Gazprom, on its Knees

Streetwise Professor reports that once-mighty Gazprom has come upon mighty hard times:

The last couple of days I’ve felt that when I wrote “Teleconnections” I was like that guy in the TV show “Early Edition” who got the paper (the Chicago Sun Times) delivered to him before it was published.  Yesterday Bloomberg had an article about a shale gas bonanza in Europe; today’s WSJ has an article describing how Italian energy firm Eni has renegotiated its contracts with Gazprom, as I suggested would happen in the post, because (a) oil prices and gas prices have delinked, due in large part to increased non-traditional supplies, and (b) the development of LNG has helped spur development of a spot market for gas:

In an interview, Eni Chief Executive Paolo Scaroni said the renegotiated long-term contracts will allow the company to counter deep changes in the economics of Europe’s natural gas market, which has weakened of late.

. . . .

For decades, steady gas prices allowed Eni and other distributors to purchase natural gas supplies from fields in Russia and Norway using contracts linked to the price of oil. Over the past year, however, oil prices have recovered from the financial crisis while demand for natural gas has not. That left European gas companies on the hook to purchase gas supplies at higher rates than their spot market prices.

Natural gas prices have also been hurt by the emergence of new supplies, including shale gas fields in North America and an abundance of liquefied natural gas projects, Mr. Scaroni said. “Around this, the drop in demand and the growth of liquefied gas, we renegotiated some characteristics of our long-term contract,” Mr. Scaroni said, declining to elaborate on the terms of the new agreement.

Gazprom head Alexei Medvedev was rather vague about the changes too:

Gazprom Deputy Chairman Alexander Medvedev told a press conference earlier this week that Gazprom had renegotiated the contracts with European companies taking “into account the trends in the European market and the crisis.” However, the “base principles” of the long-term contracts remained unchanged, Mr. Medvedev said without elaborating. Gazprom declined to comment on the matter.

I wonder just what “base principles” and “characteristics” mean. Reading between the lines, I would wager that it means that the pricing mechanism has been shifted (as conjectured in “Telecommunications”) from oil prices to spot gas prices.  It is also possible that the take-or-pay provisions have been altered, as a shift to a more accurate pricing mechanism would reduce the scope for opportunism that TOP clauses are designed to combat.

It is very interesting that even Eni is renegotiating.  The Italians have been particularly slavish in their dealings with Gazprom and Russia.  When Gazprom would say “jump”, Eni would ask “how high, boss?”  The fact that this company has succeeded in wresting contract changes from Gazprom is a very clear indication of how the bargaining power, and the perception of bargaining power, have changed.  And, methinks, the process has only begun.

As I noted in the original post, these changes will have geopolitical effects, not merely economic ones.  One interesting thing to consider is how it will affect Ukraine.  The eastern Europeans and FSU countries generally, and the Ukrainians specifically, will receive less direct benefit from LNG and other new sources of gas.  Moreover, to the extent that western Europe is less dependent on Russian gas–or, put economically, its demand for Russian gas is more elastic due to the availability of alternative supplies–Ukraine is less important to it.  This doesn’t seem to bode well for Ukraine’s ability to fend off Russian pressure.

12 responses to “Gazprom, on its Knees

  1. I knew it.

    It doesn’t matter where the shale gas is discovered. The effect on world LNG prices is bound to be sharply downward. Practically everyone on earth will benefit from cheaper energy prices.

    The Putin government will find their situation very difficult as they so richly deserve.

  2. Also my sister has gas & oil holdings in eastern Montana. She has high hopes for a substantial return.

    I have said nothing as I wish my little sis well. The substantial returns she hopes for will not materialize. The value of all energy fields will decline because of the smashing shale gas discoveries.

