Gazprom’s gas price pledge will not transform markets – experts
Russian exporter Gazprom’s promise to incorporate more frequent price review clauses in its oil-linked long-term natural gas contracts is unlikely to be a quick fix for liquidity and competitive prices in eastern European countries, according to market experts.
Gazprom has made a raft of promises over changing the way its long-term gas supply contracts are written, on which the European Commission is seeking feedback ( click here to read Gazprom’s proposals ). The Russian supplier has said it would give customers a right to trigger a review when the prices they are paying diverge from key hub benchmarks ( see ESGM 13 March 2017 ).
This will be a major win for some eastern European countries, like the Baltic States or Bulgaria, where price revision clauses do not currently exist. Oil is the dominant price driver in these countries, since crude is Gazprom’s preferred reference and is dominant within the supply contracts of eastern Europe.
The commitments seek to end a long-running antitrust case over alleged anti-competitive behaviour in the region.
Gazprom’s pledges have been heralded by the commission as a catalyst that will allow the free flow of gas in central and eastern Europe at competitive prices, and will integrate gas markets in the region.
More frequent price reviews in long-term contracts, which could see eastern European prices move from following the oil price to being more influenced by supply and demand fundamentals, echo the transformation of western markets in the late 2000s into competitive hubs ( click here to read the ICIS briefing on oil indexation in European gas contracts ).
In 2009, demand for gas in Europe plummeted following a recession in 2008. Increased LNG imports, as well as take-or-pay contracts forcing shippers to buy more gas than they could use, meant unwanted supply flooded into Europe. At the same time crude prices were recovering, leading to an increase in the price of oil-indexed long-term supply contracts to Europe.
In response to this gas glut, northwest European producers began to agree to sell gas to western European customers on contracts priced at continental European hubs. It did not take long for gas prices to begin reflecting supply and demand influences, breaking away from the higher oil price trend in 2010.
Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said Gazprom’s commitments would not be a major spark for change in eastern European countries including Bulgaria, the Baltics and Hungary. This is because supply to these regions is too small to make a difference.
“It’s not a big deal at all. The EU has made a big fuss about it, but these volumes are small. Annual supply to the Baltics is less than 5 billion cubic metres (bcm), and to Bulgaria is 3bcm. The only market of any size is Poland and they can get gas from the German market,” Stern said.
He said market development and liberalisation meant the eastern markets in question were only around four or five years away from attaining hub-status anyway.
“If you are a [real] hub, you will get a measure of hub prices. It is just that you don’t usually get this without a fight,” he said.
David Stokes, director at consultancy firm Timera Energy, was sceptical over whether there would be an immediate change to the influence oil has on eastern European gas prices as a result of Gazprom’s pledges.
“The question is to what extent will the influence of oil-indexation on hub prices be eroded. Don’t expect big changes in the near term. This will depend on a lot of renegotiations that will need to be done on a company by company basis,” Stokes said. firstname.lastname@example.org