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Gazprom

Gazprom is the world's biggest natural-gas producer and the supplier ofabout a third of Europe's needs.

Background of the company:

Founded in 1989, Gazprom was created when the Ministry of Gas

Industry of the Soviet Union transformed itself into a corporation, eepin!all its assets intact" #he company was later privatized in part, $utcurrently the %ussian !overnment holds most of the control in its hands"

In &'11, the company produced (1)"& $illion cu$ic metres *18"1& trillioncu$ic feet+ of natural !as, amountin! to 1- of worldwide !asproduction" In addition, Gazprom produced )&") million tons of crude oiland 1&"1 million tons of !as condensate" Gazprom.s activities accountedfor 8- of %ussia.s !ross domestic product in &'11"

Total ne may amount to:1'- of the company.s annual !lo$al turnover in cases where a /rm isfound !uilty of anti0 competitive practices" #his would rou!hly amount to2 $illion"

!ature of the accusation:

Gazprom was accused of $reain! antimonopoly rules $y hinderin! thefree 3ow of !as across 4uropean Union states, preventin! countries from

diversifyin! their !as supplies and imposin! unfair prices $y insistin! incontracts that its !as price $e lined to oil prices"

In the words of the 4uropean Union 5ompetition 5ommission, it isinvesti!atin! suspicious anti0competitive practices that could cause6"""hi!her prices and deterioration of security of supply"""6" It added,6"""ultimately, such $ehaviour would harm 4U consumers"""6"

"n#estigation:

7n trac" Gazprom was accused in the $e!innin! of Septem$er &'1&"

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$ue to the early stage of the process% Gazprom is yet to presentmitigating e#idence to counter the accusations made against the core of

the rm's strategy.

The nature of the accusation:

The European Commission launched an investigation Tuesday into whether Gazprom - theworld's biggest natural-gas producer and the supplier of about a third of Europe's needs -had broken antimonopoly rules by hindering the free flow of gas across European Unionstates preventing countries from diversifying their gas supplies and imposing unfair prices

by insisting in contracts that its gas price be linked to oil prices! The Commission allegesthat Gazprom divided gas markets in the EU and prevented the diversification of natural gassupplies which is a breach of antitrust provisions of the Treaty on the "unctioning of theEuropean Union! The gas supplier is accused of multiple counts of misconduct# imposing

unfair prices on its customers by linking gas prices to the cost of oil$ breaching Europeanregulations that prohibit a single energy company from combining upstream downstreamand sales operations$ and failing to grant access to its gas transport infrastructure to localcompanies!

The nature of the enquiry and how it was conducted:

The commission said it was investigating three suspected anti-competitive practices# "irstGazprom may have divided gas markets by hindering the free flow of gas across %ember&tates! &econd Gazprom may have prevented the diversification of supply of gas! "inallyGazprom may have imposed unfair prices on its customers by linking the price of gas to oil

prices! Gazprom's activity in the Czech epublic Estonia (ungary )atvia )ithuania*oland and &lovakia will also be probed! There is no legal deadline to complete in+uiriesinto anti-competitive conduct! The duration of an antitrust investigation depends on anumber of factors including the comple,ity of the case the e,tent to which the undertakingconcerned cooperates with the Commission and the e,ercise of the rights of defence!Therefore the outlook appears to be for a slow EC investigation followed by trickynegotiations with Gazprom! o wonder investors have hardly reacted to the news!

Main findings:

The investigation is still pending further consideration by the plaintiff and more evidence isre+uired!The duration of an antitrust investigation typically depends on the case and theEuropean Commission has yet to give a timeframe for the completion of its in+uiries!

The recommendations of the CC and any punitive action that was handed down:

ather than fines the company.s main problem may be the revision of contract details suchas the pricing formula and the basis for its calculation! Gazprom now faces a fine e+ual to

/01 of its annual revenue in the EU 2roughly 34 billion5 if it is found guilty! To date thelargest anti-trust case ever won by the European Commission was a 3/!6 billion settlement

paid by 7ntel for unfair competition with 8%9 in European markets!

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Any mitigating factors that explain the plaintiff's action:

There aren't any as the investigation is still on track!

Process that brought this case to the attention of the CC:

The investigation follows raids the commission made last year on natural gas companiesacross Europe including Gazprom affiliates that were suspected of anti-competitive

practices!

otably 8ndrius :ubilius prime minister of )ithuania said the commission was right tobegin an investigation! (e said his country had ;repeatedly spotlighted< the issues raised bythe commission and had made a formal complaint early last year! )ithuanian officials havecomplained that because the country has tried to open up its energy market Gazprom had

punished )ithuania with the highest gas prices in Europe!

!mpact this ruling will have on contestability and consumer welfare:

The EC said it was investigating suspected anti-competitive practices that could cause;higher prices and deterioration of security of supply

behaviour would harm EU consumers!! 8lthough in the long run contestability andcompetition in the European gas market will be promoted in the short run consumers mayindeed suffer as a legal battle between the EU and Gazprom unravels! The result may berising gas prices for consumers as Gazprom limits its supply in retaliation for the legalmeasures undertaken by the European Competition Commission!