EU vs Gazprom: The Substance and Implications of the Antitrust Clash Introductory Remarks at Expert Roundtable at Chatham Houses Russia and Eurasia Programme, London, UK, 27 November 2013 Dr.Andrey A.Konoplyanik, Advisor to Director General, Gazprom export LLC, Professor, Chair International Oil & Gas Business, Russian State Gubkin Oil & Gas University

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,

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

CEC vs Gazprom: three ways of action => three lines of debate A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK, EU Investigation against Gazprom, Economic Political Legalistic RF Presidential Decree 1825 ( ) 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 Official DG COMP procedure (dominance of legal over economic considerations)? => (most probable) continued EU action? 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 => authors line of proposed debate 4

DG COMP Summary: Gazprom may be abusing its dominant market position in upstream gas supply markets in Central and Eastern European Member States Three claims: – two refers 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,

DG COMP : 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 dont 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 – cant 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,

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

CEE capacity market diversification: two lines of EU action A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK, EU- CEC Semi-economic way (to preserve capacity deficit, but to save time & money): -Economic part: 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) 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)

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

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

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

Gas price/pricing: visual & hidden part of the iceberg Competitive prices (different facets) : – Competitive contractual structure => SPOT vs CONTRACT, 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) But search for multilateral or unilateral solutions? : – DG COMP, Mario Monti (10 years ago): We will look MOSTLY to consumers interests; – DG COMP, Nelly Kroes: We will look ONLY to consumers interests (Source: Johannes Hettema, GasTerra, , Groningen Energy Conference) A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,

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

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

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

From hardline to softline in 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,

Thank you for your attention A.Konoplyanik, CEC vs Gazprom expert debate, Chatham House, London, UK,