Page 15 - RusRPTJul22

2.2 Gazprom’s low EU gas exports explained: prices too high
Prices explain Russian gas export drop, jump. A persistent question is why Gazprom has not exported more gas to Europe this winter. The answer is simple: month-forward pricing mechanisms in almost half of its contracts have made the company’s gas too expensive, until now.
§ Contract pricing mechanisms explain why Gazprom’s exports fell YTD ... ... meaning commercial logic has been driving gas flows, at least so far
§ Almost half of Gazprom’s exports are priced on a month-forward basis ... ... and have been well out-of-the-money vs spot since 1 January
§ Ergo, European customers rationally reduced purchases of Russian gas ... ... causing a sharp drop in Russian exports YTD in 2022
§ European gas prices jumped in the last week to as much as $2,000/mcm ... ... putting Gazprom’s month-forward contracts back in-the-money ...
... and causing a noticeable increase in Russian gas exports
Gazprom’s export contracts have changed much since 2009, when its gas was 100% oil-price linked. After a dozen years of steady pressure from European customers to re-negotiate pricing, we estimate Gazprom’s contract portfolio is now c20% oil-linked, c30% linked to long-dated gas hub prices, perhaps 5% linked to day-forward hub prices, and c45% to month-forward prices. It is the latter that are most interesting: Locking in a single price for each month based on the average mo-forward price on the exchange in the previous month. As shown above, these contracts can end up being priced either well above or below current spot prices when market dynamics change quickly.
Export volumes driven by price competitiveness. The average mo-forward price in December was $1,350/mcm, which was locked in for the entire month of January even as spot prices dropped to ‘only’ $990/mcm. Out of the money by c$360/mcm, it was no wonder nominations for Russian gas dove on 1 January, from an average of 92mmcm/d in December to 37mmcm/d in January. With the 1 February repricing, the mo-forward contract price fell back to c$990/mcm, but for much of February, spot prices were still a bit lower, leaving Gazprom again out-of-the-money. However, the spike in European gas prices in the last week to c$1,300/mcm suddenly made Gazprom’s month-forward contracts one of the cheapest sources of gas in Europe. Gazprom’s exports via Ukraine almost immediately jumped from a very low c27mmcm/d to c90mmcm/d. Still low, but heading in the right direction.
2.3 Europe imports record amounts of LNG
The pumping of gas into European underground gas storage (UGS) facilities in May not only reached a record level for this month, but hit a fresh high since records started in 2011, according to data provided by Gas Infrastructure Europe (GIE). LNG imports to Europe also reached a record level last month.
15 RUSSIA Country Report October 2020 www.intellinews.com