Analysis: Russia takes long view to defend Europe gas supply

Thu Jul 5, 2012 6:54am EDT
Email This Article |
Share This Article
  • Facebook
  • LinkedIn
  • Twitter
| Print This Article | Single Page
[-] Text [+]

By Henning Gloystein

LONDON (Reuters) - In accepting a price cut for its gas supplies to Europe and paying billions to build the South Stream pipeline, Gazprom (GAZP.MM: Quote) is paying a high short-term price to protect its long-term position as Europe's dominant gas supplier.

Earlier this week, Russia's Gazprom gave in to customer pressure and offered German utility E.ON (EONGn.DE: Quote) a price cut on its long-term gas supplies, boding well for Germany's RWE (RWEG.DE: Quote) and Poland's PGNiG PGNI.WA, who are also seeking to renegotiate.

While the deal means lower revenues for Gazprom in the short-term, the Russian company said it safeguarded its pricing model - with contracts that can span over 10 years and which are indexed to the oil market.

The move comes as Europe's domestic natural gas resources dwindle and Gazprom faces rising supplier competition as well as from other fossil fuel sources.

Around 150 billion cubic meters (bcm), or 40 percent of the European Union's gas imports, are currently supplied by Russia, while 80 percent of Gazprom's revenues come from European customers.

"The price adaptation in the long-term contract with E.ON will increase the competitiveness of Russian natural gas and, enhance Gazprom's market position," Sergei Komlev, Gazprom Export's head of contract structuring and price formation told Reuters.

Gazprom has been under pressure from its clients to loosen its contractual links with the oil market and allow more spot market pricing into its contracts.

"Gazprom had to give up some price concessions as Europe is in recession and as gas is being displaced ... (in) power generation in favor of coal," Societe Generale analyst Thierry Bros said.   Continued...