  3. Development of the Shtokman gas field in the Barents Sea has been postponed for several years…and probably will be delayed for even longer period. However, Russia pushes vigorously its geopolitical Nord Stream and South Stream pipeline projects. I wonder where the gas will be taken from to supply both “streams”. The gastro-intestinal tract of comrade Putin is likely unable to produce enough gas to deliver it to Europe under pressure of 220 bar :-) Without supplies from the Shtokman gas field, Nord Stream becomes No Stream. Nevertheless, the construction of the Molotov-Ribbentrop pipeline is to begin this spring. Russian energy weapon policy is truly schizophrenic.

  4. Yanukovic last week invited Gazprom to buy a third share in Ukraine’s gas pipeline infrastructure, I don’t think this offer was made as a gesture to strengthen Russian/Ukraine relations, this offer is about economic survival, Currently 80% of the gas Russia sells to the EU is piped through Ukraine, As clearly stated Russia’s market share is falling due to LNG sold at competitive prices on the spot market. Plus the development of unconventional gas (Shale) is going to explode all across Europe over the next decade,

    The building of Nord/South stream will take a large slice of Ukraine’s transited gas and more importantly the transit fee Ukraine receives from Russia, it can ill afford this loss in revenue so it makes sense to tie gazprom into a part ownership deal,
    The EU is now teaching Russia the meaning of “diversification” did Putin really think that we would sit back while this “dim wit” tried to make us his “gas slaves”.

    What I find ironic is this the Soviet Union had been supplying countries like Austria with piped gas since 1968, but even a the height of the cold war they avoided at all cost using gas as a political weapon.

    Putin the stupid totalitarian idiot could not resist the juicy prospect of making a political weapon out of Russia’s gas; he will pay a heavy price for this skulduggery,

    Ukraine’s offer of shared ownership in its gas infrastructure should lead to a resolution of their politically motivated gas problems. Russia has the option of perhaps dropping the Nord/South stream projects, but Putin has placed so much political capital into these projects he will probably carry on leaving a debt ridden Gazprom even further in the red, just to save face. In contrast the EU will only go forward with the Nabucco pipe line if it’s economically viable, if not; well why waste EU tax payer’s money, we will leave the squandering to the Russians.

    Russia still has China in the east only they will drive a hard bargain they have no intention of paying EU prices, they intent to screw Russia on the price.Putins little games will cost Russia billions in revenue, but we should at least thank him for spurring on the development of Shale gas.

    Every cloud has a silver lining

  5. I am willing to sacrifice my poor little sis just to watch the shale gas do it’s thing.

  6. China is building a railroad into Central Asia Roosha does not want. Just in spite Chinese are making the tracks narrow gauge, so to go all the way to Europe on their system. No wide RooSSiyski rails, since they will bypass those fools completely.

    Rooskis say Chinese cannot compete with the Trans Siberian Railroad. Hahaha………. And guess which way the gas will go?

    • I hope China builds more and more roads and especially gas and oil pipelines into Central Asia. That way, Russia and its Central Asian allies will be able to sell more and more gas and oil to China, Korea and Japan, making Europe fight hard for the Russian and Central Asian oil and gas and raising prices.

      Why should China, Korea and Japan import expensive oil all the way from the Middle East, when the Russian and Central Asian gas and oil are plentiful and close-by?

      • @Arthur,

        You missed the entire point, and that is Roosha will control non of the Gas and Oil of which it is running out in the RF.

        Chinese Railroad will go into Central Asian republics that want non of Moscow’s extortion. Central Asian States are not Rooshan Allies just because some share rooshan bloodlines. Past dealings are well remembered.

        Japan will just get its Northern Islands back and spit in Rooshan Faces. Chinese goods will go on to European rail system through other countries.

        No Rooshan pigs will get the benifits because the tracks can’ t run into Roosha or opposite. Dumbass Moscals made this wide gauge rail to protect themselves from commerce and invasion. Dumbest thing since the Great Wall.

  7. Ron, I hope your poor sis has a forgiving nature!!!

  8. You left wing posters are having little actual negative effect on this site. The reason is that you look so organized. The information we are all looking for available to all.

  9. the price must be like in the control,for this many things must be done.

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