Gazprom close to deal with the EC, BEH close to a fine

Gazprom close to deal with the EC, BEH close to a fine




It is strange to watch that the Bulgarian Energy Holding has opted to push the limits of the patience of the European Commission’s anti-trust body whereas Gazprom has chosen reconciliation.


Concurrently, Russian media are singing praise for Bulgaria, as the only EU member in the CEE that has formally voiced support for Gazprom’s commitment letter – to be used as the basis for a case resolution.


The Directorate-General for Competition is conducting a parallel investigation into BEH on its abuse of a dominant position, which is reminiscent of the case against Gazprom. Easy comparisons might be misleading but rather interesting and revealing.1


The scale of the two cases is incommensurate. There are many nuances, yet the matrix is identical. What is most important – the comparison tells the hidden story of the genetic bonds between Gazprom’s monopoly and the spillover monopoly of the Bulgarian state gas companies.


The EC’s investigation into Gazprom commenced in 2012. After three years of work and negotiations, the Commission and its Directorate-General for Competition, issued in April, 2015 the so-called Statement of Objections, which sets out the established account on Gazprom’s offense in 2015. The Russian gas company took two years to reconcile the differences of interpretations at EC level and reach a stage where it could both hope to avoid sanctions and reputational loss, sending a commitment letter in March 2017. This gave the DG COMP the opportunity to push a step further and engage in the final market test – check the response to Gazprom’s proposal from the interested parties.


Throughout the whole investigation, the Damocles’ sword of an $8 billion fine forced Gazprom to soften its initial hardline position and forego its original arrogance of ignoring the EC’s existence in 2010 to the present situation where almost nothing significant of what the Russian gas giant wants to achieve in Europe can happen without the blessing of Brussels. Although there is no final agreed upon document yet, Gazprom has shown a degree of acquiescence that has no parallel in the past.


The Russian gas giant has all the chances to see through the case and avoid the fine. The latter might be delayed by recently received objections to the commitment letter. But the process has been set in motion and a mutually acceptable end after a five-year ordeal is in sight — which is indirect proof that Gazprom’s approach makes sense and might bear fruit.


Meanwhile, BEH and its subsidiaries are virtually deadlocked after refusing to accept the recommendations of the EC’s Competition Directorate-General. The Russian gas monopoly seeks compromising ground, which is very much in line with DG COMP’s ideas, in order to spare itself arbitration proceedings where it could lose a lot more than foreseen in the fine. The managers of the Bulgarian Energy Holding and its subsidiaries stubbornly avoid remedial action – restructuring the ownership structure – so as to guarantee repetition of restricting access to the transmission infrastructure.


Eight countries in CEE have been deemed interested parties to the Gazprom anti-trust case. But besides the energy companies involved, consumer organizations and professional groups have been able to voice opinion and pass comments. This stage ended May 4th. Sources in Gazprom hope to have the case over by this August, autumn latest, with an acceptable outcome, long before the case is closed with BEH.


The option of not complying with the EC regulations is not existent. The time for a mutually agreeable solution seems to have passed amid sheer incompetence and a sequence of bad judgments by the management of the state energy companies.


Let’s recall the interim options that have been missed. The first opportunity, which was quickly wasted, was moving Bulgargaz or Bulgartransgaz to ministries other than the Ministry of Energy – i.e. Bulgartransgaz could be moved to the Ministry of Regional Development and Public Works.


Upon receiving the recommendation from DG COMP, an initial unease began to transcend into silence, perhaps as a cover-up for a sense of insecurity and even fear.


The Commission took the lack of response as a “no” and hardened its position. There is no shortage of good will left over and a chance to break the deadlock. But the train left the final “last warning” station during the visit of Commissioner Margarita Vestagger last June. A scarcely reputed visit with lasting consequences – one of which immediate – the Siderokastro-Kulata border interconnector was nominally opened.


Not sure whether the BEH management got the subtle message of the European Commission, the decisions taken by the Bulgarian government and implemented by the state energy companies are no more a matter of solely national decision making, concerning just the Bulgarian gas market and consumers, but of the entire European Union.


