ICIS view: Gazprom looks to defend its home turf

Tom Marzec-manser

14-Mar-2017

In an effort to stave off sizable fines from the European Commission and to end an antitrust investigation dating back to September 2012, Russia’s Gazprom on Monday said it will fall into line with the fundamental rules and practices of the EU’s natural gas market. It agreed – for eight years at least – to remove various destination clauses and to increase the relevance of hub-based pricing in contracts.

It is highly unlikely that after almost five years, Brussels would have accepted anything less.

But Europe’s largest supplier also went one step further, which seemingly came as a surprise to the commission, given the comments of the EU competition commissioner. Gazprom offered to allow its major buyers in Poland, Slovakia and Hungary to undertake swaps with the four countries which are most isolated in terms of gas supply: Bulgaria and the Baltic States of Lithuania, Latvia and Estonia.

Yet this swap proposal, along with the other commitments, are not altogether startling when taken in context of Gazprom’s need to defend its European market position. Not only against the EU and its liberalised market design, but also against a reshaping global gas market that has been driven by LNG shipments; and the future arrival of Azerbaijani volumes.

Monday’s proposals are really a continuation of a slight change in tack in strategy seen recently, rather than an altogether new approach. After all, in the last couple of years Gazprom has used auctions to sell volumes directly to customers, and some buyers in central Europe already have long-term contracts that are increasingly a hybrid between hub- and oil-indexation, where spot prices are used as price floors and ceilings.

Added to this, Gazprom’s role in trading directly on the hubs has also grown through the full ownership of WINGAS, adding to the activities already undertaken by Gazprom Marketing & Trading.

Nord Stream 1 and 2

The existing and proposed Baltic Sea pipelines cannot be viewed as separate from these antitrust developments, regardless of how the commission segments its policy work. Gazprom wants to sell more gas into the EU to fill the widening supply gap left by dwindling Dutch and British production, and so has already fallen into line on how these volumes are, and could be, shipped once they reach the German beach.

Even though Nord Stream 2 will largely deliver gas towards central Europe, Gazprom knows it needs to keep the various EU regulators and authorities onside. The outcome of the current case on OPAL, which carries volumes delivered by the original Nord Stream pipeline through Germany to the Czech border, therefore matters greatly. So any well-received forward looking actions actively proposed by Gazprom with regards to antitrust will have a sentimental bearing on the entire Nord Stream venture.

Supply competition

While the full and proper liberalisation of central and eastern European markets historically posed something of a risk to Gazprom, it is increasingly clear this is no longer an issue to the supplier. As long as the gas consumed in the region is initially exported from Russia by Gazprom this will now suffice. Ukraine purchasing gas through middlemen, which has been delivered via Nord Stream and then shipped into the west of the country from Slovakia is a clear example.

Increased supply competition mainly in the form of LNG, but also via the southern corridor, poses a much bigger problem for Gazprom.

Turning its back on Gazprom, Achema, the single largest gas buyer in the Baltic States, earlier this month showed signs it would return to the LNG market having procured new terminal capacity. On Tuesday Poland’s incumbent PGNiG increased its off-take of Qatari LNG. In Greece, a Norwegian spot cargo is due to arrive at Revithoussa within the week. Northbound flows into Bulgaria should not be discounted, which again could reduce the need for Russian supply.

And should the IGB interconnector between Greece and Bulgaria be built then buyers from across the region, and Bulgaria in particular, would truly be able to procure volumes produced well-beyond Russia’s borders. IGB would be both a gateway for Azerbaijani gas to enter the country and for LNG.

This is why the Baltic and Bulgarian swap offer is key. It would allow PGNiG, along with fellow incumbents of Hungary and Slovakia – MFGK and SPP – to become wholesalers in these otherwise poorly interconnected markets of Bulgaria and the Baltics. In this way, Gazprom remains the main supplier to central Europe, while also fostering a market.

This would be a definite win for Gazprom. And for Brussels. In a few months’ time, it will become clear if the wider-market agrees. tom.marzec-manser@icis.com

READ MORE

Global News + ICIS Chemical Business (ICB)

See the full picture, with unlimited access to ICIS chemicals news across all markets and regions, plus ICB, the industry-leading magazine for the chemicals industry.

Contact us

Now, more than ever, dynamic insights are key to navigating complex, volatile commodity markets. Access to expert insights on the latest industry developments and tracking market changes are vital in making sustainable business decisions.

Want to learn about how we can work together to bring you actionable insight and support your business decisions?

Need Help?

Need Help?