Gazprom and the Fear of the Spot Market

Today Vladimir Putin is visiting France and enjoying his new role as a potential economic savior to the dying eurozone … but of course there is a bit of a catch:  these are precisely the same economies who buy so much of Russia’s natural gas at relatively high prices on long-term contracts, and they’re going broke.  Brought about by the advent of shale gas and other alternative technological developments, many consumer countries are seeking to renegotiate long-term contracts to spot-market prices, which is an anathema to Gazprom.  The Russians first acquiesced to a contract renegotiation back in February in order to preserve market, and promised that it was a one-time only deal.  But as one observer pointed out, “Gazprom may struggle to put the free-market genie back in its bottle and reassert its dominance in future.”

That struggle went live on stage, as Alexei Miller delivered comments before the European Business Congress in France.  From the Financial Times:

Addressing the annual European Business Congress in France for the first time since 2008 – when he predicted oil prices would soar to $250 per barrel – Mr Miller said sales had recovered in the first few months of 2010, “but the month of May has seen the positive trend reversed. As we see, financial turmoil in the eurozone has started to affect energy markets”.

Swiping at those pressing for linkage to spot prices, MrMiller said this price could soon rise as demand recovered, whileGazprom’s long term contracts offered greater stability.

“Inseveral cases we have agreed to take into account the spot marketcomponent,” he said. “But please note: when in a couple of years themarket bounces back, do not ask us to revert to previous pricepractices.”

Jonathan Stern, director of gas research at the OxfordEnergy Institute, said Mr Miller’s comments on gas prices appeared tobe “overly optimistic”.

“The only way that can happen is if demandrecovers to where it was in 2008 and all the additional supply [fromLNG and shale gas] is absorbed. It is possible but it seems overlyoptimistic … when you see the crisis going through the eurozone,” hesaid.