Gazprom

Gazprom is the world's biggest natural-gas producer and the supplier of

about 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, keeping
all its assets intact. The company was later privatized in part, but
currently the Russian government holds most of the control in its hands.
In 2011, the company produced 513.2 billion cubic metres (18.12 trillion
cubic feet) of natural gas, amounting to 17% of worldwide gas
production. In addition, Gazprom produced 32.3 million tons of crude oil
and 12.1 million tons of gas condensate. Gazprom's activities accounted
for 8% of Russia's gross domestic product in 2011.
Total fine may amount to:
10% of the company's annual global turnover in cases where a firm is
found guilty of anti- competitive practices. This would roughly amount to
$6 billion.
Nature of the accusation:
Gazprom was accused of breaking antimonopoly rules by hindering the
free flow of gas across European Union states, preventing countries from
diversifying their gas supplies and imposing unfair prices by insisting in
contracts that its gas price be linked to oil prices.
In the words of the European Union Competition Commission, it is
investigating suspicious anti-competitive practices that could cause
"...higher prices and deterioration of security of supply...". It added,
"...ultimately, such behaviour would harm EU consumers...".
Investigation:
On track. Gazprom was accused in the beginning of September 2012.

Due to the early stage of the process, Gazprom is yet to present

mitigating evidence to counter the accusations made against the core of
the firm's strategy.

The nature of the accusation:

The European Commission launched an investigation Tuesday into whether Gazprom - the
world'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 Union
states, 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 alleges
that Gazprom divided gas markets in the EU and prevented the diversification of natural gas
supplies, which is a breach of antitrust provisions of the Treaty on the Functioning of the
European 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 European
regulations that prohibit a single energy company from combining upstream, downstream,
and sales operations; and failing to grant access to its gas transport infrastructure to local
companies.
The nature of the enquiry and how it was conducted:
The commission said it was investigating three suspected anti-competitive practices: 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. Finally,
Gazprom may have imposed unfair prices on its customers by linking the price of gas to oil
prices. Gazprom's activity in the Czech Republic, Estonia, Hungary, Latvia, Lithuania,
Poland and Slovakia will also be probed. There is no legal deadline to complete inquiries
into anti-competitive conduct. The duration of an antitrust investigation depends on a
number of factors, including the complexity of the case, the extent to which the undertaking
concerned cooperates with the Commission and the exercise of the rights of defence.
Therefore, the outlook appears to be for a slow EC investigation followed by tricky
negotiations with Gazprom. No wonder investors have hardly reacted to the news.
Main findings:
The investigation is still pending further consideration by the plaintiff and more evidence is
required.The duration of an antitrust investigation typically depends on the case, and the
European Commission has yet to give a timeframe for the completion of its inquiries.
The recommendations of the CC and any punitive action that was handed down:
Rather than fines, the companys main problem may be the revision of contract details, such
as the pricing formula and the basis for its calculation. Gazprom now faces a fine equal to
10% of its annual revenue in the EU (roughly $6 billion) if it is found guilty. To date, the
largest anti-trust case ever won by the European Commission was a $1.5 billion settlement
paid by Intel for unfair competition with AMD in European markets.

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 ECC:
The investigation follows raids the commission made last year on natural gas companies
across Europe, including Gazprom affiliates, that were suspected of anti-competitive
practices.
Notably, Andrius Kubilius, prime minister of Lithuania, said the commission was right to
begin an investigation. He said his country had repeatedly spotlighted the issues raised by
the commission and had made a formal complaint early last year. Lithuanian officials have
complained that because the country has tried to open up its energy market, Gazprom had
punished Lithuania with the highest gas prices in Europe.
Impact 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. It added: Ultimately, such
behaviour would harm EU consumers.
Undoubtedly, the case is another sign that the Union is trying to fulfill a long-held goal of
reducing its reliance on Russia, which supplies about a quarter of its gas needs. Since then
the Union has stepped up efforts to diversify its gas supply, particularly after disputes
between Gazprom and Ukraine, a transit point for European gas, led to severe winter
shortages, notably in 2006 and in 2009. Although in the long run contestability and
competition in the European gas market will be promoted, in the short run, consumers may
indeed suffer as a legal battle between the EU and Gazprom unravels. The result may be
rising gas prices for consumers as Gazprom limits its supply in retaliation for the legal
measures undertaken by the European Competition Commission.