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Gazprom Concedes to Spot Market Pricing

Writing on the WSJ blog The Source, James Herron notes that Gazprom gave its first major sign that it is reeling on its back heels to preserve market share as it has “cracked open some of its sacred texts” of natural gas pricing as linked to the six-month lag behind oil prices, and opened up for renegotiation of several long-term contracts with European customers. 

As usual, blame the U.S. oil shale technology for flooding the market with supply.  However, I’m not sure I agree with Herron that spot market pricing will stick around forever, but this move away from oil-indexed pricing in global markets is huge news.  Cheaper gas is obviously not a huge threat to Gazprom’s survival as a colossal global corporation, but it does do damage to its potency as a political weapon.

In the face of serious discord among its key European customers, Gazprom has offered to shift a portion of the gas it supplies to a free-floating price established on market hubs like the U.K., the Netherlands and Belgium. This is a major concession for a big, conservative, slow-moving company like Gazprom, which has consistently derided the notion that free markets should set the price of its product and even pushed to establish an OPEC-like cartel to control global gas supplies.

The volume affected by this shift looks to be modest at first. Gazprom’s big German customer, E.ON Ruhrgas, said only a “small double-digit percentage” of gas it buys from Russia would be sold at spot market prices.But all the pressure will be for this chunk of supply to grow, simplybecause spot market prices look likely to be considerably lower thanoil-indexed prices for many years to come. (…)

In such an environment, and with Europe’s next largest suppliersNorway and Algeria also moving away from oil-indexed prices, Gazprommay struggle to put the free-market genie back in its bottle andreassert its dominance in future.