Gazprom export target in doubt as contract prices rise

22 August 2018 16:53 Source:ICIS
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LONDON (ICIS)--Russia’s Gazprom is likely to increasingly need to sell natural gas to its customers on a spot basis this winter, rather than under long-term contracts, if the company is to hit its target of supplying Europe with 200 billion cubic metres (bcm) by the end of the year, ICIS analysis suggests.

This may be the rationale behind the recent move by Gazprom Export to establish an auction platform through which prompt and curve contracts will be sold to the market.

Analysis of the TTF’s near curve relative to an array of notional long-term oil-indexed contracts shows the discount held by the Dutch hub through the six months of Winter ‘18 will be the widest for a winter-period since Winter ’15.

This suggests buyers who have the capability to nominate down their long-term contract gas under the terms of their take-or-pay clauses, will do so, and in-turn will look to procure any needed replacement volume on the spot market. If this happens it will threaten the probability of Gazprom selling a record volume of gas into its core market.

All-time high?

Gazprom earlier this year said it could reach an all-time high of 200bcm for European exports if the strong off-take demand of the first half of the year continued. But while the spreads between the TTF and long-term contracts were relatively favourable during the opening six months of 2018 – and in February and March in particular – the pricing levels are now increasingly diverging.

Year-to-date, Gazprom has exported almost 122bcm, but this is only up 2.4% over the same period in 2017. Last year the company delivered 190bcm in total, so on the current rate Gazprom will not hit its target, regardless of how the volumes are contracted.

Gazprom already sells spot gas on Europe’s hubs through subsidiaries Gazprom Marketing and Trading as well as WINGAS. Establishing an auction platform would allow it to also include other buyers that are away from the centres of liquidity in which these two units usually operate and to stand a better chance of ramping up its exports.

More importantly for the Russian company, by providing alternative contracting terms to all of its current customers Gazprom will be able to protect its market share, even when its traditional pricing terms are not competitive.

633 hybrid to TTF spreads

While the particulars of most long-term contracts are not public, ICIS modelled an array of notional Brent-lagged prices, all of which show an increasing premium to the TTF over the coming winter. Of particular market relevance is the 633 contract, which takes the average oil price over a six month period, with a three-month lag, and then applies the price to the subsequent quarter.

Weighting the 633 – and other contracts – with a 60:40 split to the hub price then models those buyers who have an element of hybrid hub pricing too.

Brent and TTF prices suggest that on average hubs which are valued at a €2/MWh premium to the Netherlands – like those in central Europe – would be $1.77/MMBtu cheaper than the oil-indexed hybrid 633 contract this winter.

Last winter this spread averaged $0.72/MMBtu, while in winter 2016 it was just $0.51/MMBtu.

When the spread in recent years has been wider than what current forward prices suggest it has always been during the summer, and therefore less pertinent due to the lower demand. During the 2017 gas summer, when the average discount was $1.47/MMBtu, Gazprom exports dropped with flow data also indicating a noticeable preference to hub-gas procurement.

By Tom Marzec-Manser