Industry Trend Analysis - Russian Gas To Remain Key - SEPT 2017

BMI View : Russia will maintain its dominance in the European gas market, due to the cost competitiveness of its supply and the increasing flexibility demonstrated by Gazprom to its buyers in the region . We do not expect the company to engage in a price war or attempt to block LNG out of the market.

We believe Russia will remain the dominant exporter of gas to Europe across our 10-year forecast period and in the face of rising competition from other suppliers. However, Russia's bargaining position in the region has weakened substantively over recent years, due to the increasing interconnectedness of the European gas market, softer regional demand, and the growing flexibility of alternative sources of supply, notably LNG. In response, and under pressure from both its buyers in the region and the EU, Russian major Gazprom has enacted a number of pricing and contractual concessions. We believe further concessions will be needed in the coming five years to 10 years, in order for Russia to renew its large pool of long-term sales contracts and maintain its share of Europe's imports.

The key will be the extent to which Gazprom is willing to bring its pricing in line with European hub prices, or to undercut them. To date, it has done this through temporary price concessions and rebates, but buyers are likely to negotiate more aggressively for hub-indexed pricing formulas in upcoming contract renewals. Russia's short-run costs of supply are low, economic in Europe in a range of USD3.0-4.0 per million British thermal units (/mnBTU). As such, it can offer amongst the most competitive sources of supply in the region. Given the increased availability (and flexibility) of alternative supplies, holding prices above market levels would lead to a significant loss of volume, and so revenue, for Gazprom. If prices are held significantly above market levels, the company may also find itself faced with arbitration.

Russia Maintaining Its Dominance
Share Of Total Gas Imports Into Europe, %
Source: IEA, BMI

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