For a long time the EU had been working on the first pillar; however, in recent years the context for EU energy policy has changed dramatically1. This is due to the fact that increasing reliance on more expensive renewable sources makes energy-intensive industries less competitive in global markets. Equally, the practice of replacing indigenous coal with imported gas, to reduce emissions by half, has raised costs both financially and politically2. Therefore, today, in the light of the Ukrainian crisis, concerns of energy security and industrial competitiveness have become more pressing3.
Nevertheless, today the European Union is heavily dependent on energy imports. This is apparent due to the persistently negative energy trade balance, which in 2013 amounted to 3.1% of EU GDP up from 2.1% in 2009 4. Certainly, these numbers are high; however, dependency on intense importation does not generate any threat per se. The threat occurs when there is a lack of diversification in terms of energy suppliers. In fact, that is the core issue that the European Union is facing at the moment.
The problem with the gas and oil imports in the EU is that only several gigantic companies (which are highly inter-related and often owned by state) supply these products. In fact, today, of Europe’s gas consumption, 60% is imported, nearly half of that via Russia5. Over the next twenty years, at least according to some projections, the imported share will rise to 80%, as Europe’s own gas production falls and demand rises. Some of the Western European countries do not seem too concerned due to a mixture of imports of liquefied natural gas and a constant supply (although not significant in quantity) from, for instance, the North Sea; nevertheless, Central and Eastern Europe is highly dependent on Russian gas.
These considerations are absolutely crucial for the European Union, since the energy market is generally considered to be a ‘superior’ market that every other market depends on. History provides a number of examples when energy had been used in order to control nations. Therefore, in order to avoid these kinds of problems, the European Union needs to make sure states and energy ‘giants’ are no longer key players in the energy sector. However, it is submitted that it is not always possible to tackle these problems due to a lack of legislative competence; particularly, in relation to controlling acquisitions and mergers between companies.
Acquisitions by means of minority shareholding – Gazprom and Rosneft
It has been a common practice for energy companies to buy minority shares in various companies in order to increase their dependency on the acquiring party. Often the Commission blocks these attempts if they constitute threat to competition6. However, when the acquisition of a minority shareholding is unrelated to an acquisition of control, the Commission cannot investigate or intervene against it7. The consequences of the European Commission’s inability to tackle energy related issues is perfectly evidenced by the 2009 Russian-Ukrainian gas crisis, when supplies to some of the EU countries were stopped by almost 100%. Nevertheless, until now no strong preventative measures has been undertaken.
Both Gazprom and Rosneft, since their very early presence in the European market, have been investing in transport-export and the distribution-retail sectors. For instance, in Central Europe and the Balkans Gazprom holds minority stakes in companies which operate all local gas pipelines. In these companies Gazprom has a special class of rights attached to its shares and, therefore, has a decisive influence regarding the companies’ management. In fact, Gazprom’s investments are spread all over the European Union.
The success of Gazprom’s strategy is proven by data illustrating the increase in its gas storage capacity in the EU. According to studies conducted by the Centre for Eastern Studies (OSW), Gazprom’s gas storage capacity is constantly growing because Gazprom acquires European companies that already have gas storage facilities or are about to start building them.
Perhaps, one of the largest gas storage facilities that Gazprom has a minority shareholding in is “Haidach” in Austria. Although Gazprom owns only 33.3% of the shares, as is usually the case, there are special rights attached to its stake, which allow Gazprom to use 1.7bcm of the facility’s capacity out of 4.3bcm overall capacity8.
Similar numbers could be given in terms of gas storage facilities in the Czech Republic and the Netherlands. In the Czech Republic Gazprom owns a 50% stake in “Damborice” storage facility, which by 2018 will give Gazprom an extra 0.456bcm capacity to store its gas9. Similarly, in the Netherlands Gazprom owns a 42% stake in “Gas Storage Bergemeer”, which allows Gazprom to use 1.9bcm capacity10. These examples could be extended further with ownership in Latvia, Germany or even the United Kingdom; however, the conclusions would remain the same – using its special type of rights attached to its shares, Gazprom is able to gain significant control over these companies and thus get the opportunity to reach consumers directly even though these transactions potentially have anti-competitive effect. In fact, the anti-competitive effect is quite clear in this respect. Gazprom could influence the prices by increasing its share in the spot market11 or it could even foreclose other consumer-related (distribution) gas suppliers.
