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Gazprom held auctions for winter gas delivery

Only a third of the total on offer went, but it was a significant move for the Russian company

Russian export monopoly Gazprom Export tried a new approach to gas sales in September: it held auctions for winter gas delivery (1 October to 31 March), with volumes on offer at two points. Only a third of the 3.2bn m³ total on offer went, but it was seen as a significant move and one that would be welcomed by traders, allowing new counterparties to acquire gas directly from Gazprom and so improving liquidity marginally.

The European Commission is investigating Gazprom for allegations that it uses discriminatory pricing and that it has abused of its market position in the European Union’s gas markets, mainly in central and eastern Europe – the former Soviet bloc – where it traditionally dominates supplies.

The gas auctioned is in addition to what Gazprom is due to deliver and it said the mechanism “supplements the system of long-term contracts”.

As a result of the auction, over forty deals with 15 clients were concluded, with a total volume of over 1bn m³ sold. In all, 39 companies were qualified to bid.

The auction contract prices turned out higher than the average of Gazprom Export’s contract price for delivery October 2015 – March 2016. For central and northern Europe including Germany the prices were higher than the spot and forward prices on the European gas hubs, too, Gazprom says.

“We are satisfied with the process and the results of the auction. We managed to effectively sell additional gas volumes on our most important German direction, to earn additional revenues, and to gain valuable experience,” Gazprom’s Alexander Medvedev says.

There were three auctions. Two were for delivery at Greifswald, landing point for the Nord Stream pipeline, from where the gas may flow south or west; and the third was for delivery at Olbernhau II with the option for the buyers to purchase entry capacity to the Czech pipeline network from Gazprom Export.

For all Gazprom’s talk about a “pivot” to Asia, Europe will remain a vital revenue stream, and it has to find new ways to market its wares. The European Union is trying to reduce imports from Russia in favour of other sources, such as Azerbaijan and global LNG; and it is also trying to reduce its use of all fossil fuels, gas included.

At home, Gazprom is losing its status as the monopoly exporter, with Novatek becoming an exporter of LNG; while its search for new markets in Asia is not progressing as fast as Russia would have hoped.

A paper published in September by the Oxford Institute of Energy Studies and free for downloading considers these and other pressures and concludes that Gazprom is indeed groping towards a more market-based outlook, although it is largely being improvised in response to political and commercial events. The authors find signs that Gazprom is softening its rhetoric where European gas directives are concerned and bowing to the inevitable with respect to third-party access.

The paper suggests also that, with respect to the market dominance fears in Europe, Gazprom might lower its sights slightly and settle for supplying about 30% of Europe’s gas over the coming decades, allowing room for LNG imports.

Given the global LNG oversupply even before competitively-priced US exports hit the market, and the paper’s estimate that Russia’s long-term customers have cut their take-or-pay commitments to an average 70%, Gazprom will perhaps be lucky to achieve even that much unless it savagely cuts its prices. 

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