Gazprom : slow to adapt and unable to exert influence

Abstract

Changing market realities in natural gas engender significant challenges for Gazprom in both Europe and Russia alike. The trend consists in a growing number of suppliers domestically, with a boost of independent gas production, and internationally, with a more liquid gas and LNG trade. Transition towards a new market model in the EU affects existing pricing mechanisms and contracts. For the Russian gas export monopolist a separation between pipeline capacity and commodity markets also generates risks of capacity-supply mismatch and constitutes barriers to new pipeline projects. In Russia itself, Gazprom faces competition from fast-evolving gas producers such as Rosneft and Novatek. The two companies are striving for the gas export de-monopolisation, which already occurred for Russia’s LNG. Current low price context reverts the situation in Gazprom's favour. In particular, Gazprom's production competitiveness improves, oil-indexation regains a rationale, while natural gas demand growth rates somewhat restarted, whereas domestic competitors experience severe difficulties. However, main political barriers, conflicts surrounding Ukraine and diversification strategies subsist. A more positive market context stems from exogenous factors rather than from Gazprom's own strategies. It may become essential to use the positive market context to demonstrate flexibility on contracts, pricing and hub-based exports. An ability to adapt does not deny a more vivid defense of the company's views especially regarding new projects and capacities. Nevertheless, pipeline over-capacity loses attractiveness. On a smaller scale, investments into small liquefaction capacities might be a starting point to depoliticize Gazprom’s supplies to Europe. A transit agreement with Ukraine remains strategically important alternative to investments into new pipelines.