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Gazprom Makes Concessions in E.U. Gas Deal, but Trouble Looms for Russian Giant

After fitful negotiations spanning nearly two years, Gazprom moved a step closer on Monday to resolving a longstanding dispute with European antitrust regulators critical of the company's dominance in regional natural gas markets.

News of the provisional agreement provides a welcome respite for the Russian state gas exporter and for the government in Moscow, which has long benefited from Gazprom's profits.

The company's issues, however, run far deeper.

Gazprom faces tighter profit margins at home, thanks to a more competitive domestic market, and overseas because of regulatory pressure in Europe. Several major projects are also either running behind schedule or have been delayed. In the longer term, increasing demand for renewable energy will affect the company, which is dependent on fossil fuel sales.

On Monday, though, the energy giant got some good news.

Countries in Central and Eastern Europe have long argued that Gazprom used its powerful position to inflate prices and quash competition. The European Commission, the executive arm of the European Union, filed charges against the company in April 2015, accusing it of breaking regional antitrust rules.

The commission said on Monday it had provisionally accepted commitments by Gazprom to address those charges. Margrethe Vestager, the bloc's competition commissioner, could have imposed a large fine and forced the company to change the way it does business, but thus far, she has not.

"We believe that Gazprom's commitments will enable the free flow of gas in Central and Eastern Europe at competitive prices," Ms. Vestager said in a statement. If the deal comes into force, she would be able to fine Gazprom up to 10 percent of its worldwide revenue for any violations of the agreement.

Gazprom's deputy chairman, Alexander Medvedev, said in a separate statement that the provisional deal demonstrated the company's "willingness to address" European concerns, and hoped the commission would "respond positively" to the company's commitments.

The high level of mutual dependence involving the two sides helped pave the way for a settlement. The European Union relies on Gazprom for about a third of its natural gas supply, and Moscow earns significant revenue from selling that gas to Europe.

It may signal an easing of at least some of the tensions between Russia and Europe, which have been at odds for years over what officials in Brussels say are aggressive tactics by Moscow to leverage the region's energy supply to extract diplomatic concessions.

Europe has also sought to reduce reliance on Russian energy, as the two sides face off over a growing list of geopolitical disputes, including the conflict in Ukraine and the civil war in Syria.

The move is not the final word: Gazprom's customers and competitors have seven weeks to comment. The vetting process, a regular step in antitrust settlements involving the European Commission, has led the commission to abandon deals in the past, but that outcome is relatively rare.

Still, it is a major step toward ending the case and providing some measure of closure for Gazprom.

The company, formerly the Soviet ministry of gas, has long functioned as a bottomless expense account for Moscow. For years, it propped up the Russian budget, at times accounting for as much as a tenth of the country's tax revenue. In a sign of the company's political importance to the government in Moscow, Ms. Vestager noted on Monday that Russian ministers had joined Gazprom delegations on multiple occasions in talks over the dispute.

With the government grappling with sanctions and austerity, and Russia's economy only meekly emerging from a recession, budget contributions from Gazprom in the form of dividends are more important than ever.

The sprawling business, which controls the world's largest reserve of natural gas, is 50 percent owned by the government, with the remainder trading on exchanges in London and Moscow. Wary of its politicized management, though, investors have mostly stayed away in recent years. From a peak market capitalization of $367 billion in May 2008, Gazprom's value has plummeted, sitting at around $52 billion on Monday.

And in recent years, as the energy market has shifted, so have the company's prospects.

Oil prices – many of Gazprom's gas-exporting contracts are linked to them – fell from above $100 a barrel about two years ago to less than $30 last year, and are still only hovering at around $50 a barrel.

It also faces tough competition both at home and abroad.

Though it retains a legal monopoly on exports from Russia, domestic rivals are raising their production of natural gas. Gazprom, which owns the gas pipelines within Russia, is obliged by law to carry gas made by other producers for sale domestically. The increased supply has forced Gazprom to shut some of its own wells for lack of demand.

World gas prices have also been under pressure thanks to vast new supplies of liquefied natural gas that can be transported worldwide on ships, upending the traditional requirement for pipelines and shaking up a market that had largely functioned within regions. The prospect of huge volumes of shale gas from North America has also helped keep prices low.

Russia's own economic problems have consequences, as well. A fiscal shortfall means there is less capital available to invest in energy projects, while those that are underway have fallen behind schedule.

Analysts expect Gazprom's highest-profile project, a pipeline to China called the Power of Siberia, to be delayed. The company insists it is on track to be working in 2019, but planned spending has been pushed back. Other proposals not yet started have been put off.

Gazprom is also under pressure from a shift in energy consumption patterns in Europe.

Use of alternative energy has been steadily increasing in the region. By 2020, renewable power sources like wind and solar will meet all of the Continent's projected new demand, according to Kingsmill Bond, an energy analyst at the research firm Trusted Sources. After that, green energy is expected to whittle away at demand for fossil fuels.

"This new energy revolution will create a structural drop in energy prices over time," Mr. Bond said. "It means the petro states and the old energy providers such as Russia find themselves in a very different position."

There are good signs, however.

Though demand for gas in Europe may be weak, the region's indigenous supplies from countries like Britain, Denmark and the Netherlands are in decline because of dwindling reserves.

And the latest deal, though still provisional, provides some cheer, indicating Gazprom's often-fraught relationship with the European Union could be improving.

The antitrust allegations focused on Gazprom's stranglehold on energy supplies for formerly communist and Soviet-bloc countries like Poland and Lithuania. Gas prices in those countries have frequently been higher than prices in Western Europe.

Among the issues regulators investigated was whether Gazprom harmed competition by reducing its customers' ability to resell gas across borders. They also looked at whether the company used its powerful market position in Bulgaria and Poland by making supplies of gas conditional on agreements from those countries to participate in pipeline projects carrying even more Russian gas to Europe.

In its statement, the European Commission said Gazprom had pledged to remove restrictions on reselling gas; ensure that prices in Central and Eastern Europe were competitive; and not act on any advantages regarding gas infrastructure that it had obtained because of its dominant selling position.

"The European regulator seems to have found a clean way to exit this highly political and highly complex case," said Nicolas Petit, a professor at the University of Liege specializing in competition law.

[Source: By James Kanter, Andrew E. Kramer and Stanley Reed, The New York Times, 13Mar17]

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