Gazprom mulls new gas auctions in 2017

Russian producer Gazprom is likely to hold a new gas auction in the Baltic states this year, a source close to the matter told ICIS on the sidelines of the Flame conference in Amsterdam on 9 May.

The source added that some suppliers in those countries have already used gas intended to last for the whole of 2017.

Head of Gazprom Export, Elena Burmistrova, told the conference that the company was going to continue developing the auction mechanism. Burmistrova said more auctions are planned for this year as Gazprom is trying “to feel the market, to understand it more deeply and to build confidence within Gazprom Export”. “This is what we are exploring and further trying for our new markets,” Burmistrova said referring to the auction mechanism as a way of selling gas.

The source said that auctions will be held in the regions where the previous auctions were conducted. Gazprom held two auctions in 2016, one in the Baltic states and one in central Europe, and one auction in 2015 in central Europe.

Burmistrova said that auctions have helped Gazprom diversify its portfolio in Europe. “Last year, we made a lot of effort to balance our [natural gas] portfolio, half of which is oil-indexed and half is hub-indexed now,” she said.

When asked whether Gazprom will be moving to more hub indexation, she said: “This is the future, but we will not do it in the short-term.”

She added that in the short-term the company will keep oil-indexed contracts as prices on some European hubs were still not fully “reliable.”

“We see that some hubs are more advanced, like the [Dutch] TTF, while some may still be used by regional [market participants] to their advantage,” she said.

Burmistrova added that Gazprom’s investment into LNG projects are based on the oil price. The company is planning to invest into new gas projects as it expects a growth in European gas demand in the next seven years.

Burmistrova said that last year Gazprom had export a record amount of gas into Europe, with its share on the European market rising to 34%.

“Theoretically, we want to increase our share [further], but I’m not sure the European Commission will allow that to happen,” Burmistrova said.

Competing for the Baltics

Previously, Gazprom was saying that gas auctions will remain a niche in its sales strategy, with long-term contracts remaining the core channel for delivering gas to Europe.

However, the company is facing tough competition in the Baltics and southeast Europe.

LNG terminals in Poland and Lithuania have begun operations and import capacity in Estonia could come online by 2020. The Lithuanian terminal can already supply Latvia and Estonia, while the Revithoussa facility in Greece can serve Bulgaria.

Further supporting trade in the region, Latvian incumbent Latvijas Gaze’s 20-year monopoly on the network came to an end on 3 April, officially opening the market to competition (see EGM 28 April 2017).

Compared with 2012, combined LNG supply to the Greek, Polish and Lithuanian terminals has more than doubled from 976,147 tonnes to 2.4m tonnes in 2016, according to LNG Edge. This is less than a quarter of the aggregate technical capacity across the three facilities, which currently stands at 11 million tonnes per annum (mtpa) with the potential for a further increase of 3.8mtpa in the future.

In order to keep its market share, Gazprom had provided a discount of around 20% for gas supplied to Lithuanian state-owned supplier Lietuvos Duju Tiekimas for the past three years, but the discount should expire this summer. The head of the exchange and traders polled by ICIS expect liquidity at Lithuanian gas exchange GET Baltic to increase once a Gazprom price discount expires.

“We hope that with the expiration of the Gazprom discount GET Baltic will become a more attractive and competitive instrument for the Baltic gas market,” GET Baltic’s acting chief executive Gintaras Buzkys told ICIS. “Liquidity should also increase respectively.”

Traders active in the Baltic market echoed this view: “It is not easy to compete with the Gazprom price,” one trader told ICIS. “Once the discount ends it should be better for the market.”

Trade on the bourse is currently limited to single-day delivery periods, with shippers permitted to deal up to 150 days forward, intra-day and one ex-post day which means the day before. But Buzkys says monthly products will also be launched on 1 July.

Trading activity on the exchange is often erratic and largely limited to residual balancing by shippers. Traded volume on GET Baltic in the year to 11 May 2017 stood at 14.35GWh, compared with 77.52GWh in the same period of 2016. There was particularly low trade in February and March 2017, with only just over 1GWh across the two months combined, versus over 36GWh in February and March 2016.

Almost all deals so far in 2017 have been ex-post, although there have also been a handful of Day-ahead trades. GET Baltic currently has 61 registered participants from across the Baltic region. ekaterina.kravtsova@icis.com and julie.fisher@icis.com