London — When Russia's Gazprom Export held the first auction on its Electronic Sales Platform (ESP) a year ago, the extent of its future impact on the wider European gas market was uncertain.
Receive daily email alerts, subscriber notes & personalize your experience.Register Now
Fast-forward 12 months, and it is clear the ESP is playing a key role in European gas dynamics with total sales of more than 12.5 Bcm in its first year of operation.
To put that performance into perspective, the 12.5 Bcm of extra Russian gas sales on the ESP would be almost enough to meet the demand of Austria and Hungary combined, and would even outpace the expected production next year of the giant Groningen field in the Netherlands.
The sales also account for more than 6% of Russia's current annual exports of around 200 Bcm to Europe -- not an insignificant contribution.
Jack Sharples, leading gas analyst at the Oxford Institute for Energy Studies, said the ESP would continue to be a useful means for Gazprom to utilize any spare export pipeline capacity that it may have -- and pick up new customers in the process.
"[ESP] volumes are being supplied by Gazprom in addition to its deliveries under long-term contracts, thus making physical supplies from Gazprom available to European counterparts that do not currently have long-term contracts with Gazprom," Sharples said.
He added that one major impact of the ESP on the European gas market over the summer has been the availability of extra volumes for injection into European storage facilities, with physical deliveries of gas sold via the ESP almost doubling between May and August.
The ESP replaced the email-based auctions that took place in the summers of 2015 and 2016, which saw a total of just 2 Bcm of additional gas sold in Europe.
But at the first ESP auction on September 20, 2018, the platform barely resembled what it does today.
Gas was only offered for delivery in the following month or the month after that, with no gas available for more prompt delivery or further down the curve. So while the delivery points were varied, there was limited flexibility in delivery period.
After a relatively bright start, the success of the platform then looked in doubt with zero sales across a three-day period in October amid high European spot gas prices and Gazprom's long-term, partly oil-indexed contracts very much in the money.
Gazprom Export quickly adapted the tool, though, to be able to sell day-ahead and balance-of-month gas, making the ESP better suited to fast-moving European market dynamics.
It also offered sales to new delivery points in 2019, including the Dutch TTF hub and interconnection points into the Czech Republic and Hungary.
"Over the course of the past year, the ESP has completely evolved from a simple auction platform to a dynamic sales tool, covering contracts right down the curve and delivery points right across Europe," gas analyst Ornela Figurinaite from S&P Global Platts Analytics said.
"We expect the ESP to remain a key part of the European gas market, allowing Gazprom to maximize sales opportunities, provide a significant price anchor to the market and help increase trading possibilities in some of the less liquid parts of the European market," Figurinaite said.
In March, Gazprom Export also made the first sale of ESP gas to a western company price priced in roubles -- largely a symbolic event -- and in April began publishing its ESPGazEx price index, an average of the price of all the gas sold on the ESP each month.
By doing so, Gazprom was able to further attempt to demonstrate its stated commitment to gas market transparency.
Sales on the ESP have increased as time has passed, culminating in a record daily sale of 406 million cu m on July 10.
"The volumes sold via this platform are substantial enough to be worthy of analysis," Sharples said.
The increase in sales followed a similar trajectory to the European gas hub price, just in reverse.
Indeed, the market looks very different now than it did when Gazprom Export launched the ESP.
At the time, European hub prices were well above the oil-indexed range, which provided Gazprom customers with the incentive 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.
But with hub prices having fallen significantly through 2019, the oil-indexed components of long-term Russian gas supply contracts are struggling to compete with the European hubs, with buyers having the incentive to nominate their Russian import contracts down to the minimum take-or-pay level and buy on the hubs -- or the ESP -- instead.
And despite the low European gas prices, Gazprom Export CEO Elena Burmistrova in June said the company was "not intending" to reduce volumes offered on the ESP -- suggesting a clear continued volume-over-value strategy.
-- Stuart Elliott, firstname.lastname@example.org
-- Edited by Jonathan Fox, email@example.com