Monday, March 1, 2010

A Crack Forms in Gazprom's Wall

The Wall Street Journal reported last week that Russian natural gas giant Gazprom has agreed to price a portion of the gas it sells to Germany's E.ON based on spot prices.  Until now, Gazprom has relied on long-term contracts pegged to the price of oil.  Now that larger amounts of LNG are arriving in Europe rather than the over-supplied U.S., a spot pricing market has developed for natural gas.  With natural gas prices showing few signs of recovery, the pricing disparity between oil and gas has made these contracts very expensive for customers. 

I view this concession to E.ON as big hit to Gazprom, which has enjoyed a near monopoly in certain parts of Europe for years.  Most other Gazprom customers are pushing for similar deals and it's just a matter of time before Gazprom faces serious pricing pressure.  Because the company has long relied on healthy export margins, it likely will have to make some significant internal changes to face a new reality.

This is such an interesting time to be following the natural gas industry.  Obviously my interest is the shale gas industry, but the changes rippling throughout the international natural gas business are monumental.  With widespread international investment in LNG infrastructure, gas is on the cusp of becoming an internationally traded commodity, breaking the shackles of the confining regional markets.  Add to that the potential to find new gas deposits because of the introduction of new technology and everything changes.  As Chesapeake Energy likes to say, there will be winners and losers, and I wonder how much longer Gazprom will stay in the "winner" column.


Anonymous said...

I wonder how much longer Gazprom will stay in the "winner" column.

Robert Hutchinson said...

Don't think that the Russians won't put up a fight: