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Gazprom will adapt gas price to European market

Gazprom has agreed to supply some of Europe's gas at spot market prices in a bid to defend its shrinking market share.

 

Gazprom has agreed to supply some of Europe's gas at spot market prices in a bid to defend its shrinking market share after three decades of oil-indexed pricing, a source in the company said Friday. The source said Gazprom, which supplies about one-quarter of Europe's gas, had agreed to allow a European spot price element in deals with most European customers, a move that will likely be cheered by its stock holders.

 

Analysts and investors have criticized the gas export monopoly for its lack of pricing flexibility as its big European buyers have bought more gas on the growing spot markets over the last year, shrinking demand for Gazprom's product. "The spot market is playing a certain role and we have taken this role into account in our contracts without changing fundamental principles," said the source, who asked not to be named. Germany's E.On Ruhrgas said Friday that it had completed talks on more flexible gas purchasing contracts with Gazprom, allowing one of Europe's biggest Russian gas buyers to get a chunk of its contracted supplies at spot prices.

 

"The agreements reached do not put into question the fundamental principles — the system of long-term contracts, the 'take-or-pay' principle and the pricing system based on a peg to a basket of oil products," the Gazprom source said. Take-or-pay contracts require customers to pay for a certain volume of gas even if they do not take full delivery of it. Increased LNG production and less voracious demand for imported gas in the United States than previously expected has boosted supplies of LNG in Europe over the last year. The extra supply drove spot European gas market prices below oil-indexed Russian prices, leading Gazprom's customers to consume as little Russian gas as their long-term contracts allow.

 

"Gazprom is unable to sell any more gas under the old oil-indexed price formula. Breaking the oil link is the only way to get additional profits from European gas sales," said Mikhail Korchemkin, from the East European Gas Analysis think tank. The fall in gas demand has already prompted Gazprom to postpone the launch of the giant Bovanenkovo Yamal Arctic deposit and Shtokman on the Barents Sea. "We are adapting the contracts' pricing to strengthen competitiveness of Russian natural gas on key European markets," the Gazprom source said.

 

Energy Minister Sergei Shmatko said Friday that Gazprom should be "more innovative" and react quickly to market conditions without changing the system of long-term supply contracts. "Gazprom is quite innovative and should be more innovative, and swiftly react to changed market conditions," Shmatko told reporters. "But by no means should the system of long-term contracts that we have created be destroyed." E.On's gas unit has agreed with Gazprom on taking a "low double-digit" percentage of its supply at tariffs linked to spot market prices, E.On Ruhrgas chief Bernhard Reutersberg said, Handelsblatt newspaper reported Friday. The outcome of discussions with Gazprom may have been "more favorable than expected for E.On," Oppenheim Research GmbH said in a note.

 

Source : Reuters