Gazprom’s sales to Europe this year will be the highest since the 2008 recession despite its insistence on retaining oil-price indexation in long-term contracts, says Professor Jonathan Stern, chairman of the natural gas research programme at the Oxford Institute for Energy Studies (OIES).
Speaking to Gastech News at the November European Autumn Gas Conference in Brussels, Stern said Russian gas supplies to Europe did not recover in the period up to 2012 because Russia had been refusing to adapt its prices to hub levels.
“However,” he said, “in 2013, several other things happened. Firstly we had the very cold spring, which meant that companies had to buy gas to refill depleted storage. At the same time Norwegian supplies dropped off a little. Then we have a terrible crisis in North Africa that nobody in the gas industry wants to talk about despite the fact that this is by far the most serious supply problem facing European gas.
“The most interesting thing is that, though the Russians keep saying that they won’t abandon oil indexation, they have adapted their prices through a strange mixture of P0 reductions and rebates. They've adapted their prices in the competitive markets to the point where they are selling quite a lot more gas. How much more this year I don't know, but it looks like 10 Bcm more than in 2012. But they're doing what they should be doing, which is competing in competitive markets. Prices are still a bit above hub levels, but not more than 5% in most of the markets.”
Russia’s new pricing strategy in Europe is likely to be partly a response to the strategies of other major suppliers, such as Norway, which has been more accommodating when it come to linking contracts to hub pricing. Another crucial factor may well be the competition that Gazprom is facing at home.
“Many people have neglected what's happened in the domestic Russian market,” says Stern. “which, however you measure it, is somewhere between 400 and 450 Bcm – so, much more important than the volumes going to Europe. Many people don't seem to have noticed how that market has become incredibly competitive as prices have risen and big companies have begun to fight for market share.
“Gazprom has lost very large chunks of that market, in particular the most profitable parts, while, among others, Novatek and Rosneft have been the major beneficiaries.
“People also don't seem to have noticed that that the Russian market has become much more liberalised . . . the way in which transportation has been liberalised is very interesting.”
The question of how markets are driving change in Russia will be a central theme of the latest “big book” that the OIES will publish in 2014, entitled “The Russian gas matrix - how markets are driving change”.
“It's not the upstream that’s driving anything,” says Stern. “It’s markets and prices which are going to shape what happens with Russian gas in the next two decades. They have increasingly shaped what’s happened in the last few years.”
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