Wednesday, 11 July 2012

Gazprom Blinks - Gulps - Swallows

Yes, the long-running Gazprom gas-pricing saga is coming to a sort-of conclusion, for the time being, with a settlement between the Russians and their most important customer E.on-Ruhrgas.

Recall: Gazprom insists on selling gas under long-term contracts with the prices indexed to that of oil.  Since the collapse of European industrial gas demand in late 2008, coupled with shale gas displacing LNG cargoes otherwise bound for America, Europe has been awash with gas - only partly offset by increased Japanese demand post Fukushima.  Hence, spot gas prices have tended to be less - often, very much less - than oil-indexed prices, to the ruination of importers stuck with the latter, who are trying to run energy businesses on a tight margin.  They've all piled into arbitration (and/or litigation) because the said contracts are civil-code type arrangements which allow for judges to re-set prices in extremis.  

And in extremis is where some of these chaps have been (well, almost).  Gazprom has already offered material discounts and various other concessions; and now they've apparently agreed a fairly whopping outright rebate for E.on.  It is clearly in the low billions of Euro's, based on E.on's revised earnings guidance.  Which is nice.

Not as good as re-writing the price formula and deleting the oil element, of course.  But I should imagine everyone in Düsseldorf and Essen is, quietly, rather pleased with the precedent this sets.  Let's see what RWE settle for.  The Chinese have certainly told Gazprom what they can do with their oil indexation.

Of course, with the price of oil having taken a bit of a dive lately, there stands to be a corresponding dip in the oil-indexed price shortly.  But then GlobalRecession2 will trash gas demand once more, and it will be rebate time again in just a couple of years ...  Rather a blunt hedging instrument, but certainly better than nothing.

Meanwhile, back at the Russian spin factory: 

"[Gazprom's] comments along with the recent settlement with E.ON, lead us to believe that the gas pricing debate in Europe is nearing an inflection point with more and more commentators and counterparties accepting the longevity of the oil-price-link over the spot pricing model " (brokerage firm Otkritie Capital).

Yeah, yeah, I'm changing my mind rapidly. What games, what games.



Electro-Kevin said...

Can't win with these commie bastards.

Close down the Trotskyist UK coal fields and hand Labour three things:

- a subsidised underclass to replace its subsidised miner class

- a leftist welfare establishment to manage the leftist underclass

- hand Labour freedom to persue leftist green agendas because their voter base is no longer dependent on polutant industries for work.

And worse.

Our loss of our energy independence has handed the Russians a loaded revolver to hold to our head.

We've outlawed coal as a suitable source of energy. We must still be sitting on mountains of it, surely ?

Electro-Kevin said...

Should have read your post better.

Jan said...

Does this mean my Eon gas price will come down? The price of a UK passport has come down by a fiver today. What's going on?

rwendland said...

Passport will be a fiver less, but they closed 22 interview offices to do it. If I have to catch the train to London rather than Newport because I have an issue, like I had a few years back, I'll be about £40 down instead, not to mention the extra half day of time wasted! Not sure this is a net gain for UK Outside-London plc.

Nick Drew said...

EK - not sure which of your paragraphs to respond to there !

I'll just say: agree with most, but not "Our loss of our energy independence has handed the Russians a loaded revolver to hold to our head

in a way, Jan, the answer may be yes: retail prices do (eventually) reflect wholesale prices and (IMHO) we will see another cycle of price-softening there

Mr R - it's an odd one, that, I must admit. BTW, per our last exchange, the DECC reference you want is this - Table 1, page 5 (if you hadn't found it in the meantime)

what an abortion !

Sebastian Weetabix said...

Commies indeed. My personal experience of the old industrial working class as I was growing up on the Clyde was that virtually to a man they were small-c conservative patriots who hated communists (qv Ernie Bevin) and patronising petit-bourgeois metropolitan pinkos. They wouldn't have voted for gay marriage, for example, and they certainly didn't approve of the EEC, which was clearly a capitalist racket to screw the workers and/or a Papist Plot to restore the Holy Roman Empire (take your sectarian pick). What they really did care about was getting a fair shake, improved working conditions and getting decent educational opportunities for their children (happily I benefitted from this, got out, and now live in middle class comfort in a nice English town - no shipyards or mines for me!). And they hated Tories. Because Tories represented entrenched unearned privilege. Because Tories were the management types who would dock 3 hours pay if you spent more than 5 minutes in the shithouse in the shipyard (no joke if you're an old codger nudging retirement with piles). Because Tories included that vile old bugger Churchill who asked police to shoot striking workers in Dundee who simply wanted a living wage (happily Plod refused). Because Tories called honest working men like miners "the enemy within". People's memory for these things is very long which is why that nice Mr Cameron will never pick up enough votes north of Watford Gap.

