Interview with Sergey Komlev, Gazprom Export

The ‘new’ model for long-term contracts suggests shifting the balance of risks in favor of a buyer. Although such risk sharing scheme exists in some contracts, we doubt the viability and stability of a pricing system in which such contracts would be promoted to play a dominant role. In the case of 100 percent gas indexation, any take-or-pay obligations on the buyer’s side lose their function as a guarantee of demand security because buyers can dispose of excess volumes on hubs with no risk to their revenues. Producers from third countries will run the intolerable risk of gas price erosion because there is virtually no force in Europe interested in preserving the value of natural gas.

That situation is untenable for traditional suppliers who must take all the risks of price uncertainty without any means of affecting hub price formation, and who must incur the substantial additional costs of providing supply flexibility in these long-term contracts without any reciprocal benefits or tangible rewards.

Gazprom has been raising concerns over the evolution of the internal gas market in Europe for sometime now but Brussels seems to be paying little attention. How do you explain this, knowing that you are Europe's first external supplier? 

Furthermore, how do you explain the European phobia against Russian gas? What critiques would you address to your own strategy? And lastly, why is there not a Brussels office?

Brussels is focused on geopolitics. Our company participates in various discussions held with the EU, but unfortunately, our arguments are often unheard or unwanted. Namely, we haven’t yet heard a clear explanation why such a big emphasis is put by the EC on lowering the dependence on Russian gas. On the contrary, our approach is commercial-based: we want to sell as much gas as possible, at prices that provide for balance of interests of both buyer and seller and support investment cycle; we aim at harmonious development of European gas market that’s in interest of everyone involved in it.

As to the Brussels office, it is being established. 

Regarding the possible removal of flexibility clause from Gazprom contracts, wouldn't things be worst if such a move is made at a time when Brussels is very much willing to reduce its imports from Russia (if not suppress) and when European companies are asking for more flexibility?

Preserving the flexibility of long-term contracts has its price. Long-term contract foresees not just a certain volume of gas to be supplied, as it is at spot market. It also provides for a certain package of services, possibility to change the delivery quantities even within one day depending on buyer’s needs, gas delivery to the agreed point, storage, and so on. Spot trade does not provide for all that. Here, a certain volume is purchased on hub and then the buyer has to find himself how it would be transported, or stored if not consumed instantly, etc. If someone wants from us both a long-term contract (that is, security of supplies), and flexibility, and the spot price level, and – in some cases – no take-or-pay obligations – what should such a contract benefit to us supplier? How does it provide for balance of interests, or risk sharing that is incorporated in the current contracts? Under such conditions we would prefer to sell gas on spot only when the price is favourable enough for us, and not to take any additional costs, or risk fines for not providing the flexibility demanded by the buyer. Or, this would force us to fully delete every flexibility from the contracts, imposing a 100 percent take-or-pay obligation. Especially when some other suppliers already removed any flexibility from their contracts, what in fact means that it is the Russian gas contracts that provide the flexibility of the whole European wholesale market.

 Gas pricing formula is also a point of disagreement between Russia and China. With regards to China's wide imports options, isn't it time to make some concessions?

The problem is that Chinese party wants to buy Russian gas at prices that are bound to the internal prices in the country. These however are set by government and artificially kept down and in no way related to the market level. These regulated prices are part of artificial inflation restraining measures. But why should we subsidize the second biggest global economy through undervalued prices for our gas? What we aim is to sell gas to China at market prices. And the development of Chinese gas market makes us optimistic about the possibility to reach the agreement that would satisfy both parties.

What would you like to say about the anti-trust investigation launched in September against Gazprom?

This investigation aiming at our long-term contracts is in fact a political-moved operation through which the European Commission seeks to reach the decrease in gas prices for several countries of Eastern Europe. Long-term contracts with oil-pegged pricing are a standard practice in gas industry throughout the world, for pipeline gas as well as LNG. The pricing formula is individual in every contract, because the composition of alternative fuels and their prices are unique for every country. Therefore, if the gas prices resulting from different formulas vary between the EU countries at some moment, it gives no reason to accuse Gazprom of being “monopolistic”. The pricing formula is agreed in advance, and itself it is a result of agreement of both contract parties. The European Commission says it has nothing against oil peg as such but against the price differences – this means then it has no clear view of the specifics of pricing based on the substitution price of an alternative fuels, in contrast to traditional demand-and-supply mechanism.

While Russian gas is being "ill-treated" by the European Commission, very little is said about Algerian gas. Is there a real difference in treatment? If so, why?  Generally speaking, how do you explain the increasing energy relation tensions between the EU-Russia?

In Italy or Spain, where the bulk of Algerian gas goes to, the Algerian suppliers are not “patted on the back”. But you are right noticing that Brussels speaks more often about Russian gas. It might be logical to explain that the reasons behind that are rather political than economical. But we, as a commercial company not dealing in politics, we would prefer not to comment on political issues.

Yasmina Sahraoui