The EU has settled a seven-year dispute with Gazprom after the Russian state-controlled energy giant agreed to change its operations in central and eastern Europe.

The deal, announced on Thursday by the EU’s competition commissioner, Margrethe Vestager, comes at a time of tensions between Russia and Europe over Ukraine, Syria and the poisoning of the Skripals in Salisbury, which has taken British-Russian relations to a new low. Meanwhile there is division within the EU over the construction of the Nord Stream 2 pipeline between Russia and Germany.

Vestager sought to isolate the case from the political turmoil. “This case is not about Russia, this case is about European consumers and European businesses and making the market serve them,” she said. “This is about what rules to play by, no matter your flag, no matter your ownership.”

Under the terms of the deal, Gazprom will be banned from imposing restrictions on how its customers in central and eastern Europe use gas. Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Slovakia will no longer be banned from exporting gas to another country.

The deal aims to answer concerns that customers in five countries were being over-charged for their gas. From now on, customers in Bulgaria, Estonia, Latvia, Lithuania and Poland have the right to demand a price in line with those in Germany and the Netherlands.

If Gazprom fails to respond, these customers can take their complaint to an arbitration body in the EU, which is empowered to impose a lower price.

Some governments are unhappy about the commission’s decision not to fine Gazprom for its past behaviour. Lithuania’s prime minister, Saulius Skvernelis, described the proposed settlement as “strange”, Reuters reported.

Acknowledging that some would have liked to have seen Gazprom fined, Vestager said that option was not in the best interests of European consumers.

“With today’s decision, Gazprom has accepted that it has to play by our common European rules, at least if it wants to sell its gas in Europe. It has accepted to play by a rulebook that is tailor-made to ensure that European customers can benefit from the free flow of gas this very day.”

She said failure to comply could lead to a fine of up to 10% of global turnover, a step that can be taken without another lengthy legal investigation.

“This is not empty theory,” she said. “In 2013 we fined Microsoft over half a billion euros when the company broke its obligation. In other words, the case doesn’t stop with today’s decision. Rather, it is the enforcement of the Gazprom obligations that starts today.”

Gazprom’s deputy chief executive, Alexander Medvedev, said he was satisfied with the settlement, describing it as “the most reasonable outcome for the well-functioning of the entire European gas market”.

The price of crude in rubles has surged to an all-time high, but Russian oil producers will miss out on record first-quarter profit because of a rising tax burden.

Investors in Lukoil PJSC or Rosneft PJSC — which is due to publish earnings on May 14 — will probably have to wait until later in the year to see the full benefit of the surge in crude. So far, Russia’s government has done a better job of translating record prices into revenues, said Denis Borisov, a director at the Ernst & Young Oil and Gas Center in Moscow.

“The golden rain will likely fall on the companies in the second quarter if key conditions — the oil price and ruble exchange rate — remain in place,” Borisov said on Thursday.

The price of international benchmark Brent crude averaged 3,823 rubles a barrel ($67.23) in the first quarter, just a hair away from the previous quarterly record in 2014. It’s risen further to as high as 4,881 rubles this month. Yet the price of Urals crude in Russia’s currency, net of taxes, was 3 percent lower from January to March compared with the fourth quarter due to higher oil-extraction levies, according to Deutsche Bank AG.

Tighter Burden

Tax costs of Russia’s producers have been rising since last year

The industry also faced a jump in petroleum-product excise tax — an additional support to the state budget to fund road construction that may reach 40 billion rubles this year, according to Finance Ministry’s estimates made last year. However, Russia’s domestic gasoline price increases lagged crude in the first quarter, possibly showing that companies were holding back from shifting part of this burden onto consumers ahead of presidential elections in March, said Ildar Davletshin, an energy analyst at Wood & Co.

The revenue of state-run Rosneft, which pumps more than 40 percent of Russia’s oil, could have hit a record of 1.73 trillion rubles in the first quarter, according to Renaissance Capital. However, it expects net income to drop 19 percent from the fourth quarter to 81 billion rubles.

Rosneft plans to start its first-ever share buyback program this quarter, spending $2 billion over three years. That means investors will also be closely watching cash flow. Renaissance Capital expects the company to generate 75 billion rubles in the first quarter, almost 16 percent lower than a year ago, Bloomberg calculations show.

Several of Rosneft’s peers are planning or implementing buybacks as a way to share the rewards from rising crude prices with investors. Lukoil announced a five-year repurchase scheme worth as much as $3 billion back in January — four months before Rosneft. The move boosted the stock’s appeal to investors and helped close the gap in the market value of the rivals.

For 2018 as a whole, Lukoil and Gazprom Neft PJSC are expected to post big gains in net income, according to analysts surveyed by Bloomberg. Rosneft’s cash flow should more than double to some 550 billion rubles, which is enough to cover interest payments, dividends and as much as half of the planned share purchases, Davletshin said. Another Rosneft plan — to cut its debt by 500 billion rubles this year — may need proceeds from selling non-core assets, he said, a move the company is already considering.

Still, the size of the tax burden remains a risk, particularly as Russia forms a new government. President Vladimir Putin’s administration will soon lay out targets for the economy and budget for his fourth term. While the state has promised to avoid significant changes in oil taxes this year, Prime Minister Dmitry Medvedev said this week that Russia will need at least 8 trillion rubles in additional spending to fulfill its plans

The 18th ministerial meeting of the Gas Exporting Countries Forum (GECF) in Doha tomorrow will further explore ways to strengthen the global gas market, which faces numerous challenges including lower prices.

The Doha-headquartered GECF currently accounts for 42% of the global gas output, 67% of the world’s proven natural gas reserves, 40% of pipe gas transmission, and 85% of global LNG trade.
The GECF seeks to increase the level of coordination and strengthen the collaboration among member countries, and to build a mechanism for a more meaningful dialogue between gas producers and consumers to ensure stability and security of supply and demand in global natural gas markets. 

It also aims to support its members over their natural gas resources and their abilities to develop, preserve and use such resources for the benefit of their peoples, through the exchange of experience, views, information and coordination in gas-related matters.
Saudi Arabian Energy Minister Khalid al-Falih is expected to travel to the Qatari capital, Doha, this week for meetings with oil-producing countries on the sidelines of an energy forum, three sources familiar with the matter said, according to a Reuters dispatch. Al-Falih is expected to meet other energy ministers from Opec and possibly Russian Energy Minister Alexander Novak on Friday, the sources said, speaking on condition of anonymity.
It was not immediately clear whether al-Falih would meet Iranian Oil Minister Bijan Zanganeh, the sources said, as there was no confirmation from Tehran yet on whether Zanganeh would attend the gas forum.

Qatar and Russia are members of the GECF, while Saudi Arabia is not.
The natural gas market is very dynamic and requires liquidity, flexibility and transparency for it to function effectively, GECF noted. It, therefore, needs multiple supply sources, users and comprehensive infrastructure for transmission and distribution. The natural gas market is highly developed in the US Europe and Asia.