Russia gas prices for Europe utilities at lowest since 2011

The Gazprom logo is displayed on a sign in front of pipe work at the company’s new Bovanenkovo deposit, a natural gas field near Bovanenkovskoye on the Yamal Peninsula in Russia (file). The premium of imported Russian gas over that traded in markets has narrowed 66% in the 12 months through August as a decline in liquefied natural gas shipments, falling output from North Sea fields and waning stockpiles sap alternative supplies.

Bloomberg/Moscow/LondonEuropean utilities are importing the most Russian natural gas in at least three years as prices slide, reducing the likelihood that Gazprom will abandon a 40-year-old system that drove RWE and Edison to the courts to seek a better deal.Shipments to Europe and Turkey jumped 14% in the first eight months of the year to the highest since at least 2010, Moscow-based Gazprom Export said on September 2. Prices for Russian pipeline gas at the German border, tied to the cost of oil, fell to the lowest level since June 2011, according to data from the International Monetary Fund.Increased imports from Russia, the supplier of 25% of Europe’s gas, strengthen the hand of Gazprom as it re-negotiates supply contracts with European utilities from EON to GDF Suez. The premium of imported Russian gas over that traded in markets has narrowed 66% in the 12 months through August as a decline in liquefied natural gas shipments, falling output from North Sea fields and waning stockpiles sap alternative supplies.“The European gas market is shifting again, to a certain extent, from a buyer’s market to a seller’s market because of a sharp decline in LNG supply,” Valery Nesterov, an analyst at Sberbank Investment Research in Moscow who has 40 years of experience in oil and gas, said by phone. “Gazprom managed to significantly increase its gas exports to Europe. This will also be reflected in prices, and the main link to oil will remain because consumers in Europe don’t have sufficient alternatives.”Gas at the German border cost $10.97 per million British thermal units at the end of August, 3.8% lower than a year earlier, IMF data shows.Russian prices are linked to crude and oil products with a delay of about six months. Brent dropped 8.1% in the first half of this year on the ICE Futures Europe exchange to close at $102.16 a barrel on June 28. The next-month contract traded at $109.04 yesterday.Gazprom’s average sales price will fall to as low as $370 per 1,000 cu m ($10 per million Btu) this year from $402 in 2012, in part as a result of contract renegotiations, deputy chief executive officer Alexander Medvedev said on June 4. The company charged its customers a record $410 per 1,000 cu m in 2008 as crude peaked at $147.50 a barrel. Brent rose to a six-month high of $117.34 a barrel on August 28 this year.Gazprom doesn’t disclose the formula of specific contracts. Agreements have been renegotiated with customers including EON in Dusseldorf and Courbevoie, France-based GDF Suez, typically by cutting the price retroactively. Eni, Italy’s biggest energy company, has sought to revise supply terms at least three times, Gazprom’s export unit said on February 20.RWE, Germany’s second-biggest utility, obtained an undisclosed spot linkage in its contract with Gazprom through arbitration, the Essen-based company said on June 27. Electricite de France’s Italian Edison unit is seeking rates in “line with gas-market prices” from Gazprom through courts, EDF said on July 30. Hearings with Edison are scheduled for June 2014 at an arbitration court in Stockholm, according to a Gazprom bond prospectus obtained by Bloomberg.Gazprom will cut the price in current renegotiations by less than the average of 7% to 10% it agreed to in previous talks, Medvedev said in June. Limited spot-market pricing has been included in some deals and doesn’t exceed 8% of the total contract portfolio, he said.Norway’s Statoil, the biggest supplier to the UK, plans to have more than 75% of gas contracts linked to spot prices by 2015, up from 55% by the end of last year, Eldar Saetre, executive vice president of marketing, processing and renewable energy at the Stavanger-based company, said on February 7 in an interview in London.Russian President Vladimir Putin, who hosted a meeting of the world’s biggest gas exporters in Moscow on July 1, said the oil link is “the fairest and most market-oriented” way of pricing gas. As LNG trading grows, the market will become more global and enable producers to “start thinking about other forms of pricing,” he said.Gas flows from Russia to Europe and Turkey rose to 105.2bn cu m in the first eight months of this year, up from 91.9bn a year earlier, Gazprom Export data show.“Gazprom is using recent increases in European demand for Russian gas as an argument against further price concessions,” IHS Inc’s PFC Energy unit in Washington said in a June 24 report to clients.Europe’s options are dwindling as a drop in LNG imports continues after a 27% decline in the first seven months, Thierry Bros, a Paris-based analyst at Societe Generale, said in a September 13 report.Output from Norway, which rose to a record last year, will fall in 2013, while supply from Africa will be limited because an Angola LNG plant commissioned this year is “still not ramping up,” and Algerian pipeline imports decline, he said.European demand for the fuel surged amid the coldest March in 26 years in Germany, according to Deutsche Wetterdienst, the national weather service. Availability of gas in storage fell to a record-low 21% full on April 13, according to data from Gas Infrastructure Europe, a lobby group in Brussels. Stores were 76% full Sept. 24, compared with 87% a year ago.“With stocks currently still low, European buyers will need more Russian gas during the coming months,” Bros said.UK gas output slid 14% in 2012 to the least since 1985, government data shows. European imports from Norway will fall by about 15% in 2013 from last year, according to the Norwegian Petroleum Directorate.Next-day prices at the Title Transfer Facility in the Netherlands, continental Europe’s biggest hub, have risen 6.6% from an 11-month low on August 2 to €26.43 per megawatt-hour yesterday, broker data show.Oil-indexation now represents less than half of Europe’s gas pricing, “and this should continue to fall as other arbitrations could follow,” Bros said in the report.Linking gas prices to oil offers buyers flexibility such as an option to vary volumes bought daily, relieving the customer of the need to store supplies and book fluctuating pipeline capacity, according to Sergei Komlev, Gazprom Export’s head of pricing and contract structuring in Moscow.