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Russia's Gazprom concedes 'shrinking' share of natural gas sales linked to oil

Gas supply contracts with Russia's Gazprom are increasingly linked to trading hubs in Europe with fewer sales indexed to oil products, the gas giant said in its 2016 financial report published Thursday.

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Gazprom continues to support oil indexation as the fairest way to price gas in Europe, but buyers are increasingly winning concessions in their contracts to include more hub indexation.

"A significant portion of gas sales are tied to various price indices at liquid trading hubs in Europe," Gazprom said. "The share of gas sales linked to oil product prices is shrinking."

In its financial report, released under International Financial Reporting Standards, Gazprom revealed net income of Rb997 billion ($17.5 billion) and more details on the volumes of gas transported to Europe in 2016.



Gazprom supplied a record 178.3 Bcm of gas to what it calls the Far Abroad (Europe plus Turkey but not the countries of the former Soviet Union) -- a record high.

But its sales to those countries actually slipped 1.1% to Rb2.14 trillion ($37.5 billion) because of a lower sales price.

According to the report, Russian gas prices dropped to an average of just $176/1,000 cu m in 2016, due in part to the stubbornly low oil price against which Russian gas is indexed.

That compared with a price of $246/1,000 cu m in 2015.

Gazprom said its contract price includes a premium for reliability and flexibility of supplies "as opposed to the hub-traded gas which is supplied in standard equal lots over the contract term."

It added that under the long-term contracts between Gazprom Export and counterparties, each party is entitled to request a revision of the contract price if any material changes occur on respective markets.

"Negotiations on price are currently underway with some of Gazprom Export's customers," it said, without giving details.

European markets are increasingly important to Gazprom as its share of the domestic market stagnates due to competition.

Gas sold to the Far Abroad countries in 2016 accounted for 48% of Gazprom's total gas sales compared to 41% in 2015.

Gazprom said falling gas production in Europe and the "price attractiveness" of Russian gas triggered the increase.

EUROPEAN FOCUS

It also sold some 2 Bcm of gas to buyers in northwest Europe via an auction held in September last year.

The gas was sold to 11 companies, both traditional partners and new buyers, it said.

Gazprom has not yet announced official plans for another auction this year, and said only that the approach "may be developed and used in the future to secure balancing sales in addition to the long-term contracts if required by market conditions."

Regardless, Gazprom is keeping its focus firmly on northwest European markets, and shipped more gas than ever through the Nord Stream pipeline last year.

It supplied some 43.8 Bcm via Nord Stream in 2016, up 12% on the year, and running at almost 80% of capacity.

Gazprom sent a further 13.1 Bcm via Blue Stream to Turkey, an increase of 17%, and some 41.7 Bcm to Europe via the Belarus route.

A total of 60.3 Bcm was put into the Belarus transportation system -- 100% owned by Gazprom -- indicating Belarus offtake of 18.6 Bcm.

Gazprom's other main export route, via Ukraine, carried some 82.2 Bcm in 2016, according to data from UkrTransGaz.

Gazprom also gave an update on expected first gas supplies to China via the eastern route under a 38 Bcm/year deal signed in 2015, saying exports would begin "between 2019 and 2021."

According to the official line from China, the pipeline is expected to start operations in 2020.

Gazprom also said its Russian storage capacity was currently some 73.6 Bcm.

During 2016, withdrawal and injection amounts for Russian storage sites totaled 44.9 Bcm and 24.7 Bcm of gas, respectively.

It also has its own gas storage sites in Europe with a total of 5 Bcm of capacity and a daily capacity of 83.4 million cu m.

A total of 2.6 Bcm of gas was injected in 2016 into European storage facilities with total gas withdrawn of 4.9 Bcm.

"In terms of international underground gas storage expansion, the challenge is to enhance Gazprom's storage capacity in foreign countries to an active capacity of at least 5% of annual exports by 2030," it said.

To address this challenge, Gazprom said it continued the construction of the Katharina, Jemgum and Etzel storage facilities in Germany.

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

--Edited by Jeremy Lovell, jeremy.lovell@spglobal.com