Thursday 15 October 2015

Gazprom: On The Back Foot (Again)

It's been a while since our last Gazprom update.  Here's one for afficianados:
Gazprom is preparing to offer to sell more gas to Europe at spot prices
As opposed to, priced on an oil-based index.  Well, like I said, it's a matter of specialist interest: but for the generalists, stick with it - there's a punchline.  

For years and years, oil indexation had been a religion with Gazprom (check the Gazprom label-link below for back-catalogue on this). They had imposed it effortlessly during the years of strength, and in the bad times post the 2008-9 meltdown in European gas demand had been willing to die in the last ditch to retain it.  During the recent rounds of price re-opener negotiations they gave almost everything else - relief on minimum annual payments (effectively surrendering market share), even cash rebates -  so long as they were allowed to preserve oil indexation.  They didn't even mind telling people that cash rebates were on offer as a quid pro quo: and boasted about how they'd held the line on the oil index against all the odds (unlike their main rivals, the Norwegians, who used to have the same policy but rolled over quickly from 2009 onwards - and retained market share without too much difficulty, mainly at Gazprom's expense).  This was indeed a hallowed principle for the Russians, however irrational.

One might imagine they are jumping horses from oil to gas just now because the oil price is so low.  But unless they see it falling still further, you'd think they'd be even more keen to sell at an oil-indexed price, because the upside is that much greater ..?  Certainly, gas prices look like being soft - or even softer - for a long time to come.

No, that's altogether the wrong line of reasoning.  Signalling spot-gas indexation for continental* European buyers is an out-and-out white flag, a gesture unmistakeable in the gas world.  And a concession as big as that would never have been made without sanction from the very top.  As CU said yesterday, they aren't feeling too comfortable right now.

* They'd already conceded it for smallish volumes sold to Centrica in the UK, because (a) otherwise Centrica would readily have gone elsewhere, not an easy option for several continental players; and (b) it was for delivery in the UK, i.e. a wholesale deal, not a mainstream Russian export-pipeline gas sale


Anonymous said...

Spot pricing of course goes with spot availability. In the event of a severe European winter, things may look rather less rosy for customers than they do now.

Nick Drew said...

No, it's indexed to spot pricing - in the pricing formula under a secure long-term contract. For the most part (excepting periods when they are at war with Ukraine, commercially or indeed militarily) Gazprom has been an ultra-reliable export supplier, more so than (say) the Dutch, who interrupt exports at the drop of a hat to prioritise suppliying Dutch customers

Of course, if spot gas becomes scarce, the spot price will spike up accordingly and this will be reflected in the price formula. However, experience shows that, taken over a long period, it tends to works out cheaper on average to buy spot (or spot-index) than to buy at fixed price (- you are paying the "hedger's premium") or indeed oil-indexed price

also, if (as a wholesale / large industrial buyer) you are 'exposed' to spot price spikes it incentivises you to cut demand during spikes, making your effective average even better against other forms of pricing, which won't spike to the same extent

(well, unless you buy indexed to electricity price ...)

James Higham said...

Yes but all things come around, Nick.

Nick Drew said...

not once you have settled for gas-gas indexation, James - the only reason for not doing this is irrational

anyone who really wants to buy on an oil index can easily do a financial swap (ditto any other desired pricing basis)

gas-gas is entirely neutral and allows everyone to go their own ways - gas-oil is at best an historical anomaly with inbuilt inefficiencies