR/RF gas export to EU since 1968) • Gazprom – by definition – can’t prevent EU to develop alternative routes, supply sources &/or energies => why this was not done by EU in CEE until 2009 (when EU gas market changed to oversupplied)? • Increasing competition in EU gas market will best force Gazprom to adapt to its new architecture, not the administrative attacks => EU to create economic preconditions for diversified/saturated infrastructure => investment climate (trade vs investment) A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

7. Capacity market component of the claim A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

8. CEE capacity market diversification: two lines of EU action • Semi-economic way (to preserve capacity deficit, but to save time & money): • Economicpart:CMP (increase efficiency of utilization of existing though limited transportation capacity) • Non-economic part: to “take away and share” (restrict access to existing limited transportation capacity for incumbents in favour of newcomers) EU-CEC Economic way (to liquidate capacity deficit & to exclude its appearance by developing corresponding procedures (Coordinated Open Season) => to spend time & money): - To invest in developing new capacity & its diversification (plus using CMP instruments) A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

9. Diversity (saturation) of gas transportation infrastructure in the EU (trunk pipelines only, km/100 km2), preliminary results Figures for UK & Denmark should be much higher if offshore pipelines are added (to be done at the next step of analysis) Calculations made by E.Orlova, PHD postgraduate student, Chair “International Oil & Gas Business”, Russian State Gubkin Oil & Gas University, based onthe data for 2011/2012, kindly provided by ENTSOG A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

10. Diversity (saturation) of gas transportation infrastructure in CEE: (trunk plus distribution pipelines, km/100 km2), preliminary results How much will it cost & how long will it take to cover this gap in gas infrastructure diversity between CEE & NWE ? Calculations made by E.Orlova, PHD postgraduate student, Chair “International Oil & Gas Business”, Russian State Gubkin Oil & Gas University, based onthe data for 2011/2012, kindly provided by ENTSOG A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

11. Commodity market component of the claim A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

12. Gas price/pricing: visual & hidden part of the iceberg • Competitive prices (different facets) : • Competitive contractual structure => SPOT vsCONTRACT, but: • Contract(3 components) = price + volume + flexibility (TOP = virtual UGS) => what value of contractual flexibility? • Spot (2 components) = price + volume => to take flexibility from the market => either from liquid hubs (=> oversupplied market) or UGS (=> CAPEX + time) • Competitive energy structure => GAS vs COAL vs RES, but: • Gas => flexibility for free? (move 3-component price to level of 2-component price) • Coal => CO2 emissions (who cares? How corresponds with 20:20:20 policy?) • RES => State subsidies (who pays? How corresponds with WTO rules?) • EU gas market dilemma = to find the balance between: • Consumers & intermediaries => lowest price level • Producers & project financiers => highest marketable price => resource rent for non-EU sovereign states + CAPEX pay-back (RROR) • Butsearch for multilateral or unilateral solutions? : • DG COMP, Mario Monti(10 years ago): “We will look MOSTLYto consumer’s interests”; • DG COMP, Nelly Kroes: “We will look ONLYto consumer’s interests” (Source: Johannes Hettema, GasTerra, 31.05.2013, Groningen Energy Conference) A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

13. Evolution of gas value chain & pricing mechanism of Russian gas to EU (1) Past (Pre-2009) – growing EU market Oil-indexation Oil-indexation Gazprom Wholesale EU buyers/ resellers End-use EU customers Common interests Nowadays (Post-2009) – oversupplied (in NWE segment - ?) EU market with not yet clear future trends Request for hub-indexation where hubs are rel.liquid Gazprom as price-taker from oil market Gazprom as price-taker from OIL market Gazprom as price-taker from oil market Hub-indexation Oil-indexation End-use EU customers Gazprom Wholesale EU buyers/ resellers EU hubs Non-EU customers (f.i. reverse flows to CIS/UA) Request for hub-indexation both where hubs are relat.liquid & where there is no hubs (under threat of arbitration) Common interests

14. Evolution of gas value chain & pricing mechanism of Russian gas to EU (2) Future (“NO GO” contractual scheme under any (?) supply-demand scenario) Hub-indexation Hub-indexation End-use EU customer Gazprom Wholesale EU buyer / reseller Traditional flexibility for buyer (TOP) Common interests – downgrading price spiral for RUS gas Gazprom as price-taker from GAS BUYER’s market (with no participation on it)? => NO GO Future (what competitive niche for oil-indexed LTC in DELIVERIES to EU?) Oil-indexation Hub-indexation Role of DG COMP? Wholesale EU buyer / reseller (delivery) End-use EU customers (delivery) Gazprom Oil Gazprom as one of price-makers at EU market? Hub-indexation EU hubs (trade) Direct supplies to EU end-users Common interests

15. Conclusion A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

16. From hardline to softlinein search of multilateral solution • Multi-facet complex & complicated cross-border issues (incl. both commercial and sovereign dimensions) require first intensive soft/friendly informal expert discussions (if the aim is to find mutually acceptable long-term solution) but not hardline political claims or other administrative pressures as a perceived instrument for reaching forced unilateral (and thus short-term) decision A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013

17. Thank you for your attentionwww.konoplyanik.rua.konoplyanik@gazpromexport.comandrey@konoplyanik.ru A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,27.11.2013