“Gazprom” has started to sell gas to Europe for 20% cheaper than the market

The price of Russian natural gas in Europe fell to the lowest values since September 2004 and is now approximately 20% below European spot (market) prices of gas is the biggest discount in eight years, writes Bloomberg.

Gazprom did not disclose the contract price for its gas in Europe and apply selective discounts, depending on the contract and the consumer, so the gas prices are not directly observable. But as an indicative indicator uses the Bloomberg monthly prices of Russian gas on the border with Germany. According to the IMF (IMF Primary Commodity Prices), in may 2016, the average monthly price of Russian gas at the German border was $3.99 for 1 million British thermal units (BTU). The figure has been declining for 18 consecutive months — from December 2014, according to the IMF, and now dropped to the lowest level since September 2004.

Leading indicator of European spot gas market is the price on the UK NBP hub (along with other liquid Playground — TTF in the Netherlands). The cost of gas NBP futures for delivery in near month on the results of yesterday’s auction amounted to £3,356 per million BTU, or $4,9 (data exchange ICE Futures Europe). It is 22% more expensive than Russian gas at the border with Germany — so cheap gas “Gazprom” was not worth it since April 2008, Bloomberg calculations show.

Based on the conversion factor in the annual report of Gazprom for 2015 (1 million BTU = 0,028 thousand cubic meters of gas) the current price at the border with Germany is equivalent to $142,5 per 1 thousand cubic meters, Deputy Chairman of “Gazprom” Alexander Medvedev at the end of may told reporters that in 2016 the average price of Russian gas in Europe will amount to $167-171 per 1 thousand cubic meters compared to $243 over the last year. This significant decrease is due to the binding contract prices of “Gazprom” to oil quotations with a lag of six to nine months (oil, compared with 2014 fell twice).

However, in 2015, export prices for the Russian gas for Europe, based on indirect indicators, fell faster than it should be only binding to the oil prices, said yesterday BP chief economist Spencer Dale at the presentation of annual statistical report by BP Statistical Review of World Energy. This means that “Gazprom” apparently behaved in the same way as OPEC in the oil market, — responded to increased competition from liquefied natural gas (LNG) are not measures of price support and measures to retain market share. “As is the case with OPEC, the assignment of market shares to support prices less attractive [than maintaining market share at lower prices], if the source of price weakness — in this case, the growing supply of LNG is seen as a sustainable and permanent”, — said the chief economist of BP.

In 2015, Gazprom increased its gas supplies to Europe by 8.2% (to of 158.6 billion cubic meters) and for the first time in ten years increased its share in the European gas market — with a 30 to 31%.