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    [Premium] Russia's Spimex Fights Gas Market Inertia

Summary

The St Petersburg International Commodities Exchange (Spimex) is not seeing the growth in liquidity needed to assure its future as a gas trading platform, and tariffs and the lack of transparency are also problems.

by: William Powell

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[Premium] Russia's Spimex Fights Gas Market Inertia

Hopes that a gas market might spring up in St Petersburg, enabling price discovery and possibly also competition to Gazprom, must await government intervention, according to the deputy director for gas at the St Petersburg International Mercantile Exchange (Spimex), Boris Cherny. In the meantime, trading is governed by a 30-year old set of rules, he told NGW.

Some progress has already been made in the few years since it started gas trading. Payments and transportation instructions have been computerised; the lead times for such technicalities have been shortened; exchange and clearing house transaction costs are now more than 10 times lower than the market access costs in the regulated segment; inter-region gas price cross-subsidies are smaller; and more efficient pipeline transportation routes are being used.

The extent of the permitted gas trading area is that gas enters the system in the east of Russia, from two catchment areas near Surgut and Urengoi, and there are three exit points.

The market remains rudimentary, compared with what is going on in the European Union. He told NGW during a conference in Vienna late January that last year he led a delegation – including traders from Gazprom, some of the independent producers and some brokers – to the Central European Gas Hub in Austria in order to see how balancing could be done.

“The trip was very successful,” he said. “We now have a clear vision on balancing, whereas before we all had different ideas.” But industry regulators cannot prepare a detailed balancing code as they can in Europe, he said.

Spimex is not recognisable as a conventional exchange as the trade is all one-way, with no reselling. It therefore has a churn factor of one; and one counterparty, Gazprom, accounts for 75% of the trade. And all the contracts must be prepaid.

The exchange therefore needs some reforms, Cherny said. In 2014, Spimex launched ‘Month Ahead’ trading, which last year reached 20.3bn m³, valued at €2.3bn (including transport costs of €1.4bn), nearly all of which was sold by Gazprom, and this is not enough to spark a revolution.

Gazprom alone of the Russian upstream producers has to sell its gas at a regulated price, which led it last year to sell about 17bn m³ on the exchange, while the other producers are free to reach negotiated prices with customers. Their own amount of gas for sale also fluctuates: a key example of this is independent Novatek. It could be selling a lot but, now that it has moved into LNG exports from Yamal, there is less available for Spimex trading.

Bilateral contracts between producers and consumers done off the exchange soak up a lot of liquidity, Cherny said, and the government cannot tear those up just in order to create liquidity.

Spimex expects to buy a clearing house in February, having received a licence to clear gas last month. It already offers clearing services on its oil products. "The next step is retrading, and this is a difficulty," he said, citing the law on value-added tax. Financial trading is even further off, and is a matter for the authorities to tackle.

One Russian energy economist in the private sector told NGW that, without the ability to export gas and earn higher prices, companies are preferring to invest in oil production instead. Another problem is the lack of transparency in tariffs for pipelines and storage. As to the question of allowing third parties access to export infrastructure such as Nord Stream 2, in order to buy gas at Spimex, he says that is a long way off: "The Duma energy committee continues to believe that what is good for Gazprom is good for Russia."