Gazprom Squirms

Gazprom is supposed to be a natural gas monopoly. But a 40% plunge in sales this year suggests that it is starting to feel the pinch from competition.

While Europe’s demand for natural gas will have dropped a mere 5% this year, according to an RIA Novosti analysis by Oleg Mityayev, Gazprom’s export earnings are on track to drop a whopping 38.5%—$40 billion, down from last year’s $65 billion.

“It transpires that, along with the shortfall in earnings, the key Russian gas exporter lost part of its control of the European gas market to competitors,” he wrote.

Those competitors include Norway, Algeria and the Gulf States, who have all been shipping Europeans comparatively much cheaper supplies of liquefied natural gas.

Norway alone will export 100 billion cubic meters this year, according to Jarle Hetland in European Voice, up from 85.7 billion cubic meters in 2007.

An official with the Norwegian Petroleum Directorate said that it could increase exports by 10 billion-15 billion cubic meters more in the year following.

And that was before last week, when Shell discovered an enormous new gas field in the waters off the Norwegian coastal town of Gro. This field contains no less than 100 billion cubic meters—enough that, if pumped, would elevate Norway from being the world’s fifth-largest producer of natural gas to being its third-largest (Russia would still be number one).

Norway benefits from a “spot” pricing model, based on prices that can raise or lower at a moment’s notice. Russia’s prices are bound by long-term contracts, which dictate a price based on where the world’s oil price stood at the time of writing—in effect, tying the price of gas now to the price of oil six or eight months ago.

As most consumers are well aware, oil prices around the world fell significantly during the last eight months. So gas prices based on eight-month-old oil prices will inevitably be somewhat over priced.

“Our consumers, being rational in their approach, have opted for the less expensive choice,” said Medvedev.

In addition to buying cheaper gas from Norway, European consumers have been using up more of the previously accumulated stores of gas they already bought from Gazprom over the years. Use of already-accumulated fuel increased by 65% in the first quarter of 2009. In the meantime, Gazprom’s world-leading supplies have to wait for willing buyers.

Gazprom has more gas than it can sell,” wrote columnist Paul Taylor in the Moscow Times on Monday.

He quotes a Brussels official, who told him (anonymously, of course) “We are enjoying watching the Russians squirm.”

It is doubtful they will be squirming for long, though. The United States’ Energy Information Administration forecasts European demand for natural gas going up another 13.8% (or 3.8 trillion cubic feet) between 2010 and 2020. Norway will not be in any position to fill this need.

Nor, of course, are stores of already-bought gas any long-term strategy. Sooner or later, stores run out. Then they will need to be replenished with yet more gas from Gazprom. The gas giant will be in an ideal position to provide, given what else is expected to take place between 2010 and 2020: the completion of the Nord Stream and South Stream pipelines.

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