FT learned about the preparation of “Gazprom” to the price wars in Europe

“Gazprom” has studied the economic aspects of the use of a price war and is in the process of discussion of the issue, reports the Financial Times citing informed sources. The publication cited the statement of Deputy head of gas concern Alexander Medvedev, who on 1 February at a meeting with investors in new York said that low spot prices in Europe have already made LNG supplies from the US uneconomical.

“Despite the fact that the market for the prevailing point of view that LNG from North America may change the current pricing model in Europe, in fact this is not” — said Medvedev.

Investors are afraid that “Gazprom” will move to the same strategy in the gas market, which Saudi Arabia ran on oil, writes the FT. But analysts argue that this approach for Russian companies economically viable. According to them, the newspaper writes, already low prices on the European gas market means that there is a possibility it is relatively easy to lower them to the level at which to supply LNG from the U.S. will be unprofitable, which will allow Gazprom to defend its market share in the region, bringing a significant amount of revenue.

As Saudi Arabia has the ability to increase oil production if necessary, and Gazprom possesses the largest reserve capacity in the gas market, notes the FT. According to the Russian company, the newspaper writes, these reserves amount to approximately 100 billion cubic meters, equivalent to a quarter of its volume of production and 3% of the world.

According to the expert on the Russian oil and gas sector, Oxford Institute for energy studies James Henderson, the delivery of gas to Germany is Gazprom $3.5 per million British thermal units, while LNG supplies from the US would be cost-effective when its cost at $4.3 per million British thermal units. While gas prices in the US have already reached 16-year low.

In recent years, in the US there were a lot of projects on processing of cheap gas that has become available as a result of the shale boom, the FT recalls, according to which the first deliveries of U.S. LNG abroad are expected in the next two months. The total potential export capacity of U.S. gas projects equivalent to two thirds of the exports of Gazprom in Europe, the newspaper notes.

Assessment analyst of the Paris Bank Société Générale Thierry Bros, to displace American LNG to the European market, Gazprom will have to sacrifice a revenue of $1.3 billion, which represents less than 1 percent of their annual sales. Contract prices of “Gazprom”, which are tied to the cost of oil, reduced in accordance with the trends in the market and, as noted by the FT, probably more will fall in the next six to nine months.

According to Brough, the European spot price is likely to fall below the marginal cost of the supplies of American LNG in the second half of this year. Analysts, however, believe that Gazprom will be difficult to keep low rates for a long time, writes the FT. As a medium-term strategy of “Gazprom”, in their opinion, can lead such a pricing policy to prevent the emergence of new LNG projects.