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Crude Economics
Oil Price Crash Turns Tables on Putin

For years, Gazprom’s European customers have lamented the Russian gas supplier’s choice to link long-term, take-or-pay contracts with global oil prices. With oil consistently trading in triple digits, many chafed at inflated natural gas prices, but as the price of crude cratering in recent months, Gazprom is looking down the barrel of a particularly grim financial outlook. Moscow relies on hydrocarbon sales for a significant chunk of its budget, so rough going for Gazprom is necessarily a problem for Putin, whose list of economic concerns is already lengthy as Russia wrangles with Western sanctions. As Reuters reports, all of this adds up to a much stronger negotiating position for Kiev as it works to iron out a new long-term gas deal with Moscow:

Ukraine has a stronger hand to play at talks with Russia on gas supplies thanks to the fall in oil prices, which has dragged down gas prices, and after showing it can live on less…Gazprom’s contracts are linked to crude oil and refined oil product prices, with gas prices lagging oil by six to nine months. Crude has fallen almost 60 percent since last June. […]

Russia, in financial crisis, needs the Ukraine market and the revenue it sends to the budget…Gazprom pays around 2 trillion roubles ($29.5 billion) in taxes to the Russian budget annually, money increasingly needed as companies all but cut off from global capital markets due to Western sanctions over Ukraine turn to the state for funds.

Plunging oil prices are hurting Gazprom’s prospects on all fronts, further evidenced by the company’s decision to scrap plans to beef up its Nord Stream pipeline, which transits the Baltic Sea to supply Germany and northern Europe. “When the price is decreasing… is difficult to realise these projects and sometimes it’s even not possible” explained Gazprom chairman Viktor Zubkov. This comes on the heels of the recent death of the proposed South Stream pipeline last month.

Europe still needs Russian gas, and that doesn’t look likely to change anytime soon. But Gazprom’s customers—Ukraine chief among them—are acutely aware that a staggering Russian economy and cheap oil prices are giving them an upper hand.

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  • Josephbleau

    When national industries are served by gasprom they will be inelastic vs Western facilities that can produce at the same volume with lower variable cost.

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