Russia’s Gazprom has taken steps to price a portion of its pipeline gas supplies more competitively with spot market liquefied natural gas (LNG) alternatives available to European buyers, and this could have repercussions for U.S. gas markets, analysts at Barclays Capital said Tuesday.

“If European consumers turn to pipeline gas imports instead of spare LNG, and Russian pipeline flows to Europe indeed grow by that amount, LNG imports to Europe could fall relative to last year,” the analysts said. “This would push more LNG cargoes into the U.S., meaning that, effectively, Russian spot gas would push LNG into the U.S.”

The potential for this scenario has been brought about by the recent capitulation by Gazprom to competition from spot global LNG supplies that can serve European markets, the analysts said.

Late last month Gazprom agreed to let up to 15% of its sales to Europe be linked to spot gas prices, rather than to a more lucrative oil index, which offers a roughly 25% premium to spot gas, according to the Financial Times (FT). This is “the first time that any significant volume of Russian pipeline gas will be imported to Europe based on a spot gas price…” the Barclays analysts said.

Gazprom’s Alexander Medvedev, deputy chief executive, indicated to the newspaper that the company views the spot market linkage of Gazprom pipeline gas as only temporary. “Every three years we have the right to look at prices, and what we have done today is just for a three-year period including 2010,” Medvedev told the paper. “We are sure that in three years the situation will be back on track. There is no danger in the mid to long term.”

Last year the linkage with oil prices put pipeline gas imports at a disadvantage to spot-linked gas, such as spare LNG, the Barclays team noted. “European buyers understandably maximized spot imports and minimized takes of oil-linked pipeline gas, in the process filling up storage to the brim.

“Clearly, sellers would want to retain oil indexation wherever possible as this offers premium prices in the current market. But Gazprom bore the brunt of market share losses in 2009.”

Large Russian gas developments Shtokman and Yamal will be providing pipeline gas to Europe, not LNG to the United States, an analyst at Wood Mackenzie told NGI last week. “We’ve looked at it on an economic basis, and the cost of production, cost of delivery is above our estimate for the Henry Hub price in the U.S.,” said Tim Lambert, Wood Mackenzie vice president of energy consulting.

In a recent Wood Mackenzie report Lambert said Russia faces “an extremely challenging environment in the short to medium term, with both prices and market share coming under pressure.” A global oversupply of gas and lower demand has made for a competitive European gas market, which may lead to soft prices for the next five years, the firm said. Hence, Gazprom has turned more attention toward Asian markets for its gas.

“Our analysis shows that while the interdependency between Europe and Russia will continue, Europe has been hardest hit by the global gas glut and there are two key uncertainties for Russian gas: demand growth and future gas pricing,” Lambert said. “In contrast, the Asian gas market is potentially very attractive for Russia as it provides diversification and the potential to monetize large quantities of remote East Siberian gas. With Chinese gas demand forecast to quadruple by 2030, it therefore offers substantial upside for Russian exports using gas reserves which would have been unlikely to find a market in Europe.”

Despite the general trend of rising imports into Europe, the European market will see a further increase in both established and new gas suppliers competing to place volumes. “While this competition may impact Russia’s market share in Europe in the latter half of the decade it is expected that Russian gas will solidify its dominant position in the long term from around 26% of the European market currently to over 29% by 2020 and 30% by 2030,” Lambert said.

Wood Mackenzie said Gazprom’s ambitions to grow a major business in North America based on LNG imports from Russia now faces considerable challenges. With the growth of unconventional gas supplies in the North American market, the long-term pricing environment is unlikely to be sufficient to support the economic development of high-cost projects such as Shtokman LNG and Yamal LNG.

Lambert noted, though, that Gazprom still has the ability to swap its European pipeline gas supplies for gas supplies in North America, and it can still take an equity stake in U.S. gas supplies, he said.

©Copyright 2010Intelligence Press Inc. All rights reserved. The preceding news reportmay not be republished or redistributed, in whole or in part, in anyform, without prior written consent of Intelligence Press, Inc.