Anti-Russian measures or a move to follow the mainstream market path?

Hardly a week passes without a sensitive blow or two to Gazprom’s interests in Europe. This time it was Statoil that decided to scrap the oil indexation in its gas sales. In March the Norwegian company announced it was keeping oil-based pricing for just 25% of contracts and now it dropped the old formula altogether. 

Prior to this decision, 50% of gas sold in Europe was indexed by oil; and gas-to-gas pricing at distribution hubs accounted for 45% of the overall volume, as the International Energy Agency reported. The decision of the Norwegian supplier alters the proportion in favor of hubs.

It is worth noticing that Statoil is not planning to abandon long-term contracts per se. They are still a necessary condition for justification of heavy investments in upstream and midstream projects with long payback expectations. Still, the switch to hubbased pricing ushers in real market relations in the gas trade. According to IEA, in the northwest of Europe hubs determine 72% of sales; the percentage in the Mediterranean basin is 12%; and Central Europe remains a hunting ground for suppliers with a taste for products from an oil basket with just 2% of gas-to-gas pricing.

Speaking in Moscow on November 21, Jonathan Stern from the Oxford Institute for Energy Studies’ Natural Gas Research Programme reiterated that ‘hubs represent market prices in Europe’ and have proven to be free of any signs of ‘manipulation’ by major players. ‘The future is with hubs,’ he added.

Russian politicians and Gazprom managers tend to ascribe the trends on the European gas market to ‘anti- Russian measures’. The behavior of Statoil shows that political interpretation is irrelevant. The Norwegian company has made up its mind to follow the mainstream market path and adapt its policy to interests of customers even though it sees its own material interests in jeopardy. When Italy’s Eni announced it sued Statoil in arbitration for $10 billion claiming it was overcharged for gas over several years, it can hardly be regarded an anti-Russian act.

The IEA estimates the European OECD countries to import 288 bcm of gas in 2020, just 38 bcm more than they did in 2011. The incremental volume is, unfortunately for Gazprom, much smaller than a market window of 200 bcm Alexey Miller predicted in his assurances to President Vladimir Putin in the fall of 2011. Moreover, most of the additional imports are to come in the form of LNG, making the position of traditional pipeline suppliers precarious.

According to Jonathan Stern, when industry watchers refer to a ‘golden age of gas’, they disregard the geographic distribution of demand growth. ‘While it is a golden age in China and other Asian countries, it is dark ages for gas consumption in Europe,’ he quipped.

Competition is going to be ruthless for this small incremental demand— and suppliers will have to appease consumers if they want to retain their market roles.

Mikhail Krutikhin

SOURCE: RusEnergy, 2013

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