Commie bastards indeed. J.K. Galbraith's acid critique satirised this mindset quite well -I paraphrase - those on benefits don't work because they have too much, but bankers dont work harder because they aren't paid enough. We do have an underclass problem in this country. That's because we destroyed our own industrial base so thoroughly that there are no longer sufficient jobs in large swathes of this country. Neither party really seems to know what to about this. Labour's spend, spend, spend mentality of giving ever more welfare won't bring back jobs and traps people in welfare dependency. The Tories' plan to simply cut benefits just means those same people are poorer - there still won't be enough jobs.

We need a low tax regime in this country that encourages enterprise. We need a simpler tax code. We need to encourage businesses to employ people by reducing disincentives like NI and the appalling lottery of the tribunal system where the feckless and indolent can screw a company.We need a meritocratic education system, not the Gramscian Marxist wet dream of a system that we have now that traps people in the status they have at birth. Most of all we need lower fuel costs since this is the both the foundation stone of a competitive economy and allows the old and poor to keep warm on winter nights. We need shale gas.

We're going to get none of this from the present shower of shit masquerading as our ruling class, be they Labour or Tory.

Budgie said...

Oddly enough I mainly agree with you, SW. I have a story.

A long time ago I worked in a factory. The BBC came to interview a "typical working man" about the (Labour) government "cuts". So typical he was a Trotskist shop steward, something the BBC forgot to mention.

I think that's what Thatcher meant by "the enemy within" (BBC and Trotskyists) not working people. But of course the truth does not help a 'hate Thatcher' meme by the statists does it?

Electro-Kevin said...

Quite right, Nick but - Russian gas features a lot on these pages. The issue must be of some concern otherwise alternative sources wouldn't be celebrated so much.

*trying desperately to salve some credibility here - as if I ever had any !*

James Higham said...

quietly, rather pleased with the precedent this sets

Except that Gazprom has been known to reinvent the agreement in its own image.

rwendland said...

ND, thanks muchly for that DECC annex link. I've had a first light plough through it, and it does seem fairly sophisticated (aka complex). I like the para 10 comment:

"For nuclear generation the major issue will be whether there are enough competitors to allow competitive price discovery. This is likely to be exacerbated by the fact that there are limited sites, ... Government will continue to consider the feasibility and desirability of introducing a competitive element for nuclear projects, and will do so as soon as appropriate."!

Maybe it will work well where there are many smaller competitive projects on offer, like wind, but looks like it will be a complete beuracratic fix for nuclear.

Did you spot the Citigroup analysts comment that there had been leaks that a single EDF EPR will cost £7 billion, a tad of an increase on original £2.8 billion estimate. Citigroup estimate that at that build cost EPR nuc power will cost £166/MWh if privately financed - thats higher than **offshore** wind, let alone inshore, and 3+ times current prices. In fact I could resell my domestic supply at a nice profit for that!

I suspect the £7 billion is a deliberate EDF leak to help prepare the ground for the lobby for a really good CfD price. There will be a lot of sly moves over then next few months I suspect.

Nick Drew said...

Kev - the pleasure in Gazprom's discomfort relates to its beneficial effect on the overall European gas market - which will serve us well one day (whatever Budgie says)

Mr R - my pleasure, all pertinent link-swaps gratefully encouraged ! Who worse to be fielding these sly moves for us than the Civil Service, eh ?

rwendland said...

... maybe £7 billion each is sound, given that the Finnish EPR has slipped again to after 2014 - new timetable has not yet been set. That will make it a 10+ year build, rather than the 4.5 year build, to be ready in 2009, Areva originally promised! This is sliding toward a Dungeness B level fiasco.