Gazprom defends EU market share by holding auctions to sell gas

By ANNA SHIRYAEVSKAYA, ELENA MAZNEVA and STEPHEN BIERMAN
Bloomberg

Russia-based Gazprom PJSC will this week hold auctions to sell gas in Europe as the world’s biggest exporter of the fuel takes unprecedented steps to defend its market share in the region.

The Moscow-based company started the sales at 10 a.m. Moscow time Monday and will hold three auctions for delivery into Germany, complementing its decades-long practice of long- term contracts mainly linked to oil.

Gazprom is seeking to boost supplies to Europe and Turkey by 7% this year to make up for an anticipated 30% drop in the price it will receive for its fuel, Valery Nemov, a deputy department head at the company’s export arm, said on a conference call Sept. 1.

Gazprom faces falling prices in Europe, its biggest market by revenue, and plunging deliveries to the former Soviet Union after Ukraine stopped imports from Russia in July. While Europe’s appetite for the company’s fuel rebounded after the oil drop was priced into contracts, competition from sources including liquefied natural gas has intensified amid stagnating demand.

“The move represents a fairly historic shift in Gazprom’s marketing of gas to Europe,” said Trevor Sikorski, head of gas, coal and carbon at Energy Aspects, a London-based consultant. “It is one of the most high profile interactions Gazprom has had with the concept of putting spare gas into the spot market. There are some good reasons why Gazprom is making this change now.”

The Russian state-owned company, which supplies about 30% of Europe’s gas, will through Sept. 10 seek buyers for 3.24 billion cubic meters (114 billion cubic feet) for delivery in the six months from Oct. 1, according to documents published on the website of Gazprom Export. The price will be fixed and determined by the auction.

Vitol, Gunvor Group, Goldman Sachs Group, Glencore and Novatek Gas & Power are among potential bidders, Elena Burmistrova, head of Gazprom Export, told reporters in St. Petersburg Monday.

While the company will deliver the fuel using the Nord Stream pipeline to Germany because it has spare capacity, other delivery points may be possible in future, she said. The auction price will be higher than Gazprom’s average price as gas at hubs fluctuated less than the oil-linked rates, Gazprom's deputy CEO Alexander Medvedev said at the briefing.

Changing Market

“The European gas market is changing constantly and, to meet its challenges, we want to test a new form of trading gas and see what benefits it can bring to seller and buyers,” Medvedev said in a Gazprom Export statement Monday.

Gazprom has long defended long-term contracts with an oil-linked price formula, saying it helped it invest in fields and pipelines and offered security of supply to buyers. It has since 2010 offered concessions to customers, via talks or arbitration, and lowered contract prices or included some linkage to spot markets after customers including Eni and EON argued the 2008 recession caused a fuel surplus and made spot gas more competitive.

The auction is “an additional instrument of gas sales in the European market,” Nemov said. Gazprom said Sept. 3 that 39 bidders pre-qualified for the auction. The results of the auction are expected in four days, Medvedev said Monday.

Yet there is no lack of gas in Europe this winter. Surplus LNG cargoes are being diverted from Asia to Europe and the gas influx as LNG production expands will put further pressure on European prices, according to analysts from UBS to Sanford C Bernstein.

UK winter gas fell to 43 pence/therm on Aug. 24, the lowest level since the contract started trading in July 2010, ICE Futures Europe data show. An extra 3 billion cubic meters of gas in the winter is “moderately bearish,” Sikorski said.

“The auction will bring additional volumes to northwest Europe, and as the market is already well supplied and most market participants should have hedged most parts of their physical short position for the winter, it does have a negative effect on the market price,” said Andreas Holzer, a senior portfolio manager at Montana Energie-Handel GmbH, a German energy trader. “Timing of the auction is likely not the best to receive high revenues, auctioning volumes in the second quarter would have been more successful.”

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