The decline of the Gazprom era in Europe
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Last month's European antitrust charges against the Russian national gas company, Gazprom, seem to signal that the heyday of Russian gas in Europe may be coming to an end. Europe has been Gazprom's largest gas export market for decades, but dependence on Russian energy and Moscow's resulting influence has increasingly bedeviled European policymakers and cemented their resolve to pursue energy diversification. The EU's antitrust case is only one among the many factors over the last decade that point to a turning point in Gazprom's role in Europe, but neither Russian energy influence nor the importance of ongoing EU energy reforms should be discounted too fast.

The European Commission's recent charges against Gazprom's monopolistic practices in Central and Eastern Europe include setting "unfair prices"; seeking to partition European gas markets; and bullying states into Gazprom-led pipeline infrastructure projects. The targets were Bulgaria, Estonia, Latvia, Lithuania and Poland, which are all almost completely dependent on Russia for natural gas supplies. In many regards, the investigation launched in 2012 continued the commission's regulatory efforts vis-à-vis Gazprom of the last decade. EU regulators already forced Gazprom to remove destination clauses from its contracts with Western European companies ENI (2003), OMV and EON Ruhrgas (2005). While it is yet uncertain what fines or remedies the commission will propose in 2015, it is certain that going forward, Gazprom's operations in Central and Eastern Europe will need to fully conform with EU regulation.

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During the 2000s, until the global financial downturn, Gazprom had a successful spree riding the wave of rising oil and natural gas prices and growing global demand for energy resources. Russia was persistently the largest supplier of Europe's gas imports while Gazprom sought to acquire European downstream energy assets and launched the Nord Stream and Blue Stream pipelines. At the same time, Moscow was increasingly free-handed in its use of the energy weapon for political leverage over vulnerable European states.

Russia's energy influence was arguably best exemplified by the "gas wars" with Ukraine of 2006 and especially 2009, when Gazprom cut gas to a pipeline supplying Ukraine and more than a dozen EU member states in the dead of winter. The cut had significant humanitarian consequences that included fatalities in southeast Europe. This was a wake-up call for Europe. I remember the cold days in Prague, where I arrived with the Lithuanian delegation to the unveiling of the Czech Republic's European presidency. In the background of the ceremonial pomp, most European foreign ministers were worried about Kremlin's evident upper hand in gas relations. And rightfully so.

Since that cold winter of 2009, EU policymakers reinvigorated their efforts to diversify Europe's energy sources, improve its energy infrastructure, build up gas storage and try to reduce its reliance on Russian gas. The Third Energy Package, or regulation to increase competition in EU's internal gas and electricity market via "unbundling," was adopted in 2009. Unbundling seeks to ban the same company from owning both the pipeline and the gas that is transmitted by that pipeline and has direct consequences for Gazprom. By 2014, Lithuania was the first among EU members to force a sale of Gazprom's transmission assets in that country. Ukraine, despite not being a EU member, also looks to follow the Third Energy Package regulation. Furthermore, last year, due to EU regulations, Gazprom abandoned its plans to build the South Stream pipeline, which would have supplied southern Europe. In 2015, as Russia's war in Ukraine rocked the European continent with its implications for energy supply, the EU announced its plan to create a European Energy Union to bolster its energy security and reduce reliance on hydrocarbons.

Possibly more worrying than EU regulations for Gazprom, long-term, is the unfolding American energy boom. Over the last five years, the U.S. has emerged as the world's largest producer of natural gas. Enabled by new liquefied natural gas (LNG) delivery technologies and driven by the growing preference of spot markets over long-term contracts with Gazprom, many European countries like Lithuania are increasingly looking to diversify their gas imports with LNG deliveries (including from the U.S.). The U.S. government has authorized LNG exports to countries without free-trade agreements of over 100 billion cubic meters a year, which is roughly two-thirds of current Russian gas sales to Europe. Azerbaijan and Iran both also look to export gas to Europe.

In stark contrast to the developments in the global gas sector, Gazprom has questionable potential for growth due to its ineffective management and uncompetitive practices common among nontransparent state monopolies. Furthermore, Gazprom's dominant position is also challenged by other Russian energy companies such as state-owned Rosneft and publicly traded Novatek. Already in 2014, Gazprom's exports to Europe fell by 9 percent from the previous year, which was largely attributed to the warmer winter but also to reduced consumption, energy efficiency and renewables policies. These challenges have impacted Gazprom's bottom line: The company's net profits plunged 86 percent in 2014 in comparison to 2013.

Nonetheless, Gazprom's present leverage over Europe cannot be discounted. Currently, EU members Estonia, Latvia, Finland and Bulgaria are still nearly 100 percent dependent on Russian gas. Thirteen EU members receive Russian gas via the Gazprom-owned pipeline through Ukraine. The setback on South Stream notwithstanding, Gazprom is now pressuring Turkey to host the Turkish Stream pipeline — a project that would replace South Stream and compete with Europe's planned Southern Gas Corridor and TANAP (Trans-Anatolian Natural Gas Pipeline) pipelines bringing Caspian gas to Europe via Turkey. Meanwhile, Russian President Vladimir Putin is promising Russian gas deals to Greece and Hungary — just a few of the European states whose friendship Moscow is courting with energy supplies. Among Moscow's other countermoves, it is also possible that Gazprom could try to defend its market share in Europe from American, Azeri and Iranian gas imports by cutting its prices.

The European antitrust case is just the latest in a series of developments that have challenged Gazprom's role on the European continent. Moscow's increasingly unpredictable and aggressive foreign policy and a history of using oil and gas as a geopolitical weapon has strengthened the resolve of most European nations to diversify away from Gazprom's gas. This long-term strategy of diversification and new energy infrastructure will matter most to the EU's most energy-vulnerable states of Central and Eastern Europe. In the meantime, European and American policymakers will have to face the last vestiges of Gazprom's influence over the European continent, all while countering Russia's foreign policy.

Grigas is the author of The Politics of Energy and Memory between the Baltic States and Russia (Ashgate, 2013) and Rebuilding the Russian Empire, forthcoming from Yale University Press.