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Analysis & Opinion
18.08.11 Burned-Up Patience
By Tai Adelaja

Russian gas giant Gazprom, which for many years held an unbreakable monopoly over gas supplies and price-setting, may be having a change of heart after getting bitten by its own monopolistic practices. The gas monopoly has lately been losing its hold over the price of gas as double-barreled pressure from its EU and Chinese customers mounts, local media reported on Thursday. Gazprom’s European consumers continue to insist that the company review its gas prices, while Beijing has rejected Russia’s supply price offers as too expensive.

Gazprom has been having it both ways since it inked a groundbreaking gas agreement with China National Petroleum Corporation (CNPC) in March of 2006. According to the terms of the agreement, Moscow pledged to export between 60 and 80 billion cubic meters of Russian natural gas to China starting in 2011. However, the plan remained largely on paper without serious attempts to implement it, Nezavisimaya Gazeta wrote on Thursday. This, the paper wrote, raises suspicion that Russia was only trying to use the agreement on gas supplies to China as a bargaining chip in its price dispute with the European gas consumers. But the Europeans gas consumers no longer buy into such an argument, the paper said.

Many European gas buyers have been pushing Gazprom to loosen the rigid terms of its gas supplies, which are tied up in long-term contracts linked to the price of oil. "More and more EU consumer states are waiting for Russia to revise downward its gas prices on long-term contracts," Gregory Birg, the co-director of the Investkafe agency, said. Gazprom said it has tried to meet its customers half way by altering contracts for a three-year period to include a ratio of up to 15 percent spot prices and 85 percent oil-indexed prices. However, the company still refused to fundamentally alter long-term contracts, which in some cases stretch beyond 2030, arguing that long-term contracts provide a more predictable and stable product with greater flexibility on volumes.

Gazprom CEO Alexei Miller told a June 30 shareholder meeting that the company does not expect changes to its oil-indexed, long-term gas contract system. "We have demonstrated firmness in the talks with our clients and our sales earnings rose to $43.9 billion in 2010 from $42.5 billion in 2009,” Miller said. Within Europe, Gazprom's market share was 23 percent as of the end of 2010, compared to a 19 percent share for Norway, ten percent for Algeria and six percent for Qatar, Miller said. However, under mounting pressure from EU companies to cut prices, the Russian gas monopoly said this week that its export arm is currently in consultations over demands to renegotiate the contracted price in its long-term gas contracts with several of its key European partners, including GDF Suez, Shell Energy Europe, RWE Transgas, E.ON Ruhrgas and Eni. "Currently Gazprom Export is in commercial consultations with RWE Transgas, SPP, Shell Energy Europe, E.ON Ruhrgas, Eni, GDF Suez, EconGas, GWH Gashandel and Centrex," Gazprom stated in its second quarter financial report on Tuesday.

Analysts say the whole issue hinges on abundance of gas in the market, which has exposed the unfavorable price difference between spot and long-term contract prices indexed to oil. “The difference between the spot and long-term contract price of gas can sometimes reach $100 per thousand cubic meters," Birg said. "That is why European companies are insisting that Gazprom must give them the opportunity to buy large amounts of gas in the spot market." In the present market situation, Gazprom has little choice but to surrender its position and allow its European customers to buy part of their gas requirement in the spot market, he said. “The old ploy that if you don’t buy at our price, we will sell to the Chinese no longer works today,” Birg said.

Birg's words echo the objective reality on the ground. Five years of on-and-off gas price negotiations have not brought China and Russia closer together. Russian officials had expected a final agreement on gas prices to be reached in June of 2009, and gas supplies to start in 2014 to 2015, but instead negotiations dragged on. Gazprom can no longer raise prices without losing its customers, or use threats to drive China, the Asian giant, into a tight corner, Nezavisimaya Gazeta wrote. The Chinese, the paper said, have already begun to import their energy requirements from places like Iran and Australia. Beijing has also inked contracts with Turkmenistan and other Central Asian countries where gas supply pipelines are already in place and functioning, putting further pressure on Gazprom. “Time – perhaps the market situation – is on China’s side,” Birg said. “Despite holding tight onto its monopolistic prosperity, Gazprom is no longer an exclusive supplier of fuel to the Chinese Empire. Australia, for instance, has quite a few projects on the supply of liquefied natural gas. All the Chinese need do is wait quietly until an opportune time."
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