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Russia plays on Europe’s gas-cut fears

Gazprom reduces gas supply to Europe amid freezing temperatures

Gazprom is using freezing temperatures to drive home the importance of Russian gas supply to Europe, helping to sending prices skywards in the process.

The Russian export monopoly reduced gas exports to Europe last week after domestic demand soared amid plummeting temperatures. Gazprom said it could deliver contracted volumes to European customers – but despite a cold snap gripping Europe, too, the firm said it would not be able to supply any additional gas as utilities try to meet increased heating demand.

"[European gas] supplies decreased slightly, by around 10%, for several days, and to Poland and Italy for basically one day. The rest of the time [our supplies were] in line with the contracts," deputy chairman Andrei Kruglov told Russian prime minister Vladimir Putin at a meeting over the weekend.

Kruglov also said that European customers were requesting more gas, but Gazprom was unable to meet the additional demand. He added that Gazprom had boosted gas production by 20-30% to 1.6 billion cubic metres a day (cm/d), compared with around 1.3 billion to 1.4 billion cm/d last year, and that Ukraine had consumed 150 million to 170 million cm/d compared with the contracted level of 135 million cm/d.

Big freeze

Snow and freezing weather, around six to 15 degrees Celsius below seasonal norms across Europe, has led to a spike in gas demand for heating. The UK’s National Grid, the domestic energy network operator, said daily UK gas demand on Monday was 20% above seasonal averages at 394 million cm. The Italian ministry for economic development said its domestic demand could reach record highs of 440 million cm/d in the next few days.

At the end of last week, Russia reduced supplies to Poland, Slovakia, Austria, Hungary, Germany, Bulgaria, Romania, Greece and Italy, according to the European Commission (EC). “I don't have the exact figures for today [February 3], but yesterday in Austria there was a 30% cut, Italy 24% and Poland 8%," EU energy spokeswoman Marlene Holzner said.

Italian energy firm Eni warned today that gas supplies to customers on interruptible contracts could be reduced if Gazprom reduced deliveries. Interruptible contracts give cheaper rates but allow for supplies to be reduced in times of high demand or low supply.
Gazprom also said today that it expected a gap between requests from European customers and the amount it can supply during the cold snap to narrow, with supply and demand beginning to balance by the coming weekend.

The pan-European freeze resulted in UK spot gas prices hitting six-year highs of around 79 pence per therm ($12.50 per million British thermal units). European gas prices also rose. Prices on the the NetConnect Germany (NCG) gas hub jumped a third since the start of February to around €33/megawatt hour ($12.65/million Btu) and contracts on the Dutch TTF gas hub climbed about 25% to €30/megawatt hour ($11.50/million Btu).

Timely drop

With several companies in the process of renegotiating contracts with Gazprom, the timely drop in temperatures is perfect timing for the Russian firm to emphasise the importance of its preferred long-term, oil-linked contracts, and resist consumer demands to price its gas more in line with the spot market.

The head of Gazprom’s export division, Alexander Medvedev, said Russia would increase European gas deliveries to 180 billion cm/y in 2012 compared with 150 billion cm/y, adding that “voices defending the spot market and global warming have disappeared”.
Gazprom’s reduction in gas deliveries echoes previous disputes with transit country Ukraine, which resulted in supply cuts in the winter of 2006 and 2009. But unlike the gas wars of previous years, Gazprom is still meeting its contracted volumes.

Russian gas buyers have been trying to escape loss-making oil-linked gas contracts, hoping to include a larger spot element in pricing.  But Gazprom insists on the oil link, arguing that it is needed for expensive upstream investment.

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