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Caught on wrong foot, Gazprom sees market go elsewhere
Published: 16 December, 2009, 17:32
Edited: 18 December, 2009, 11:52
TAGS: Markets, Crisis, Russia and the global economy, Gas
Gazprom has been the major exception amongst global gas producers in the economic downturn. It has lost market share in Europe, keeping prices high, while rival producers, like Qatar, have sold gas more cheaply.
Overestimating the demand for gas in Europe – and then pushing up prices – has backfired on Gazprom. For the first time in the past decade, Europe’s largest energy supplier cut its exports by 20% and axed production by a quarter.
Artyom Konchin from Unicredit, says it has been caught on the wrong foot by a demand slump
“Consumption was a lot lower this year and they couldn’t sell all the gas that was contracted. A lot of customers switched over to spot gas which was many times cheaper than what Gazprom has in the contracts. So they either didn’t take out the full amounts that were contracted or tried to find some other ways around to save money.”
While Gazprom blames a drop in energy demand – the biggest in Europe since the Second World War – other producers are reaping their benefits. Qatar boosted exports by 66% in just nine months.
European customers chose not to buy under contract – but switched to the spot market where prices were cheaper.
Dmitry Lyutagin, Chief analyst at Veles Capital says the glut in the gas market could have been avoided with better co-ordination.
“Market operations of the major gas exporters should be coordinated to avoid the misbalance of supply – as we saw when Qatar flooded Europe with Liquified Natural Gas. As a result Gazprom’s market share dipped from 25% to less than 20%. That was the result of the uncoordinated policies of the main players. That’s why we need organisations such as newly formed Forum of the Gas Exporting Countries. “
With new reserves arriving on the European market and growing interest in unconventional gas production – total gas sales aren't expected to rise again before 2013. While European governments have talked about diversifying their sources of gas the 2009 demand slump has prompted action at Gazprom’s expense.
16.12.2009, 17:07
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16.12.2009, 17:42
2 comments
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There is another issue affecting Gazprom natural gas sales. When Ukraine was stealing gas, Russia / Gazprom cut off the gas to Europe. While I can sympathize with the problem of stopping this theft, it also showed Europe that Russia is an unreliable partner. For example, what did other European nations do wrong that they deserved to have their gas shut off? Russia / Gazprom have an image problem over gas. When this decision was made I knew it would create problems later. Russia has to provide this critical energy in a rock solid, reliable manner, and this perception will fade over time. When problems arise with a country that steals gas, Russia must punish only the guilty, without ill effects on the innocent, or do nothing at all. This is my opinion, you may disagree. I'm not saying that Gazprom's estimate of market demand did not cause a problem, I'm sure it did, just that the issue above is also likely a problem and I have not seen any discussions on it in news stories here.
This story, like most other analysis, tends to look at one dimension and ignore others. I agree with Brian that the Ukrainian steeling of gas, and the subsequent shutoff of supplies, had some unintended consequences, especially in the light of the economic slump. But there is more to it then meets the eye. The spot market, like Qatar, is a funny creature. The prices are not realistic at all. This are "come on" prices, that have a political dimension. On one hand, it cuts into Gazprom's business. But on the other hand, gets Nabucco screamers off European back. The "Russian alternative" is here, and is working. This will keep any potential private sector investor in Nabucco running far away. Since there is plenty of future need to satisfy, Russia is hurt only in the very short term, with long term benefits being actually enhanced. By developing a more diversified market for gas, including liquefied gas, gas exporting countries will learn how to protect their interests in THEIR infrastructure --- whether it is gas pipelines, or gas liquification plants --- and keep their market. Otherwise, the benefit would go to the capital-controlling groups that would muscle in and build infrastructure at the expense of both, producer and the consumer. Nabucco is the exhibit number one in that approach. As Nord Stream becomes a reality, and South Stream slowly takes shape across possible two corridors --- the Balkans and Italy --- the suppliers and consumers become the co-investors in infrastructure, cutting the costs and creating mutual dependencies. All that Qatar did was diffuse the Ukrainian mess, create a favorable spot market, and give Russia and Europe some quality time to move projects along. Good work everyone.