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Listen: EU antitrust case makes Russia's Gazprom shift on oil-indexed prices

Russia's Gazprom is offering more flexible natural gas pricing in its contracts with central and eastern European customers in an attempt to avoid being fined by the EU for anti-competitive practices. Gazprom is not about to end its love-affair with oil indexation, however -- and neither are its customers, as long as oil prices stay low.

S&P Global Platts editors Siobhan Hall, Stuart Elliott and Nadia Rodova discuss Gazprom's changing strategy for European natural gas sales, the next steps in the EU's antitrust case, and what the European gas market will look like in eight years' time, when the European Commission thinks Gazprom's antitrust commitments would no longer be needed.

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Podcast Transcript

SH: Hello, and welcome to this Brussels to Beijing policy podcast from S&P Global Platts. I’m Siobhan Hall, Platts’ expert on European Union energy policy based in Brussels, and I’m joined from London by senior gas writer Stuart Elliott and from Moscow by bureau chief Nadia Rodova.

Today we’re talking about one of the most anticipated antitrust decisions in the European gas markets, the European Commission’s case against Russian gas giant Gazprom’s activities in eight central and eastern European countries.

The big news is that Gazprom has offered to allow its customers in five of these countries to ask for regular price reviews that take account of competitive gas benchmarks in western Europe. So Nadia, is this the end of Russia’s love affair with oil-indexed long-term gas contracts?

NR: Well, I think Gazprom understands that it has to be flexible around its contractual terms. We’ve seen Gazprom’s strategy for gas sales in Europe evolve in recent years – it’s carried out gas auctions and has been quite flexible in renegotiating contracts with big customers in western Europe.

SE: Let’s be clear here – Gazprom is not abandoning oil indexation. These commitments are about allowing eastern European customers to ask for regular price reviews. And these reviews would take account of western European gas benchmarks if – and it’s an important if -- customers’ contract prices and gas hub prices start to diverge.

Oil-indexed prices are low at the moment because oil is still relatively cheap, so that makes Russian gas contracts that are still mainly oil-indexed competitive with western hub prices.

SH: OK, so it’s not the end of oil indexation per se, it’s more about developing a basket of fuels to index to, if the customer wants that. And does Russia still want to sell gas at these current low prices?

NR: Well, I think as a seller Gazprom would have preferred higher prices, surely, but prices are where they are. In any case, Gazprom and Russian officials have repeatedly stated that they consider Europe as a key market even though Russia is looking increasingly to the east recently.

And European customers are buying more while it’s cheap. Russian gas sales to western EU countries were up nearly 20 billion cubic meters in 2016 compared with the year before.

That’s nearly 20% higher. SE: But sales to the eight countries covered in this antitrust case only went up 2% in 2016, and the volumes are much, much lower. Gazprom sold 121 Bcm to its western European customers, and just 31 Bcm to these eight countries.

SH: So the five countries cited for the price reviews are Bulgaria, Estonia, Latvia, Lithuania and Poland, and the Czech Republic, Hungary and Slovakia are also part of the wider antitrust case.

All these countries were closely linked to Russia until about 25, 30 years ago, and they are mostly small markets with Gazprom as the dominant supplier.

NR: Yes, and there’s not much room for growth in these eight markets. But Gazprom expects its gas deliveries to western Europe to grow even more as domestic production there is falling, creating a gap that Gazprom can fill.

SH: So Gazprom is looking at the long game here. But do these commitments mean these five eastern EU countries will get access to lower gas prices?

SE: Well, not necessarily, because, as we’ve said, oil prices are low anyway and close to the European hub prices.

When the commission started this investigation in 2012, oil prices were more than double what they are now, and Russia’s oil-indexed gas was priced way above the gas hubs. But if oil prices rise again, customers in these countries could trigger price reviews and renegotiate.

SH: OK, so can we say which of these five countries are set to benefit most?

NR: Well, on paper it looks like Poland, as it is the biggest buyer in the region. The state-owned gas company PGNiG bought around 11 Bcm of Russian gas in 2016, up 24% on 2015.

SE: But PGNiG has already criticized these commitments as not going far enough to address Gazprom’s dominant position in its market. It says it will formally ask the commission to reject them.

NR: So what happens if PGNiG objects?

SH: Well, anyone can send their views on the commitments to the commission until May 4. Then the commission has to assess the comments and decide if the market reaction is overall positive or not.

If it is, the commission can make the commitments binding, and then if Gazprom breaks them later on, it has to pay a fine of up to 10% of its global annual turnover.

NR: And if the commission decides the market reaction isn’t positive? SH: Well, that’s a bit less fixed, but basically I think the commission would go back to trying to find commitments that do get a positive market reaction.

I think it’s going to want to avoid a formal ruling and a fine if possible, because Gazprom would probably appeal the fine, and then there would be a long court case.

The commission wants to change Gazprom’s behavior – and the most effective way is through binding commitments.

SE: So if the commission does make the commitments binding, when would they start to apply?

SH: Ten weeks after the commission notifies Gazprom that it has made them binding. So that could be before the end of this year. And they would last eight years – which gives you an idea of how the commission thinks the European gas market will change in the next few years.

SE: Well, in eight years’ time, Europe will be importing Azeri gas through the southern gas corridor, and it will also be importing Russian gas through Turk Stream and Nord Stream 2, most likely. Plus there could be gas coming from the eastern Mediterranean, as well as LNG from the US and other countries.

SH: Nadia, is there any chance that Gazprom could lose its export monopoly at some point?

NR: Well, at some point – possibly, although it’s hard to say if this can happen any time soon. The government wants to avoid Russian gas competing with itself and bringing prices down for all the Russian companies.

But there are two major independent and influential gas producers in Russia apart from Gazprom– Rosneft and Novatek -- which are pushing for this, so the chances for such a move are getting higher. Even the fact people are talking about it shows how things have changed.

SE: Well, these commitments may be a test case then, as they would remove all resale restrictions. That means companies could resell Gazprom’s gas to other parts of the region, and Russian gas would compete with Russian gas in eastern Europe for the first time.

SH: Right, so, these are clearly very interesting developments in the European gas markets, and we’ll be following them closely here at Platts. That’s all we have time for today. Thank you for listening, and tune in next month for more Platts perspectives on policy.