However, although Gazprom’s control over gas storage capacities is worrying, it is not as worrying as the extent of the control Russia has over pipelines that are used in order to supply both gas and oil to Europe. It must be noted that neither of the companies control the pipelines de jure. Due to obvious competition law-related reasons, most of the pipelines are controlled by another state-owned company – Transneft. However, some pipelines are also controlled using minority shareholdings in certain European companies which operate the pipelines.
Perhaps the best example of how this works is the Yamal-Europe pipeline. The actual pipeline is very important both to Europe and Russia as it connects Siberia with Germany. Not surprisingly, EuRoPol Gaz owns its European part, which is a joint venture of the Polish PGNiG (48%), Russian Gazprom (48%) and Polish Gas-Trading S.A. (4%). Clearly, Gazprom does not have control over the pipeline, however, most likely, it enjoys a decisive influence over the decisions of the company. In fact, presumably, Gazprom would not be able to own this pipeline fully, as Gazprom already owns majority stakes in some other core pipelines, such as the Nord Stream.
Another strategically important pipeline, which is supposed to be used to export oil, is the Burgas-Alexandroupoli pipeline. This pipeline is generally presented as an alternative route for Russian oil, which delivers it from the Black Sea to the Greek Aegean port of Alexandroupoli. Although its development is currently suspended due to environmental issues, it can be renewed in the future. In this case, the pipeline was to be constructed and owned by the Dutch company called Trans-Balkan Pipeline B.V., which is a joint venture of Transneft, Rosneft and Gazprom Neft. Once again, neither of the companies should have acquired control over the pipeline; however, it is not hard to infer who would have had decisive influence over it.
The EU Commission’s lack of power
Under current EU antitrust legislation, the EU Commission can only interfere with mergers and acquisitions where concentration would relate to acquisition of control for the purposes of the European Merger Regulation 139/2004. The EUMR sets two basic conditions: first, there must be a concentration between at least two undertakings and, secondly, the turnover of the undertakings must meet a certain threshold laid down in Art.1 (3) of the Regulation12. However, concentration will only be prohibited if it “significantly impedes effective competition in the market or in substantial part of it, in particular as a result of the creation or strengthening of a dominant position”13.
What the EUMR does not recognise is that competition can be compromised even where non-controlling minority shareholding is acquired.
One of the examples is where a minority shareholding has been acquired in a competitor. Here the acquisition could possibly lead to a reduction or an increase in the acquiring party’s product prices, depending on the financial interest that the company has. This, of course, could be done in a number of ways. For instance, if the acquiring party wishes to strengthen its own position, it can limit competitive strategies available to the competitor using its voting powers. Accordingly, having weakened its competitor, the acquiring party would be able to raise its own product prices.
Surely, the threat in relation to minority shareholding does not occur as often as in relation to control-gaining shareholding. Nevertheless, there are some specific industries where minority shareholding can be crucial in relation to protecting a healthy market. One and, perhaps, the most important industry is energy.
The Commission’s reform – a failed attempt to safeguard the energy market?
The Commission has proposed a potential reform in its White Paper “Towards more effective EU merger control”14. The Commission proposes ‘a “targeted” transparency system’, under which the parties would be required to submit a notice informing the Commission of acquisitions of non-controlling minority shareholdings in cases where the transaction creates a “competitively significant link”; however, the problem is that it would only apply to the competitors or vertically integrated companies. Therefore, it might not be sufficient enough to deal with the acquisitions in the energy market as the energy sector is broad, it consists of several markets and often the key players are powerful energy conglomerates. Due to this reason it is unclear whether this proposal would be sufficient to deal with non-controlling minority shareholdings in the energy sector.
However, the two main issues that the current proposal fails to address are: failure to take into account the fact that in cases of the energy sector, a majority of the companies are de facto controlled by the states and the failure to deal with pre-existing dominance of non-EU companies.
