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Spot price pressure on Gazprom

European buyers continue insisting on new discounted prices of Russian gas fixed in long-term contracts. Main arguments currently refer to a technically easily available alterative – the LNG sold on the spot market. Issues related to coal, energy saving, shale gas and the renewables are secondary due to various reasons; the real alternative to Russian gas is relatively cheap LNG, mainly produced in the Middle East. As long as it is available, intensity of the price-based and hidden political claims to Gazprom in Europe will remain on a high level or may even rise.

In particular, RWE declared the other day that in 2011 it received an €800m operating loss in the supplies and sales segment. The result was attributed inter alia to considerable difference in gas prices under long-term contracts linked to oil prices and prices RWE resold gas on the market. RWE head Jurgen Grossmann directly said his company intended to secure concessions from its main gas suppliers, i.e. first of all Gazprom.

Frosts in Europe in late January and early February 2012 showed that the demand for gas, coupled with decline in Russian gas supplies, sharply increased, leading to immediate advance in gas prices on the spot market. Gas quotes on the European markets exceeded $600 per 1,000 cu m at that time. Yet, several days later prices dropped, which gave adherents of the liberalized market the ground to make a definite conclusion – the spot market works and there is no reason to change the trend (while average annual spot prices have been higher than Gazprom’s prices over the past few years). But in reality the Europeans faced just a short-term oversupply of natural gas. If decline in the volume of free gas continues for a longer period (e.g. in case of war in the Middle East and corresponding decrease in the tanker traffic from this region to Europe), developments may make even stubborn supporters of the spot market doubt its expediency.

By Stanislav Mitrakhovich, NESF leading expert

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