As promised, an update on Gazprom’s travails in the European gas market.
The story so far: gas demand in Europe has slumped and the spot price has collapsed, facts that (under the Civil Code contracts used by continental gas buyers) can be adduced to force a renegotiation of prices and/or volumes. The big wholesale buyers are politely bringing this to the attention of Gazprom, their friendly Russian supplier. Gazprom has told them to, err, take a hike, and that their expensive oil-indexed contract prices are here to stay. Now read on...
Gazprom is reluctantly being forced to takes its arguments public. Trouble is, they are truly awful arguments, to wit:
‘Gazprom has defended oil indexation, saying there aren't trading hubs with sufficient volume to provide better pricing signals than oil products. "The NBP [the UK pricing hub for wholesale gas] handles 15 billion cubic meters of gas a year while Gazprom sold 160 billion cubic meters to Europe last year," said Sergei Komlev, head of price formation at Gazprom Export. "If we used the NBP it would be like the tail wagging the dog".’
Unfortunately Cepëж мой друг, the figures are not these at all – you are out by two orders of magnitude.
According to best estimates, trade at the NBP is approx 10 times the amount of underlying UK demand, itself around 100 billion cubic meters per annum. A higher multiple would be preferable, but a churn of 10 is pretty respectable. Hence, price formation here is based on around 1,000 BCM of trade – around 6 times more than Gazprom’s exports. Some tail !
NBP price formation is not beyond technical criticism, but inputs include the dynamics of diverse pipeline gas supplies and LNG; the smaller German, Dutch, Belgian and French wholesale markets are highly correlated to NBP; and it is used as a pricing basis in vast amounts of contracts for traded and delivered gas and a range of derivatives across all of the UK, much of northern Europe, and in the substantial Atlantic LNG trade. It’s a real, meaningful price, reflecting the fundamentals of supply and demand. An ideal candidate for indexing long-term contract prices, obviating the need for future price renegotiations.
Still, Gazprom can rely on plentiful Stockholm syndrome amongst its counterparties.
‘The International Energy Agency said on Tuesday there could still be a big surplus of gas in the global market until 2015, but an E.ON executive said the IEA was being "a little bit on the pessimistic side".’
Yup that’s E.ON, a buyer, one of Gazprom’s biggest, hoping the surplus won’t last long! When our suppliers start thinking like this, heaven help us consumers.