CARL MORTISHED: EU isn’t letting Gazprom off the hook ... it’s baiting a trap

The excitement of seeing the first Tesla in your neighbourhood doesn’t make credible our government’s plan to ban the sale of new petrol and diesel cars by 2040. Likewise, the arrival of a few cargoes of American liquefied natural gas at European ports doesn’t mean that Russia’s dominant position in European energy supply is about to crumble.

Instead, Europe is entrenching Gazprom, the Russian state gas company, as its favoured supplier of natural gas. It didn’t make headlines, but last week the EU competition commissioner, Margrethe Vestager, agreed to settle a seven-year dispute with Gazprom under which Gazprom will avoid a huge fine in return for abiding by a set of rules governing its commercial behaviour in the EU.

Letting Gazprom off the hook for rigging markets seems shocking, given German chancellor Angela Merkel’s glacial relations with Russian president Vladimir Putin and the Dutch government’s rage over Russian involvement in the murder of its citizens in Ukraine when a Russian missile brought down a Malaysian Airlines jet. We might wonder what is the point of denying Roman Abramovich a visa when a monolithic Russian state energy utility can just ride over the bumps. In April, Gazprom’s chairman Alexei Miller welcomed US sanctions: “This means we are doing everything right,” he said.

With its control over export pipelines, Gazprom has been able to carve up markets, denying its captives — Poland, the Baltic States and Bulgaria — the ability to resell gas and take advantage of better prices offered by Gazprom to neighbouring countries. While Gazprom is forced to benchmark its prices in Western Europe, further east it is able to divide and rule, thanks to its market power.

And that is the point. Gazprom sells a commodity that is desperately needed. Last year, it supplied 41% of the EU gas market, its exports soaring by 8% to a record 194 billion cubic metres, even in the face of increasing price competition from imports of liquefied natural gas from Africa, the Middle East and the new interloper, the United States. Washington is livid, protesting over plans for a second sub-sea Baltic pipeline that will bring even more Russian gas directly to a landfall in Germany, avoiding transit fees through Poland and Ukraine. The White House wants Germany to suspend the $11.5 billion Nordstream 2 project. Instead, it wants Germany to import more American LNG; a sort of 21st-century Berlin airlift of liquefied American fuel to rescue beleaguered European states captured by the Russian gas bear.

It’s a crude caricature of a complicated market. American gas is very cheap, thanks to the surplus of output from the new shale drilling. However, despite the construction of a clutch of new LNG export terminals and much fanfare from political strategists American gas isn’t getting much of a foothold in the European market. According to Platts, the energy price assessor, only three cargoes of US LNG have arrived in Europe since the beginning of January, two to the UK and one to the Netherlands. The costs of chilling gas into liquid and transatlantic shipment make LNG expensive and Western European gas markets are competitive.

The European Commission wants to keep them that way and that is the reason Europe’s leaders are holding their noses and playing footsy with Gazprom. By eschewing the option of stamping feet and fining the Russian utility, the EU is keeping a tight grip on the company, forcing it to invest in return for the carrot of more income — which Russia desperately needs to pay the bills. The deal signed last week means Gazprom must remove all contractual barriers to the free flow of its gas across borders within Europe, customers must be able to use swaps to access better prices and prices must be benchmarked against market prices at European hubs.

The EU is right to ignore the propaganda from Washington which has more to do with commercial gamesmanship than principle. Gazprom still faces a monumental pricing problem from the global gas glut. In order to protect its market share from Middle Eastern and American competition, Gazprom will have to carry on pumping more gas at lower prices and it is this trap into which the EU is leading the Russian exporter.

For Europeans doing reliable business with enemies is sometimes necessary, especially when allies are proving to be fair-weather friends.