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Gazprom expects natural gas export price to average $190/1,000 cu m through year-end

London — Russia's Gazprom expects its European export price to average $190/1,000cu m ($5.25/MMBtu) through the end of 2017, a price that its deputy CEOAlexander Medvedev says demonstrates the competitiveness of Russian gasespecially versus US LNG deliveries.

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In an interview with Gazprom's in-house magazine this week, Medvedev alsosaid Gazprom had begun supplying gas to countries in Europe it does not reachvia pipeline -- such as Spain -- through LNG deliveries.

Gazprom is set to hit a new record export level for its pipeline gas toEurope and Turkey in 2017, with volumes expected to reach as high as 190 Bcm.

Medvedev said the average price for the first nine months of this yearwas $190/1,000 cu m, and that "we expect approximately the same level at theend of the year."

Asked about Gazprom's expectations for gas supplies to Europe in 2018,Medvedev said the company was happy with its competitive position.

"In the short term, we see stronger price competition between the mainsuppliers but Gazprom feels comfortable under these conditions," Medvedevsaid.

"Our gas is competitive, and we are able to sell volumes that exceed theminimum contractual obligations," he said.

By contrast, LNG has struggled to expand its share of the European marketin recent years and US LNG in particular has failed to make a dent in thenorthwest European market.

"Under current market conditions, the full cost of delivering US LNG tothe European market for winter 2017-18 is in the range of $265-$295/1,000 cum, which is significantly higher than both current and forward prices onEuropean hubs and the price of Russian gas," Medvedev said.

However, there have been geopolitical elements to some US LNG deliveriesto Europe so far, with Lithuania taking two cargoes and Poland one, seeminglyan attempt to prove their increasing independence from Russian gas.

Further, US LNG offtakers can still deliver cargoes even if they don'tcover their costs by applying a sunk cost methodology.

LNG BUSINESS

Gazprom is also an LNG seller, both from its Sakhalin 2 facility and alsoits traded portfolio.

Medvedev said Gazprom supplied significant volumes of LNG to Spain inSeptember, a market it does not supply gas to via pipeline.

"We delivered a lot of LNG to Spain in September. Traditionally, Gazpromseparated the markets of continental Europe from the markets of the IberianPeninsula, but now thanks to LNG, Gazprom has commercial links with thesetraditional LNG buyers."

Medvedev also said that in the first nine months of 2017, Gazprom saw aslight decrease in deliveries in comparison with the record volumes in 2016,but it expects a recovery in Q4.

"At the same time, we continue to actively participate in tenders toexpand our trading portfolio," he said.

As for a third train at the Sakhalin 2 plant, Medvedev said Gazprom andShell were working toward taking FID in order to commission the 5.4 millionmt/year train in 2023/24.

And work continues with Shell on the 10 million mt/year Baltic LNG plantthat is set to be put into operation in 2022/23.

AUCTION DOUBTS

Medvedev also expressed doubts over whether Gazprom would revisit theauction model used three times in the past few years to sell additionalRussian gas volumes in Europe.

"We have tested the mechanism of auctions and were satisfied with it," hesaid.

"We do not exclude holding new auctions for the European market but whywould we try to sell additional volumes in this way when our deliveries underlong-term contracts are setting records?" he said.

Medvedev added that he remained "convinced" that the bulk of Russian gasexported to Europe would continue to be supplied under long-term exportcontracts.

"However, we are not standing still and in response to changes in themarket we are gradually increasing our presence in the segment of short-termdeals and spot operations," he said.

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

--Edited by Maurice Geller, maurice.geller@spglobal.com