EU Could End Russian Gas Bullying In One Fell Swoop

A regulator with the European Commission could alter Europe's long-term energy security this week.

Europe's competition commissioner is set to formally file charges against Russia's Gazprom on April 22 for violating anti-trust laws. The case has been several years in the making, one that went on hold after Russia's intervention in Ukraine last year.

The EU's top anti-trust regulator Margrethe Vestager will charge Gazprom with limiting competition in Europe's energy markets. One complaint is that in bilateral deals with several eastern European countries, Gazprom allegedly links natural gas prices with cooperation on other areas of political significance. If a certain country agrees to help Russia build a pipeline, for example, they may receive a lower price for natural gas than its neighbors. That violates European competition laws. Related: Who Is Saudi Arabia Really Targeting In Its Price War?

The EU also charges that Gazprom blocks the resale of natural gas. Moving natural gas around provides a vital lifeline for countries that need supplies at a moment's notice - during a cold winter for example, or if Russia cuts off gas flows (as it has in the past). And in light of Russia's annexation of Crimea in 2014, the EU has prioritized deeper pipeline interconnections to reduce the vulnerability of Eastern European states. For years Gazprom has sought to stymie gas resales around Europe, something the Commission says is illegal.

Still, it is not clear that there is a substantial alternative to Russian gas in the near-term. Baltic States like Lithuania have turned to imports of LNG, which have loosened Gazprom's grip over their energy supplies. But Europe on the whole will still need Russian gas well into the next decade, according to an October 2014 study from the Oxford Institute of Energy Studies. The EU has 125 billion cubic meters of natural gas under contract from Gazprom through 2020, which is equivalent to nearly three-quarters of total imports from Gazprom in 2013. In other words, even if the EU found alternative sources of gas - through imported U.S. LNG for example - it will be difficult to shake off the large role that Gazprom plays in supplying Europe with energy. These contracts cannot easily be broken. Related: Wall Street Bets On Oil Price Rally

Vestager says that the case is one related to business and not politics, but bringing charges against Europe's main supplier of gas will inevitably have political ramifications. Gazprom, and the Russian government, will no doubt be irked by the case, which could bleed over into the political standoff with Europe over Ukraine. Implementing the Minsk accord that called for a ceasefire between Ukraine and Russian-backed rebels has been difficult, to say the least. A case against Gazprom is not necessarily linked to Ukraine, but broader EU-Russian relations could be affected.

Another issue to watch is gas pricing. The EU has prioritized negotiating collectively with Gazprom over pricing to secure a single EU-wide gas price. That strikes at the heart of another complaint by antitrust regulators: that Gazprom links gas prices to the price of oil, and keeps prices artificially high. Until negotiations were frozen last year amid tension in Ukraine, European regulators had not made a lot of progress in changing Gazprom's behavior on this issue. Gazprom has picked off countries one-by-one, signing bilateral deals at different prices. Gazprom's CEO Aleksei Miller issued a veiled threat on April 13, suggesting it won't fold easily on the issue of pricing. "If the European Commission will insist on equal prices," Miller said, "then of course, as you understand, a base price is not the lowest price. It will be the highest price." Related: Saudi Price War Strategy May Blow Up In Their Face

On the other hand, the case the EU Commission is bringing against Gazprom will provide the EU with more leverage. Vestager has authority to levy billion dollar fines against Gazprom. As a result, the Russian company has signaled that it would be willing to negotiate a settlement with the antitrust body. That could produce some wins for the EU, such as securing a commitment from Gazprom to end certain anti-competitive practices. Theoretically that could affect pricing or open up the door to new contracts for gas supplies.

For years, top EU officials in Brussels have promised to wean themselves off dependence on Russian energy, with little progress. While Russia will be an essential supplier of natural gas for the EU for many years to come, the anti-trust case set to be unveiled this week against Gazprom may finally provide some teeth to Europe's push for greater energy security.

By Nick Cunningham of Oilprice.com

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