With US liquefied natural gas (LNG) supplies to Europe on the rise and energy prices falling, it is safe to assume that Gazprom’s upcoming talks with its major customers will not be a piece of cake. Here’s a look into the background.
Anniversary of Gazprom-EU Friendship
The Russian energy giant is due to clinch a raft of new long-term gas contracts with its partners from Turkey as well as Hungary, the Netherlands, Serbia, Italy and elsewhere in Europe by 2024.
Some have already warned that they will seek a change in contract conditions, among them representatives of the Bulgarian Bulgartransgaz who expressed hope for a significant price reduction to be agreed before the end of February.
In this vein, Gazprom Export head Elena Burmistrova told investors earlier this week that the company plans to increase its share in the European market by 37 percent in the foreseeable short-medium term.
She pointed out Gazprom customers’ great interest in purchasing “billions of cubic meters of Russian gas” in the next four years.
“We have been cooperating with some of our major European clients since 1970, so we now start to mark this 50th anniversary with various countries and companies”, Burmistrova added.
Gas Instead of Coal
She said that the demand for energy in Europe remains stable, given the EU’s green strategy aimed at combating global warming and greenhouse gas emissions.
The strategy, in particular, stipulates that Germany will close all of its coal-fired power plants by 2038, with energy companies due to get compensation totalling €4.35 billion.
Power plants are expected to be converted to gas, so demand for blue fuel is most likely to grow steadily despite the German Greens’ demands to exclude more than thirty projects on the development of European gas infrastructure from the EU budget.
On 12 February, the European Parliament overwhelmingly voted against this exclusion, stressing that “in the transition period, we need to obtain energy from gas as a necessary bridge to even cleaner, climate-neutral sources”.
Flexible Pipe
In the first three quarters of last year, prices at leading gas hubs in Germany and the Netherlands were almost half that of Gazprom's long-term supply contracts, with the company currently selling gas to Europe at an average of $203 per thousand cubic meters.
According to Burmistrova, Gazprom is ready to adapt the “pricing mechanism in the company's export contracts to changes in the European market”.
First of all, she said, Gazprom is talking about increasing sales through an electronic trading platform, where prices are determined by market demand and supply.
In long-term contracts, Gazprom is offering partners the opportunity to link current prices not to oil, but to the index of European gas exchanges, including the Dutch TTF. This may dramatically increase the attractiveness of Russian pipeline gas compared to LNG supplied by the US.
Poland currently claims to be the main supplier of US LNG to the European market, concluding four contracts for delivering 29 million tons of LNG to Ukraine, Lithuania and Latvia, as well as Estonia and Finland over the next 22 years.
American LNG, however, may prove significantly more expensive than Russian gas, given expenses related to LNG’s transportation and regasification.
Gazprom, meanwhile, remains upbeat about the positive financial results from its cooperation with European partners .
“Low production costs, efficient gas delivery routes and Gazprom’s vast resource base guarantee profitability even during periods of low prices”, Burmistrova concluded.