Gazprom insists on making its gas more expensive
Gazprom is insisting on making its gas more expensive than customers are happy to pay, and so hitting demand in Europe for the fuel that is far less environmentally harmful than coal.
"We suggest that Komlev should simply acknowledge that he wants to retain traditional long-term oil indexed contracts because they provide the highest price, and therefore the highest return, for gas producers and exporters. This is an entirely logical and commercial position, but not one which can be defended in analytical or theoretical terms," Stern and Rogers said.
There is a longer-term price to pay for this refusal to 'modernize' its contracts, in the way that rival supplier Norway has, they said.
"The extent to which Gazprom is willing to change its views will have a significant impact on Russian gas supplies to Europe and hence on the future of the entire European gas market," they added.
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The debate is not yet over: Komlev is believed to be preparing a new paper, addressing these concerns. "We understand that the author is revising the paper in the light of comments which he has received," said Stern and Rogers. However, the debate finished some time ago for many.
Compare and contrast
Norway, by contrast, has taken a flexible approach that seems better calculated to retain customers.
"Statoil's market share within Europe is growing at Gazprom's cost, thanks to contractual flexibility, helping to offset the diminished returns from oil linkage," said IHS analyst Roderick Bruce in a paper on February 11.
This ability to move with the times -- Statoil sees the process as "modernization" -- is matched by a similar upstream approach.
"Upstream flexibility has also helped Statoil to easily meet a higher call on Norwegian volumes during 2012. Liquefied natural gas deliveries into Europe dropped 24.4% year on year as producers chased higher prices in Asia, and Norwegian gas was called on to fill the gap," he said.
"Gazprom has so far opted instead to reduce the base price of contracts for customers, retaining both oil-linkage and take-or-pay clauses. Statoil's decision to be first mover on bigger contractual concessions appears to have paid off, with both record volumes sold and higher profits," he said.
"Furthermore, Statoil has been gradually reducing the amount of its gas contracts that are exposed to price reviews. Around 75% of its volumes were exposed to price reviews in October 2011, and this fell to less than 20% in January 2013, giving Statoil more long-term financial visibility."
Statoil has shown willingness to move its pricing to hubs even in countries -- such as the Czech Republic -- where there is no actual hub.
As a consequence, RWE Transgas has reduced the price of its gas bought from Statoil, in stark contrast to Gazprom, with whom it expects to remain locked in a legal battle for months to come.
Statoil’s Q4 figures showed a 6% drop in its average selling price year on year, while its average received oil price was virtually unchanged.
Without such expensive export pipelines to pay for, such as Gazprom's Nordstream 1 & 2, Statoil is able to offer its gas more competitively as well.
And next month the Norwegian government is poised to cut Gassco's transportation tariff, which could give Norway even more headroom on price discounts.
Outlook for output
Gazprom expects to produce 495.7 billion cubic meters of gas in 2013, up 1.8% year on year, according to the figures in the company's Investor Day presentation.
Its deliveries to Europe outside the former Soviet Union dropped 5.5% year-on-year to 105.82 Bcm, with Turkey alone experiencing a rise. (See related table: Gazprom's declining European exports).
Exports are expected to rise to 151.8 Bcm in 2013, up 9.4% year on year, according to the document.
In 2012, Gazprom's gas production dropped 5.1% year on year to 487 Bcm, well below the initially planned 528.6 Bcm, on lower than expected gas demand through April-December, the document said, citing preliminary data.
Gas deliveries to Europe and Turkey were at 138.8 Bcm in 2012, down 7.5% year on year.
Gazprom's customers in Europe paid an average of $402/’000 cubic meters for gas supplies in 2012, up 5% year on year.
The company's gas deliveries to the CIS countries and Baltic states are expected at 74.8 Bcm in 2013, up 15.7% from 64.4 Bcm in 2012.
Norway is expecting a drop in output this year, but that is due to production problems and delays, with growth projected in the following years.
Norway produced 116.4 Bcm in 2012 but the petroleum directorate predicted it would fall to 106 Bcm in 2013.
But output is forecast to recover in 2014 to 109.5 Bcm and then to 112 in 2017, with a number of new facilities slated to come onstream.
Graph: European gas price trends ($/MMBtu)