Nevertheless, solution does exist. Presumably, the Commission could adopt measures that would allow it to regard certain companies as one economic entity controlled by the state. This would avoid situations where, for instance, a pipeline is owned by a Greek company, in which Transneft has a special class of shares, allowing Transneft to have almost certain control over the pipeline. By enjoying such control Transeft could grant a ‘permission’ to Gazprom or Rosneft to use the pipeline. This situation occurs because the owners of the companies are the same – the state. Therefore, the Commission should tackle this issue by forming a broad term of ‘acquirer’ and ‘acquisition’ in terms of minority shareholding.
In addition to that, the new legislation in its current version would not be powerful enough to rectify what has already been done. As it has been indicated, Gazprom and Rosneft have already rooted themselves in Europe with a strong power and now economically it is practically impossible to replace these companies with some other suppliers. Nevertheless, the Commission could tackle this issue by giving itself a power to overlook certain previous minority acquisitions that might have had strong anti-competitive effect. Nevertheless, presumably, this could not be done in the same piece of legislation due to strong negative implications to ordinary businesses. Therefore, a new piece of legislation could be drafted in respect to this issue.
Where do we stand?
Today the reality is clear and unambiguous: Gazprom and Rosneft are dominant gas and oil suppliers within the European Union. Currently, of Europe’s total gas consumption, 60% is imported, nearly half of that via Russia. More than 30% of Europe’s oil is also imported from Russia. Certainly, the high percentages could not give rise to any threat as often there are several companies supplying these goods to Europe. Nevertheless, most of these companies are de facto controlled by the state. Therefore, Europe is dealing not with private undertakings, but rather with the state itself.
It seems the Commission has tried to rectify the current situation by suggesting the implementation of a new piece of legislation, which would allow the Commission to dig into acquisitions of minority shareholdings. However, the White Paper has been focusing on the general market rather than the energy sector. In fact, the proposal seems to be adequate enough to catch majority of minority acquisitions in the energy sector, yet some of the issues will remain unsolved.
In order to tackle the issues fully, the Commission would have to adopt another piece of legislation, specifically directed towards the actions in the energy market. Some of the core suggestions would be, firstly, to adopt broad definitions of ‘acquirer’ and ‘acquisitions’ in order to catch all possible minority concentrations on behalf of states; and secondly, to adopt measures capable of rectifying damage done to the market by previous minority acquisitions that had anti-competitive effect. However, the adaptation of these or some other similar measures is yet to come.
1 Energy security has been a priority of policymakers since a 2009 gas dispute between Russia and the Ukraine disrupted supplies to the Union: http://www.euractiv.com/sections/energy/eu-dependent-russian-gas-foreseeable-future-warns-iea-310469
2 Vladimir Urutchev, ‘Energy policy: reducing dependence on Russian gas’: https://www.theparliamentmagazine.eu/articles/opinion/eu-energy-policy-reducing-dependence-russian-gas
3 International Energy Agency, ‘Energy Policies of IEA Countries. European Union’, 2014: http://www.iea.org/Textbase/npsum/EU2014SUM.pdf
4 Member State’s Energy Dependence: An Indicator-Based Assessment, Occasional Paper, 145/April 2013
6 2011 acquisition of shares in the Central European gas hub
7 According to EUMR No. 139/2004 acquisition of control is compulsory to be caught by the Regulation
8 Szymon Kardas “The Tug of War. Russia’s Response to Changes on the European Gas Market”, (OSW Studies), Number 50, Warsaw, September 2014
9 Szymon Kardas “The Tug of War. Russia’s Response to Changes on the European Gas Market”, (OSW Studies), Number 50, Warsaw, September 2014, p.26
10 Szymon Kardas “The Tug of War. Russia’s Response to Changes on the European Gas Market”, (OSW Studies), Number 50, Warsaw, September 2014, p.26
11 Howard Rogers (Oxford Institute for Energy Studies) ‘Paying the piper. Gazprom and European gas markets’, The Economist, 4 January 2014
12 The European Merger Regulation 139/2004
13 Art.2 (2) of the EUMR No. 139/2004
14 “Towards more effective EU merger control” COM (2014) 449 final
Mantas Kuncaitis is member of the Homeland Union – Lithuanian Christian Democrats presidium and lawyer at the Lithuanian Freedom Fund. This article is based on the author’s dissertation “Legal regulation of concentrations by means of minority shareholding: The European Commission’s lack of power and the unprecedented threat of Gazprom and Rosneft to the EU internal market”, University of Greenwich, London.