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.