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Pricing Matters
Besieged Gazprom Gives Ground to Brussels

Score one for Brussels. The EU is finally, haltingly moving away from the onerous long-term, take-or-pay contracts Russian gas firm Gazprom has foisted on its Western customers. Yesterday marked Gazprom’s first public auction of gas in Europe, and three more will follow this week. Those auctions mark a shift in the continent’s gas market towards spot pricing, and will come as welcome developments for countries like Bulgaria, Poland, the Czech Republic, and of course Ukraine, all of which are locked into above-market prices for Russian gas. The FT reports:

[I]t demonstrates a shift in Gazprom’s strategy towards Europe, which had previously been characterised by hostility towards the commission’s goal of creating a freely traded market. As recently as last year, Alexei Miller, Gazprom’s chief executive, told a conference that Europe had “shot itself in the foot” by pushing the idea of a spot gas market. “This concept of spot trading bears grave risks to the European gas market,” he said.

On Monday, Alexander Medvedev, Gazprom’s deputy chief, said that the move was a response to the evolution of the market. “The European gas market changes constantly and, meeting its challenges, we want to test the new form of trading the gas and see what benefits it can bring to seller and buyers,” he said. Gazprom may hold additional auctions in the future, the company added.

What changed Moscow’s mind? Well, one of the biggest complaints European customers had with their Gazprom contracts was the fact that the price of natural gas was tied to the price of oil. That was an expensive correlation as recently as a year ago when crude was trading near $100 per barrel, but with oil going for less than half of that today that linkage isn’t doing Gazprom any favors. By making these small first steps towards spot pricing, Gazprom may be acknowledging that Russia doesn’t see oil prices spiking upwards again anytime soon.

Of course, the price of oil isn’t the only thing at play here. Gazprom is under investigation by the European Commission for violating anti-trust rules, and as the FT explains, the company is being blocked from fully utilizing an important pipeline across Germany:

Brussels and Berlin have frustrated Gazprom by blocking it from using more than half of the pipeline’s capacity in line with regulations designed to ensure a more competitive EU gas market.

Full use of the pipeline is crucial for Gazprom’s future plans to reduce transit of its gas through Ukraine. Without it, the expansion of the Nord Stream pipeline across the Baltic Sea, which Gazprom along with five European partners announced last week, would make little sense, analysts say. “It’s really critical for Gazprom to use more than 50 per cent of Opal,” says Ms Mitrova.

The volumes being sold are too small to make this reflective of any kind of sea change, but it does seem to indicate a change in thinking. For a continent that has struggled with its dependence on Russian gas supplies, even something as small as that will be cheered.

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  • Anthony

    “These auctions will mark a shift in the continents gas markets….” Given that European countries import most of their energy, Gazprom undoubtedly recognizes that no market can translate financial volatility into political instability as effectively as their energy markets – i.e., contracts tied to oil.

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