Platts: Sussing out the ceilings over Russian gas prices

Almost a decade on from the first Ukraine-Russia natural gas crisis of January 2006, Europe faces another winter with the threat of disrupted supplies through Ukraine hanging over it. The region’s  security of gas supply has improved significantly, but it remains vulnerable, not least where dependence on Russian gas has grown as a result of lower import volumes from North Africa. The stubborn facts are that Europe has a structural gas deficit and the only new source of supply is LNG.

From Russia’s perspective, its markets have evolved into three distinct zones. First, captive markets. These are the former Soviet Union and to a large extent south Eastern Europe, but increasingly excluding the Baltic states and Ukraine. In this zone, Russia can dictate pricing terms, has a high degree of control over transmission capacity and a high level of demand security. Nonetheless, prospects for market growth are limited.

Second are hostile markets. In Eastern Europe, including the Baltic states and Ukraine, growing interconnectivity with Western Europe and the ability to import LNG threatens Russia’s market share. Increasingly, buyers in Eastern Europe have options to use alternative supply routes and different pricing mechanisms. This is an area of potential demand growth, but one in which Russia faces increasing competition and political hostility.

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