The Economist: Gazprom and European gas markets
European efforts to reduce the Russian state-owned company’s sway over gas prices have been partially successful
THE combustibility of natural gas makes it a potent weapon. When Gazprom, a giant gas company controlled by the Russian state, cut off supplies to Ukraine in early 2009, in a dispute over unpaid bills, Europeans farther west suffered too. Gazprom provides about a quarter of their gas, to heat homes, fire industrial furnaces and fuel power stations, much of it via a pipeline through Ukraine. European utilities and regulators have since tried to reduce the Russian company’s market power. Although they may seem to be winning the battle, Gazprom could yet outmanoeuvre its customers.
The main battleground is the method of setting the price of gas. Gazprom is keen that its European customers continue to buy expensive gas on long contracts, sometimes lasting decades, with prices linked to the cost of oil. Gazprom makes a nice profit on such customers, since oil is pricey but it produces its gas cheaply from vast fields developed in the Soviet era. However, a high and rising proportion of European gas is now traded on spot markets at lower prices, set by supply and demand.
When gas was first sold internationally in volume, in the 1960s, there was no market to set its price. Since it was used as a substitute for oil in heating and power generation, it seemed sensible to link its price to that of crude. Long contracts also made sense. Building pipelines from, say, Siberia to Europe was costly. Producers wanted to be sure of recouping their investments. Buyers were glad to secure supplies.
The cracks began to show when Europe’s gas markets were shaken by both recession and the boom in American shale gas. From around 2008 Qatari liquefied natural gas, once destined for America but now surplus to requirements there, was redirected to Europe, adding to the continent’s tiny spot market. Meanwhile, crude prices rose steadily from early 2009, taking oil-indexed gas with them, and demand for gas waned. All this opened a big gap between the spot price and the oil-indexed price asked by Gazprom, Norway’s Statoil and other big, state-run suppliers.