Analysis: Gazprom says flexible pricing behind record exports to EU

Russian producer Gazprom is linking its record 2013 natural gas exports to Europe to the price structure in its contracts, but two analyst speaking to ICIS are not convinced Russian flows will continue on an upward trend.

European companies bought large volumes from Russia amid late colder weather in spring, lower supply from competitor sources and high LNG prices in Asia.

Russian gas supply to Europe reached 161.5 billion cubic metres (bcm) in 2013 according to Gazprom Export, a year-on-year increase of 16% ( see ESGM 30 December 2013 ). The previous record high in exports to Europe was 158.8bcm in 2008.

Gazprom Export claims a major factor in this increase was its pricing model’s flexibility. The exporter pegs its gas prices to the price of oil with a “moving average multiplier”. This means fluctuations of the oil price affect the gas pricing formula via a time lag.

In February, Gazprom planned to return about $4.7bn (€3.5bn) in 2013 to its European customers through price cuts ( see ESGM 11 February 2013 ). This was part of a regular price review scheduled into long-term contracts. The figure was based on the likelihood that those contracts with European companies would be renegotiated, lessening the obligation on buyers to pay for gas that they have been supplied with but not used.

In 2012, Gazprom discounted its long-term gas prices to companies including Germany’s E.ON Ruhrgas, Italian Eni, Slovak SPP and Poland’s PGNiG ( see ESGM 22 January 2013 ).

Mikhail Korchemkin, director of US-based consultancy East European Gas Analysis, agreed that Russia’s higher exports were a result of pricing changes, but said other factors also played a part.

“First, Gazprom gave a lot of substantial retroactive price discounts. Second, European clients took several billions cubic meters of makeup gas – take-or-pay gas paid for but not delivered in previous years. The volume of makeup gas can be estimated at about 10bcm. Third, combined reverse flow from Poland and Hungary to Ukraine increased the Russian export volume by 2.1bcm,” Korchemkin said.

Europe’s other major supplier of pipeline gas, Norwegian Statoil, relies on greater linkage to spot prices in its long-term contracts compared with Gazprom’s contract prices. In Norway, the amount of natural gas transported to receiving terminals in Germany, Belgium, France and the UK fell 4.9bcm to 102.5bcm in 2013 compared to 2012, according to Norwegian gas system operator Gassco.

“Norway’s gas exports depend on many elements in an interplay between production, transport capacity, resource availability, the market and so forth. This interaction creates natural variations, and the reduction in last year’s deliveries accordingly does not represent a trend,” said Gassco chief executive Brian Bjordal.

Whether higher volumes from Gazprom will continue as a trend into 2014 remains to be seen, according to Jonathan Stern, chairman and senior research fellow of the natural gas research programme at the Oxford Institute for Energy Studies.

“What matters is the volumes. They show there has been a recovery to pre-recession levels, but it is not at all clear where we go from here. The very cold spell in March and April last year, which used up everything in storage, required Russian gas to refill in September and October. Also, Norwegian, North African and LNG exports to Europe were down. Will the same thing happen this year? Maybe. If there is another late cold snap and if Norway’s exports remain down,” Stern said. Miriam Siers