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Is 2018 a banner year for Gazprom?

With the price of hydrocarbons rising, the company’s earnings have received a significant boost.

Is 2018 a banner year for Gazprom?

So far, 2018 has been a good year for Gazprom. The Russian state-owned company is the biggest investor in oil & gas projects in the world with $160 billion worth of investments. With the price of hydrocarbons rising, the company’s earnings have received a significant boost. Most importantly, however, Gazprom has seen an end to its legal battles with the European Commission.

The Russian energy giant is investing in additional pipeline infrastructure to the east and west. The construction of Nord Stream 2 is continuing despite frictions between the U.S. and its ally Germany, and opposition from Eastern Europe. The 1st phase of Turk Stream for the domestic Turkish market has been completed while the 2nd pipeline for the European market is under construction.

In the east, the highly publicised ‘Power of Siberia’ pipeline to north-eastern China is on schedule to be completed on time. The three projects are supposed to start operations at the end of 2019 or at the latest in 2020. The pipelines will provide access to the fastest growing gas market in Asia, China, the biggest economy in Europe, Germany, and, despite recent setbacks, the OECD country with the highest economic growth figure, Turkey.

Furthermore, Gazprom’s profit has increased significantly. Rising demand and higher prices have boosted earnings. Extreme weather in Europe during the winter has raised Russian exports of natural gas in 2017 to record levels. Gazprom exported 197 bcm last year and is set to increase volumes even further this year.

Next to this, European companies are still struggling to replenish depleted storages for the coming winter period. Natural gas prices have hit 3-year highs and are set to rise even further. Also, unplanned maintenance on the Norwegian gas network for 4 weeks further strengthens Gazprom’s position as the largest exporter of natural gas to Europe.

Arguably the end of the legal battles with the European Commission is the most important development for the company in 2018. Gazprom had been fighting the unbundling legislation of the EU and defending itself against unfair pricing allegations since 2014. In the pricing case, Gazprom has settled.

Concerning the unbundling legislation, the EC got its way for most of the cases due to the ruling of the WTO. Gazprom, however, expressed satisfaction despite the limited result of its legal actions.

The Commission accused Gazprom of breaking anti-trust rules in 2015 leading to higher prices in Central and Eastern European countries. The Russian giant limited the reselling of gas and manipulated the isolated position of some countries in order to set higher prices. Gazprom accepted significant concessions in order to avoid major fines. Eastern European countries, such as Poland, expressed disappointment as they believed that the culprit was escaping its punishment.

The Commission, however, defended the deal as it would lead to lower prices to the benefit of millions of consumers in Central and Eastern Europe. Gazprom can no longer manipulate the market as customers are able to resell gas and demand lower prices when it diverges from major benchmark prices such as the Dutch TTF.

The WTO ruled on a case filed by Gazprom in 2014, claiming the EU’s ‘Third Energy Package’ unfairly discriminated against the company. The Russian side argued that the European legislation concerning the ‘unbundling’ of gas transmission assets and production supply assets, is against international trade rules. The legislation was the result of the EU’s fear of Gazprom’s activities in Europe. The state-owned company was buying up assets across the continent and increasing its influence.

However, the WTO did rule in favour of Gazprom in some cases. It upheld the complaint about the exemption for Germany’s OPAL pipeline where Gazprom could only fill 50 % of the capacity. The WTO also agreed that Croatia, Lithuania, and Hungary discriminated against the Russian company by requiring security of supply assessment for foreign but not domestic pipeline operators.

Despite settling or losing most legal cases this year, Gazprom should be satisfied that all major cases have now come to an end. This comes at a time when the construction of Nord Stream 2 is facing pushback from within Europe as well as overseas from Washington. The relatively low-prices Gazprom is able to charge its customers compared to LNG suppliers, provide the state-owned company with an advantage to dominate the European market.

Showing willingness of complying to European legislation potentially provides the Russian company with the necessary goodwill in Brussels to maintain its market share without seeming to harbour malign intentions.


Author: Vanand Meliksetian