Monday, November 22, 2010

Gazprom Makes No Price Concessions to Europe

Is this the face of compromise?

I think not.  Russian media reported last week that the country's energy giant OAO Gazprom will not provide its European partners with a price break even though it is selling into a market with lower demand and higher supply.  Russia provides around a quarter of Europe's natural gas through long-term contracts with prices pegged to the price of oil.  In recent  years, thanks to massive LNG projects in Qatar and the advent of shale gas in North America, there is a new spot market for gas developing in Europe with lower prices than those in Russian gas contracts.  As a result, pressure has grown for Russia to make price concessions.

Russia has resisted taking the first step down this slippery slope.  The news comes in the context of Russia's price negotiations with Belarus, the former Soviet republic that now enjoys the lowest Russian gas prices.  It also coincides with the arrival of the first LNG shipment from the United States (a re-export from Cheniere's Sabine Pass facility).

Only time will tell if Russia's resistance to price compromise will be a good strategy.

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