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Analysis: Gazprom's electronic sales rationale in focus amid European gas hub price fall

London — Russia's Gazprom Export has now established its Electronic Sales Platform (ESP) as a permanent tool for selling additional gas on the European market with auctions continuing to take place since the start of 2019.

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ESP sales could impact own long-term contract volumes

Electronic sales are providing hub trading experience

Buyers on ESP could include new Russian gas customers

ESP sales appear to be supported by Gazprom gaining experience in hub trading as well as accessing new customers beyond traditional long-term buyers, according to analysts.

But the future level of sales volumes are likely to be dependent on developments across Europe through the course of the year, and the relative movement between European hubs and Gazprom's own long-term contract prices, partly oil-indexed.

The market looks very different now than it did when Gazprom Export launched the ESP in late September.

At the time, European hub prices were well above the oil-indexed range, which incentivised Gazprom customers to maximize their Russian gas contract purchases.

This was a win-win situation for Gazprom -- it has spare production capacity and was able to offload extra volumes into Europe above and beyond sales under its long-term contracts.

While the pricing figures for gas sold on the ESP are not known, they are expected to be at a similar level to the main European hubs, offering Gazprom the opportunity to increase its market share.

HUB PRICE FALL

But with hub prices having fallen significantly in recent weeks, the oil-indexed components of long-term Russian gas supply contracts are struggling to compete with the European hubs as the oil price slide of recent months is not yet reflected in the contract price.

According to an analysis by S&P Global Platts, the Dutch TTF month-ahead price is currently trading at Eur21.73/MWh, while the oil-indexed range (85%-100%) for February is valued at Eur21.32-Eur25.08/MWh.

Therefore contracts with significant oil indexation are more expensive than the European hubs, and buyers are incentivized to nominate their Russian imports contract at the minimum and buy on the hubs instead.

Selling a lot of gas on the ESP could, therefore, eat into Gazprom's own long-term contract sales as buyers shop on the electronic platform rather than through the flexible component of their agreements.

Gazprom Export has sold a relatively large share of ESP volumes since the start of 2019 despite the hub price decline.

ESP sales were 241 million cu m of gas for Q1 delivery since January 1 or 13% of the total volume (1.88 Bcm) since it was launched in late September.

But might a continued bearish trend for European hub prices prompt Gazprom Export to suspend ESP auctions so as not to harm its own long-term contract sales?

Or does it accept that long-term contract buyers won't nominate above minimum volumes so hopes to undercut other suppliers such as Norway and LNG via the ESP, so at least it is still Russian gas being bought?

GAZPROM CONTROL

"The risk that long-term contracts are undermined by the ESP seems quite limited due to the small volumes traded on the ESP and the fact that the quantities made available on the ESP can be controlled by Gazprom," according to Luca Franza, gas analyst at the Netherlands-based Clingendael Institute.

"The ESP might be a way for Gazprom to gain experience of hub trading in the unlikely event that long-term contracts are abandoned or in the event that Ukraine transit is only used for auctioned volumes in future," Franza said.

Jonathan Stern, leading gas analyst at the Oxford Institute for Energy Studies, said his view was that the ESP sales have been a "big success" and that some of the customers could be new to Gazprom and do not have long-term contracts.

"It's not so much the volume as the fact that it has helped to identify new [small volume] buyers who Gazprom may not have known about " Stern said.

"What ESP illustrates is that...Gazprom has totally bought into market-based pricing, which is only sensible given the way the market is going," he said.

SUMMER SLOWDOWN

ESP sales will continue for delivery in February and March under current price dynamics, but sales could slow in the summer, according to S&P Global Platts Analytics.

"There is clearly rationale for the sales into February given that the contract is still trading in line with next winter so there is no incentive to delay production and sales," Platts Analytics senior analyst James Huckstepp said.

But with summer European hub prices having slumped due to high storage stocks and expectations of reduced injection demand in the summer -- Gazprom Export may choose not to sell additional ESP gas.

"This summer we expect buyers will be nominating lower volumes year-on-year as there will be much less injection demand, as well as more LNG supply," Huckstepp said.

"We do expect the ESP to remain available, however, and that Gazprom remains reactive. How much Gazprom sells into the market via the ESP will depend on where prices are, if Summer-19 is trading above Summer-20 for example," he said.

--Stuart Elliott, stuart.elliott@spglobal.com

--Edited by James Leech, newsdesk@spglobal.com