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Gazprom losing its gas grip on Europe

The company's grip over European gas markets is loosening because of weak demand and its shrinking share of Russia's domestic energy market, industry leaders said

Vladimir Drebentsov, head of Russia and CIS economics at BP, said Gazprom was losing its monopoly over Russia's domestic gas market as independent energy producers were muscling in. This meant Russia would be increasingly reliant on Europe to buy its gas while the continent would be able to choose from several suppliers in a climate of weak demand. "Gazprom could lose most of its domestic market and it can't do anything about it. It can't stop the independent producers," Drebentsov said. "In the future Europe will grow to have higher importance to Russia than the other way around. If Gazprom doesn't want to have production going down and down the only way is to increase exports."

In 2008, Gazprom supplied around 80% of the Russian domestic gas market. Last year Gazprom's share of the Russian domestic market fell to 53% and it could fall to just 25% in the next five to seven years, Drebentsov said. In the first half of 2013 Gazprom delivered 133.6 billion cm of gas to Russian domestic customers, 7% less than in the first six months of 2012. Russian gas demand in 2012 was 416bn cubic metres (cm), according to Cedigaz figures.

Drebenstov added that gas sales were making up a smaller share of Gazprom's revenue as the company expands into other areas, such as selling oil products. Last year, gas sales comprised around 56% of Gazprom's total revenue, down from 63% in 2009.

Last year, Gazprom's gas exports to Europe increased, by 16% year-on-year, to 162bn cm. The company benefited from outages in North Africa and Norway which reduced supplies into Europe. However this year Gazprom expects its European gas exports to fall as demand on the continent remains weak. 

Europe's gas demand fell by 8% between 2008 and 2009 to 1.05 trillion cm. It recovered slightly in 2010, reaching 1.1 trillion cm, only to dip by a further 2% in 2011. Europe's gas consumption is now at a nine-year low.

Economic weakness will continue to depress the continent's natural gas demand, according to the International Energy Agency (IEA). While global gas demand will rise by 510bn cm between 2010 and 2016, Europe's will stagnate. The IEA does not expect Europe's gas demand to rise above pre-2008 levels before 2020.

The European gas industry blames high European gas prices, which cannot compete with cheaper coal, for causing Europe's gas demand to plummet. Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies, said high European gas prices, of around $10 per million British thermal units (Btu) were suppressing demand. "It doesn't matter if the gas is there because no one will buy it," Stern said. "If we want to drive up gas demand in Europe we have to drive down prices. If we don't want to do that it will be hugely problematic for the industry."

However Gazprom insisted the gas-supply status quo in Europe has not been altered and that the company should be under no pressure to lower prices."We're providing security of supply to Europe. This is a miracle but nobody appreciates it," Sergei Komlev, head of Gazprom's export price formation division, said. "Even if we decrease our (gas) prices three times gas still won't be used in power generation. It's a problem of inter-fuel competition within the EU. Look at Germany. First you have to fix your own house and develop (price) competition."

European gas buyers have suggested breaking the oil-indexation link with European gas prices would help to reduce prices and offer more flexibility with shorter term contracts linked to spot prices."We are on a high (gas) price level in Europe which is a big problem because consumers either can't afford to pay the price or they don't want to," said Christopher Delbruck, chief executive of E.ON Global Commodities. "To make gas competitive with coal, coal prices would have to rise by10% or you would have to halve the gas price."

Delbruck said oil-indexation of gas prices should be abandoned and gas suppliers must adapt to 'a new hub-based market reality'. He added gas suppliers must be more flexible and agree to short-term supply contracts of two or three years, rather then 20. The consequence of not doing so would be permanent gas- demand destruction, he said.

Komlev insisted Europe should be careful when considering moving away from long-term, oil-indexed contracts because it would expose them to increased gas price volatility. Rather than looking for gas-price flexibility Europe should be looking to ensure security of supply, he said.

Russia also wants to tap burgeoning Asian gas demand and position itself as a prominent gas supplier in the region. The value of Russia's energy trade with China could quadruple by 2025, according to Wood Mackenzie, a consultancy, as Russia's focus on developing its East Siberian reserves, falling European gas demand and China's soaring energy consumption over the past decade will drive greater Russo-Sino energy cooperation.

In 2012 China consumed 148bn cm of natural gas, according to Cedigaz figures. Gazprom has been in negotiations with China National Petroleum Corporation (CNPC), to export gas from fields in the east, via Vladivostok, to China. Last year Gazprom and CNPC signed a memorandum of understanding for a 30-year gas deal to supply China with 38bn cm per year (cm/y) of gas starting in 2018.  This could eventually rise to as much as 60bn cm/y or more. However, a conclusive deal has not yet been signed because of disagreements over pricing terms.

How successful Gazprom will be in its negotiations with China will determine how dependent Russia is on European gas buyers. "The Russia-China pipeline deal is a critical step in whether Russia will become a valuable pipeline and LNG exporter (globally)," Stern said. "If it (the deal) is not signed this year that could have important consequences for Gazprom's future, as an exporter to Europe and as a dominant player in Europe. It is the balance of power changing."

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