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 FT 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.”
Last spring at GasMart 2009 John Hattenberger, president of Gazprom Marketing & Trading, the Russian company’s U.S. marketing arm, told NGI that contracts for global LNG supplies would continue to rely on an oil price index. “Why don’t they base [LNG pricing] on Henry Hub pricing? Well, Henry Hub pricing to the Japanese is meaningless because we’re never going to move Henry Hub gas to Japan. Right now there isn’t anything better for them to go to; it’s a fact,” he said at the time (see Daily GPI, May 26, 2009).
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