Page 4 - FSUOGM Week 34 2019

FSUOGM COMMENTARY FSUOGM
Gazprom set to expand market- priced gas sales in Russia
Gazprom can now sell more gas at unregulated prices, but the increase in its allowance is small and the threat from rival domestic suppliers has already diminished
RUSSIA
WHAT:
Gazprom can now trade more gas at the SPIMEX exchange, under a government decree.
WHY:
The company sells the rest of its domestic gas at regulated prices.
WHAT NEXT:
The decree does not go far enough to yield a signi cant bene t for Gazprom.
RUSSIA’S Gazprom can now sell more of its gas on the domestic market at unregulated prices, giving it more leeway to outcompete its rivals.
Under a new government decree published earlier this month, the state-owned supplier has been permitted to sell 25bn cubic metres per year of gas at market-based rates on the St Petersburg International Mercantile Exchange (SPIMEX), up from 17.5 bcm previously.
Gazprom sells the vast bulk of its gas in Russia at government-set tari s. is has given an edge to its competitors, namely Rosne and Novatek, enabling them to entice industrial customers away from Gazprom by o ering lower prices.
Gazprom’s only option for competing for cli- ents is at SPIMEX, where until now the company could account for no more than 50% of the max- imum permitted annual sales at the platform of 35 bcm. e remaining capacity was reserved for other suppliers.
By raising the threshold for Gazprom sales at SPIEF, the new decree is good news for the com- pany’s domestic business. But it does not go far enough to yield a signi cant bene t – a er all, the new allowance 25 bcm per year is still only equivalent to 10.4% of Gazprom’s Russian sales last year. And with both Rosne and Novatek now struggling to produce enough gas to meet their domestic supply contracts, the threat they pose to Gazprom has diminished.
Domestic competition
Gazprom’s share of the Russian gas market shrank from 96% to under 55% between 2001 and 2014, as Rosne and Novatek emerged as key contenders on the stage. However, the last few years have seen circumstances change.
Fresh from its takeover of British-Russian venture TNK-BP and private gas producer Itera in 2013, Rosne announced ambitious plans to overtake Novatek as Russia’s second-biggest gas producer by expanding output to 100 bcm per year by 2020. Initially, this goal seemed realistic.
A er boosting production by 44.7% to 56.5 bcm in 2014 as a result of its acquisitions, Rosne ramped up output by a further 12.1% in 2015 and 7.3% in 2016, to 67.1 bcm. But then growth slowed considerably in 2017 to 2%, followed by 1.7% last year, to 67.3 bcm. is trend has con- tinued, with gas extraction up only 0.3% year on year in the rst half of 2019, and down 4.7% y/y in the second quarter.
Likewise, Novatek had to go on a buying spree in 2016 and 2017 to keep its domestic gas sales stable. Its output is now soaring, thanks to the launch of the Yamal LNG project in late 2017, with sales up 15.7% y/y in January to June of this year at 40.96 bcm. But almost all of this growth is being exported in the form of LNG.
Rather than enticing customers away from Gazprom, the pair are now having to buy gas from the company to meet their contractual obligations. eir lack of supplies has been evi- denced at SPIMEX, where they sold only 1.45 bcm of gas between them in 2018.
With its market share secure, then, Gazprom’s greater access to the trading platform is less of an advantage, especially given the comparatively small increase in its market-based sales. Were Moscow to fully liberalise domestic gas prices, the story would be di erent. e overall market would become more competitive, better re ect- ing the balance between supply and demand.
e government is unlikely to take such dras- tic steps, however, as doing so would put pres- sure on Rosne , Novatek and other independent producers. Any further reforms are likely to take place gradually, so as not to upset the delicate balance between Gazprom and its competitors.
Overseas
Meanwhile in Europe, Gazprom now feels threatened by the emergence of Novatek as a leading LNG supplier to the continent.
While Gazprom’s European sales fell by 5.6% y/y in the year up to July 15, to 102.8 bcm, Rus- sian LNG deliveries reached 11.5 bcm in the rst half, up from only 2 bcm in the same period last year. e bulk of this supply came from Yamal LNG. With Novatek now working on several more export projects in the Arctic, Gazprom is concerned it will have to lower prices to defend its market share, not only from Novatek but also from the rising tide of Qatari and US LNG ship- ments arriving in Europe.
For Gazprom, protecting its lucrative Euro- pean sales takes precedence over efforts to expand domestically. In order to avoid clashing, Gazprom and Novatek’s best option may be to team up at future LNG projects. Gazprom’s once-mooted plan to partner with Novatek at the Tambeyskoye eld, located near Yamal LNG, may be a good start. ™
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w w w . N E W S B A S E . c o m Week 34 28•August•2019