Greece Achieves Price Decrease from Gazprom

For almost over a year, Greek gas company DEPA and local governments have been struggling to get a sizeable discount on the price of natural gas it imports from Russia's Gazprom, in an attempt to revive the ailing heavy industry of the country, which is battered amongst other by substantial energy costs. At last a resolution has been found that has regional ramifications as well.  

According to all available information, a deal has been reached between Athens and Moscow, retaining Russia's aim of keeping a leading position in Greece, even at the expense of proceeding into a great price discount going from present-day prices of $470 per 1000 bcm to around $398 per 1000 bcm.

After a series of negotiation rounds between the two parts, it has emerged from a variety of sources within the industry in both countries that an agreement has been reached regarding the renewal of a long-term contract between DEPA and Gazprom, which ends in 2016, and looks like it will be extended for another 10 years.

Gazprom has retracted from its previous position and reduced the amounts of gas to be bought under a take or pay clauses. The Russian company is also willing to drop prices up to around $396 USD, whilst the Greek side contested for a decrease up to $370 USD, identical to the price German companies pay, although the latter consumes annually more than 18 times the amount of Russian gas than their Greek counterparts.

Independent experts assessed that it was highly unlikely that Gazprom would consent to such a discount since it will eventually lead to further decreases in its larger markets such as Germany, Italy and Turkey.

DEPA is currently obliged to import under take or pay clauses at least 2.4 bcm per annum and the Russian side is willing to lower the amount to 2 bcm.

Nevertheless, Greece wants the additional clause that it can get an extra 10-20% discount on the excess take or pay amounts it may receive in the future, something that Gazprom disagrees on. Gazprom has countered with a proposal to make certain rebates in previous imports, but without guaranteeing any future excess discounts. According to press leaks from the Greek Ministry for Energy, eventual discounts for excess amounts will be settled at around 5-10% depending on amounts involved.

Greece's neighbours who are clients of Gazprom as well pay similar amounts. Bulgaria imports gas at a settled price of $405 per 1000 bcm and has recently moved to acquire significant amounts of gas from Azerbaijan's SOCAR, which could be an indication that it will also demand additional discounts from the Russian side in the coming years. 

The Greek side faces a dilemma that can be said to reflect most of the challenges other Southeast European countries are facing such as Bulgaria. Although it has pushed and achieved to open up the so-called 'Southern Corridor' through the Trans-Adriatic Pipeline (TAP), amounts to be received are little for its internal market since the bulk will be headed for Turkey and Italy, with as few as 1 bcm for Greece and equivalent amounts for Bulgaria.

Moreover, this pipeline will not reach its full capacity before 2021 and the gigantic Shah Deniz gas reserves is filled with approximately 1 tcm, which will have to meet the needs of that country and Georgia, along with the Balkans and Italy as far as Central Europe through interconnections and regional hubs.

Due to the sheer size of consumption and the assessed rise in the use of gas in Europe, it is estimated it will need extra 120 bcm/year - on top of its current consumption, by 2025. This decreases considerably the use of Azerbaijan as a "game changer" in terms of relieving the reliance on Gazprom. The gradual reduction of North Sea gas extraction is another factor to be assessed along with the rising internal gas consumption in Middle Eastern and North African countries and the booming gas sector in Asia and in Latin America.

US LNG option remains a possibility, even though the cost of liquefying and regasifying and additional necessary infrastructure and commercial transfer across the Atlantic will top up by around $6.5/MMBtu every LNG shipment, thus, while it reaches the EU ports, it will have surpassed the cost of pipeline-transferred gas from Russia, for most of the EU markets.

Further it should be noted that full scale liberalization of US LNG could potentially have the impact of increasing American domestic prices, which in turn will further inflate international shipments, if production is not increased so as to cover the new markets, whilst securing steady domestic flow. This January and February US gas hubs recorded on average above $5/MMBtu of domestically consumed gas.

For all the above reasons, negotiations between DEPA and Gazprom have been turbulent for more than 12 months, with each side hoping to counteract the other with its set of arguments based on actual or perceived market advantages.

Although the Greek market represents a small fraction of EU gas consumption, present-day negotiations will prove to be an illustrative case study on how the market is evolving after significant 2013 developments that saw the establishment of the Southern Corridor, as well as the progress of South Stream, and the legal motion of the EU Commission against Gazprom.

DEPA gained a significant discount that will level-off pressure for the country's industry and will be used as a 'political booster' for the strained incumbent Greek administration, whilst Gazprom will retain the bulk of its market dominance in the country for another decade and will also signal to the rest of Southeast European states that natural gas diversification has a long way to go before it becomes real, rather than perceived. In the meantime more disocounts are possible that are actually solidifying Gazprom's position rather than weakening it.