Should Gazprom Imitate Saudi Arabia?

A top Russian economist thinks Gazprom would be able to adopt Saudi strategies, in a move that would help the company stay relevant in Europe. Bloomberg reports:

The Saudis compete with other crude suppliers by boosting oil production and cutting prices, [Russian state bank Vnesheconombank’s chief economist Andrey Klepach] said Friday. “We could play the same role in gas as we have the capacity for boosting gas exports and production,” he said in the Siberian city of Krasnoyarsk. […]

Facing limited demand in Russia and other post-Soviet states, Gazprom says it has capacity to produce as much as 617 billion cubic meters of gas a year, which is 47 percent higher than its output last year. The company forecasts its average price in Europe may drop more than 30 percent this year to $169 per 1,000 cubic meters (about $4.7 per million British thermal units) if oil remains at about $35 a barrel.

Gazprom has a history of tying its natural gas contracts to the price of oil, and this decision—once decried by its customers when crude was selling for more than $100 per barrel—is now coming back around to hurt it given today’s sub-$35 prices.

But discounted prices may be the only way Russia can hold on to its share of its most important market, as the Continent increasingly turns to LNG as an alternative. The global LNG market is fairly flooded with supplies these days (sound familiar?), and with the United States just now emerging onto the scene as an exporter of the superchilled hydrocarbon, prices are coming down.

So now Moscow is facing down the prospect of having to woo a customer base that for decades was more of a foregone conclusion. Russia is already dealing with the considerable pain of being a petrostate in a bearish oil market, which makes this natural gas pressure all the more harrowing.

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