The EU’s gas-buying cartel: 5 reasons why it’s going to be messy
Russia’s invasion of Ukraine is reviving an old scheme — for the EU to form a powerful buyers’ cartel and buy natural gas as a bloc.
If it works, the idea would be for the EU to play a key role in global gas markets — and to boost its geopolitical heft — while slashing its reliance on Russian energy imports.
The framing seems simple. In a 52-word paragraph, EU leaders last week agreed to “work together on voluntary common purchase” of gas and other fuels “making optimal use of the collective political and market weight of the European Union and its Member States to dampen prices in negotiations.”
The model is the bloc’s success in jointly buying vaccines, “where EU-wide action was crucial to guarantee sufficient supplies of vaccines for all,” the Commission said in a communication.
But gas is much more problematic than medicines.
There’s a reason why past efforts to set up a common gas buying system fizzled. A buyers’ cartel raises potential problems with EU competition law, could see countries squabbling among themselves for access to supplies, creates potential clashes between energy companies and governments and may blow up the current global gas market.
One cautionary example is nuclear fuel, where past efforts at voluntary joint purchases have failed, said Leigh Hancher, senior adviser in the antitrust and competition law practice at Baker Botts in Brussels.
“From the very early days member states, especially France, always opposed it, clipped its wings and made sure it wouldn’t work,” she said. “I really wonder why we think we won’t have these problems for gas supply. ”
Here are five reasons why an EU gas buyers’ club will be very difficult to set up.
1. It only works if everyone’s in
Purchasing power works best if you’re buying a lot — and right now it’s not clear what percentage of the bloc’s gas would fall under the proposed joint procurement program.
Under the scheme, the Commission sees itself setting up a contracting platform for interested countries, “collecting gas orders and matching supplies” through “bilateral negotiations with major gas producers.” Representatives of EU countries would sit on a steering board for the Brussels-led task force.
But many EU countries are already tied into long-term gas contracts. If the joint platform is only buying the equivalent of an extra top-up, it’s less attractive.
2. Getting the gas is going to need political muscle
The current global gas crunch means producers command record-high prices for their limited supply — and would need serious sweeteners to consider selling to the EU at lower rates, especially if that means jilting long-standing customers.
“I don’t see any producer giving up profit and traditional supply relationships unless they get a huge political benefit from it, which probably the EU can’t give, it’s something only the U.S. can do,” said Brenda Shaffer, senior fellow at the Atlantic Council’s Global Energy Center and energy professor at the U.S. Naval Postgraduate School.
Georg Zachmann, senior fellow at the Bruegel think tank in Brussels, agreed.
“There’s a lot of money involved, and if the Commission is going to be signing deals worth dozens of billions of euros with state companies in difficult countries, there are political considerations that might get into the decision on who to buy from and how much to pay them,” Zachmann said.
But, he added: “We need it. It does not make sense for all these different [national] ministers going to all these different places offering whatever they can offer in terms of side deals so that their companies can get the gas.”
3. It could break EU competition rules
Ganging up to force prices down could be seen as an illegal cartel, depending on who’s doing the buying and how much confidential price information is being shared.
The Commission was vague on who the official purchaser would be, while French President Emmanuel Macron said: “It is not the governments but companies that [would] sign these contracts.”
But having the EU negotiate favorable deals for private or partially state-owned energy companies on a special platform raises antitrust alarm bells.
“All these companies that would participate in the buying cartel — or if you’re nice, the joint buyers’ club — would be very large in the member state they come from, most likely government-owned, so then one question is, who gets to decide who joins it and what are the conditions for joining?” said Kim Talus, energy law professor at Tulane University in Louisiana and at the University of Eastern Finland Law School.
Hancher agreed. “If you’re [French gas firm] Engie, let’s say, and you were in there, you’d be quite happy, and if you’re BP and you’re not, you’d be less happy,” she said.
The other problem is that to ensure you’re getting a better deal, “you have to share relatively sensitive commercial information which might lead to tacit collusion, because everybody knows everybody’s price, which is normally not disclosed to competitors,” Talus added.
There are ways around that: Companies could confidentially share information with the Commission. EU competition law also allows for exemptions, like proof the agreement resulted in improved distribution of goods and a more fair sharing of benefits among consumers.
Joint buying could see companies that normally compete against each other sharing information on consumption levels, pricing and market share. “You’re not supposed to have corporate agreements that involve pricing,” said Lena Sandberg, partner in the antitrust and competition practice group at Gibson, Dunn & Crutcher in Brussels.
4. Divvying up the gas will be a headache
EU countries have different levels of gas reliance on Russia, and not every member has storage facilities or direct access to an import terminal for cargoes arriving via ship.
That creates problems when apportioning volumes and factoring in final prices, which will differ once fees are added in for re-liquefying LNG cargoes and paying transit costs to reach the destination country via pipeline.
Creating a club that would buy, liquefy and transit gas could raise even more antitrust concerns, Talus said.
“The main challenge is distributional in nature,” said Zachmann. “Finding a way to ensure the risk sharing is done in a way that is acceptable to all … there are a few countries that are more responsible than others for the current situation, and finding a nice way out for them by letting others pay is not going to fly easily.”
There’s also no guarantee that countries holding the gas in storage will send it to a neighbor as promised if faced with a cold snap or supply emergency.
EU countries are notorious for squabbling among themselves, and once the moment for international unity around the war in Ukraine fades, these tendencies are certain to return.
Sandberg played out future scraps over gas allocation. “Yes, I get more than you; no, this was not our agreement. Why does Germany get priority? How come Spain can have price caps on gas and at the same time get access to priority gas? Who decided on this allocation? Based on new figures or old figures? … I can keep going,” she said.
5. It’s already boosting gas prices
The Commission wants the buying cartel to be in place by this summer so that the EU can fill up its storage before the winter heating season.
But the EU is such a behemoth on the gas market that every utterance out of Brussels affects prices. In March, the Commission proposed mandating that countries fill up their storage to 90 percent by October 1, which sent prices soaring from about €70 per megawatt-hour in January to a record €210 in early March. The Commission quickly retreated and said it wants storage filled to 80 percent by November 1, causing prices to drop back to €108.
“Just by saying what they wanted to do, they made it harder to actually do it,” said Tom Marzec-Manser, head of gas analytics at ICIS.
That’s an example of unexpected consequences of a market intervention, and a buyers’ bloc could have similar impacts.
“Market intervention will continue to distort future gas pricing,” said James Huckstepp, a gas analyst with S&P Global Platts.
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