Indeed, European natural gas markets are changing, becoming vastly more diverse, as Russia pines for business as usual. But even if shale gas is not yet a reality in Europe, Gazprom officials may already have woken up in a cold sweat, in the wake of the US shale gas revolution, according to Mikhail Korchemkin, Managing Director of East European Gas Analysis.
“Shale gas in the US suddenly changed the future of the American market, from being the biggest importer of LNG to a potential exporter of LNG,” he explained.
Still, regarding development of unconventional gas in Europe, he said there was a combination of several negative factors against it, like geological or legal barriers.
“Ownership of the resources in European countries is definitely different from the United States. Still, shale gas is very helpful in establishing a competitive market. Even a small volume of shale gas can affect the overall situation with a gas pricing system: Five or 10% of new gas is better than nothing, better than the market being completely dominated by one supplier.”
Despite those potential difficulties, Gazprom was anything but relieved.
“Secondly, there’s tough competition from LNG that was never anticipated by Gazprom. Until very recently, (Russian President) Vladimir Putin and the top officials of Gazprom were of the belief that pipeline gas was always less expensive than LNG, which is not true.”
Mr. Korchemkin contended that the pipeline construction plans of Gazprom belonged to the old reality of the global shortage of gas and a price of $1000 per thousand cubic meters (close to $30/MmBTU).
“This is the forecast that Gazprom CEO Alexei Miller made in 2008, not long ago,” he said, explaining that Gazprom would be forced to adapt.
“In real life, the price is much lower and Russian gas is the most expensive in Europe, that’s why it is the marginal resource of gas in the European market, the last one to be bought by consumers. Gazprom gradually cuts the price and, unfortunately for them, they are lagging behind their competitors.”
The recent 10-15% price cut to importers of Russian gas, he said, was not enough to beat its competitors.
Despite all that, Korchemkin said there was a rationale in Gazprom’s construction plans, what he termed “the maximization of profits of pipeline contractors and intermediaries.”
“There are two ways to increase Gazprom supplies from West Siberia to Central Europe, Russia and for exports,” he said, explaining: “Because of the high demand for gas in winter time, the higher use of gas for space heating, there is a shortage of pipeline capacity in winter. One way is simply to increase production capacity in West Siberia in the Yamal Peninsula and build a new pipeline from Siberia to central Russia for exports.
“The second option is to build a storage facility and to ship the additional volumes of gas during summer time, using the existing production and transmission capacity,” explained Mr. Korchemkin. […]
He offered his assessment of the trajectory that the Gazprom story would take in the future.
“I think all over Europe, whether east or west, there should be a competitive gas market,” he said. “Right now, the importers that have no choice but Russia and Gazprom to pay the highest price, which is not fair. The British are paying the lowest price in Europe, while countries like Poland or Slovakia are paying the highest price/ Ukraine, Estonia, Latvia and Lithuania are also paying a very high price.”
Mr. Korchemkin admitted that a lot of what he does is about following the goings on at Gazprom.
“It’s mostly about Gazprom, because Gazprom dominates the East European market: the former Soviet Union and Eastern Europe.”
Gazprom, he said, had definitely improved its transparency over the period that he had been following it.
“Just the website of Gazprom alone and their prospectuses give a lot of information so you can very accurately forecast the company’s future in the short and medium term.
“In the past 10 years Gazprom has transferred from a more or less normal corporation into a kind of Russian ‘ministry of foreign energy relations’. The Russian government is definitely using Gazprom as a political tool, applying pressure on Russia’s neighbors and East European countries. Because of this, Gazprom is losing a certain share of profit. The Government is forcing Gazprom to act in a certain way, not the most efficient way from the standpoint of shareholder value.
“On the other hand, the Government gives Gazprom very soft operational conditions in terms of taxation. Gazprom is the least taxed company in Russia’s oil & gas sector,” said Mr. Korchemkin.
How worried was Gazprom about losing its market in Western Europe?
“Having to choose between keeping its market share or keeping the high price, Gazprom would prefer the latter. High price is more important to them than market share.”
Meanwhile, according to him, the competition for Central Asian gas had settled, and Turkmenistan had too much gas for Gazprom to purchase.
“The only option is for Gazprom to buy all or nothing. Even if they fill up one pipeline, there will be additional gas to fill up two or three more on top of that,” he commented.
“From a commercial standpoint, if you compare the Yamal Peninsula and the Caspian Region, the reserves are about the same – maybe the Caspian region has even more. From the standpoint of cost, Caspian supplies are much less expensive to develop and deliver to Europe. So from an investment standpoint, Turkmenistan and Azerbaijan are much more attractive, so that gas should come to Europe first, not the Yamal.”
Geopolitics, in this case, he said, coincided with the economics.
“From the geopolitical side, it’s diversification and this new source is also less expensive than Russian gas,” concluded Mikhail Korchemkin.