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    Gazprom freed to sell more gas in Russia at market rates


The state gas supplier can now sell more gas in Russia at unregulated prices.

by: Joseph Murphy

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Natural Gas & LNG News, Europe, Premium, Political, Regulation, News By Country, Russia

Gazprom freed to sell more gas in Russia at market rates

Russia’s Gazprom has been permitted to sell a greater volume of gas at unregulated prices, potentially enabling it to expand its domestic market share.

While holding a monopoly over Russia's pipeline exports, the state-owned gas supplier has ceded market share at home in recent years to its domestic rivals, namely national oil company Rosneft and private operator Novatek. Domestically, it is required to sell most of its gas at regulated tariffs, allowing its competitors to undercut it on price in the market for industrial users. Until now, the company has been allowed to sell only up to 17.5bn m3/year at market prices on the St Petersburg International Mercantile Exchange (Spimex) – equivalent to only 7.3% of its total sales in Russia last year.

Under a new resolution by the Russian cabinet published on August 22, however, Gazprom will be able to offer up to 25bn m³/yr at the exchange. The resolution does away with a so-called parity principle, which meant Gazprom could only account for half of the maximum allowed gas sales at Spimex, currently set at 35bn m3, with the rest allocated to other suppliers.

Gazprom has in practice been the only gas supplier to make significant use of Spimex. For example, it sold 13.6bn m3 there in 2018, whereas its rivals only traded 1.7bn m3.

While the decree should help Gazprom secure more business in Russia, the fact that the company is able to sell a mere 7.5bn m3 extra at market rates is unlikely to yield a significant benefit.

"If there were no limit at all or if Gazprom was allowed to sell all gas at prices lower than the regulated rate that would be a breakthrough," Fitch Ratings analyst Dmitry Marinchenko told NGW. "However, the government would not do that because it would cause problems for Novatek and Rosneft."

Meanwhile, Novatek and Rosneft have become less of a threat to Gazprom at home, as they currently have limited supplies available while Gazprom has spare production capacity. Novatek is rapidly expanding output, but these growth volumes are all being exported in the form of LNG, whereas Rosneft's plans to expand its gas business have underwhelmed. The latter saw gas output slide 4.7% quarter on quarter in April through June.

The government decree will provide Gazprom with more room to liberalise its domestic business, in much the same way it is reforming its export strategy. Last October the company launched a new electronic platform for sales to European buyers, marking a shift away from its traditional use of long-term oil-indexed contracts. The platform still only accounts for 4.8% of Gazprom’s total European exports, but this share is expected to grow, as more volumes are released from expiring long-term take-or-pay contracts.