By objecting to the liberalization and diversification of the Bulgarian gas market, both BEH and its subsidiaries have not only been blocking their own restructuring, hurting their own interests in the regional and European markets, but they have been also undermining key elements in the agreed upon strategy of both the EU and the US to reduce dependence on Russian gas and open the CEE market to competition from new producers and traders. The Bulgarian gas transmission and transit system play an integral role interconnecting the geostrategic, EU and US backed, Southern Gas Corridor and the Central and Eastern European markets.


Russia has its own Southern Gas Corridor version, which is epitomized by Turkish stream.


This is the backdrop against which the foot-dragging actions of the top managers of Bulgarian state energy companies are judged and weighed. They are reminiscent of schizophrenic conduct, torn between the commitments to European law and regulations, on one hand, and the will captured in dealing only with the Russian gas monopoly.


Whatever caretaker minister Pavlov has stated to the contrary, the likelihood of a fine of 200 million euros on BEH and subsidiaries is both imminent and high. Even if such a fine would not sink the holding and the state gas trade and transport companies, the blow will be close to lethal, seriously undermining their financial state and forfeiting any chance, notably for Bulgargaz, to retain sensible market share in its home and the regional market.


Worst of all, the fine will not be the end of the story. The DG COMP could renew the case at any moment in the event of non-compliance in the future.


The Bulgarian chief prosecutor’s office launched a probe into the regulator in order to identify the individual responsibility of members of past management teams for failing to act and enforce compliance with EU regulation following Overgas’s complaint of denial of access to the gas transmission system and the UGS Chiren. It is strange, however, that the prosecutors are not targeting the source of the problem – the state companies in question – but the regulator.


The State Commisson for Energy and Water Regulation could not be the root cause for the sequence of events that led to the current fine. All along the process there have been managers with specific footprints of responsibility.


Overgas may have tried to take advantage of the situation while Gazprom, its shareholder, has been in a position to abuse its dominant role stemming from Bulgargaz’s total dependence on a single supply contract. But all along this line of offenses, the Bulgarian state gas trader has been poignantly ignoring all red flags, failing to raise objections or complaints. Not even once has Bulgargaz complained about the detrimental role of the Russian company.


The investigation of DG COMP, launched five years ago, was not triggered by or supported by the top management of the Bulgarian state gas monopolies.


It comes as no surprise that both BEH and its daughter companies stand out as the only CEE companies to openly back, in broad terms, the letter of commitment from Gazprom.


The fresh nationalistic connotations in the parlance of the management of the Bulgarian state energy companies claiming that the moves suggested by DG COMP – privatization of Bulgartransgaz and Bulgargas – run counter to the national interest is just a veiled recognition of a policy line that mimics Gazprom’s reluctance to part away with its monopoly at home. Privatization in Bulgaria has failed in three instances – when it was too late (the Balkans Airline), lacking transparency, benefiting preordained oligarchs (Bulgartabac) and finally when post-privatization control was missing (Bulgarian Maritime Fleet – Navibulgar). But state companies remain without alternative if they wish to survive in a free and competitive market.


Both Gazprom and BEH seems to perceive the liberalized and competitive EU gas market as a threat. The Russian gas company has quickly learned its lessons, while BEH has persisted in fretting EU law and regulations – notably the EU Anti-Trust Regulation 1/2003.  Not only have BEH and its daughter companies become a barrier to gas market growth and liberalization in the country, but their drive to sustain a policy gravity that is in Gazprom’s orbit might not just end up in fines.


Where the Russian gas giant has adapted to change, seeking settlements with the EU anti-trust body, the Bulgarian Energy Holding has succumbed to terminal existential problems.


After all, neither the Bulgarian taxpayers, nor the Bulgarian gas consumers are obliged to pay the cost of inadequate policies sustaining the monopoly of BEH and its daughter companies when this leads to higher prices, political dependencies and lack of competition.


If these companies are unable to effectively mediate between the global markets and the needs of the Bulgarian consumers, they will cease to exist in their current form and ownership structure.


1 Link to the major events list in the investigation against Gazprom and a link to the corresponding events’ list in the investigation against BEH and its subsidiaries and companies.

By Ilian Vassilev

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