EU gas liberalization has upside for Gazprom

Gazprom should reconsider its strategy on long-term contracts in Europe towards flexibility as global oil and gas majors increase gas production.

Gazprom’s sales to Europe fell about 12% in 2009 due to the financial downturn. Demand has somewhat recovered but at the same time the Russian gas monopoly is now facing ever stiffer competition. The European Union favours diversity on the gas market and wants to liberalize the transportation networks. Russia dislikes the idea.Werner Auli, member of the OMV Executive Board, believes there is little to fear.“Liberalized market means that every supplier can enter the market and can deliver his good to the market. In the end this will be in favour of Gazprom because it is a big player and they also have a chance to enter the market directly, to go to the customer and deliver the gas to the customer. This liberalization is also good for Europe, it’s good for the trust in the customer.”Gazprom is facing an increased competition in Europe particularly from alternative sources of gas production. Energy majors such as Shell which traditionally focused on oil production are now paying more attention to developing their gas businesses, according to Aleksandr Nazarov, senior analyst at IFC Metropol. “I cannot reject the fact that the share of gas revenues in total structure of oil and gas majors is increasing, while oil revenue share is decreasing. But actually the main competition for Gazprom in Europe comes not from oil and gas majors, but from Qatar and African gas producers. I think majors like Shell and Exxon Mobil are trying to catch the market… maybe Gazporm should do the same.” Gazprom is not unaware of the problems it faces in Europe. Analysts believe it needs to be more flexible in its pricing in long-term contracts. Something the company is reluctant to do for the moment. Instead it’s focusing on diversifying its customer base in the fast-growing markets of Asia and India.