Gazprom's fat job: exports to Europe lower, incomes higher

Because of the Siberian anticyclone, called in Europe "The Beast from the East", Gazprom showed historical records on daily supplies of gas to Europe for four days running last week, which reached 655.2 million cubic meters. Nevertheless, the February frosts are unlikely to radically change the pattern of Russian gas exports from the beginning of the year. Because of the warm January, the EU countries have reduced consumption of Russian gas and its supply in the first month of the year fell by almost 10% compared to the past. The Siberian anticyclone has sharply increased the demand for gas in Europe, but the January difference of 1.9 billion cubic meters, obviously, will not be covered. This, probably, will not greatly upset the leaders of the gas monopoly. On the contrary, despite a slight decrease in supply the Russian holding's income has soared. Since the beginning of the year Gazprom’s profit might rise by $ 1.8 billion due to the price difference between the January-February period of last year and this year.

"Earnings are growing due to the increase of prices for long-term contracts. By last January, they grew by 25-30%," said Alexei Grivach, Deputy Director of the National Energy Security Fund. According to Index Mundi, which refers to the World Bank and World gas intelligence, in January the average price for Russian gas in Europe was $193.3 per thousand cubic meters, and $222.5 in February. In the first month of this year, Gazprom sold gas for a much higher price - $268.38. Thus, the export of Russian gas in January fell by 1.9 billion cubic meters - to 17.2 billion, but resulted in more revenue - $4.6 billion instead of $3.69 billion last January. The difference is + 25% or $924 million. If the prices for Russian gas remain at the same level, in February Gazprom will also increase its revenue by 855 million compared to last year. The total increase will be of $1.8 billion.

The Russian holding supplies most of the gas to Europe under long-term contracts with a price formula tied to the oil price, although taking into account the situation in the spot market. That is why, after the oil crisis in 2014, Russian gas is still one of the cheapest, including this February, when the frosts came to the EU and European companies sharply increased the purchase of gas. "At the spot, we see a more serious rally than a price increase for Russian gas," says Alexei Grivach. The Interfax agency reports that yesterday in the Austria's main gas pipeline hub at Baumgarten the contracts for Monday were $360 per thousand cubic meters, whereas at the beginning of the month the gas cost only about $230 per thousand cubic meters.

Such an increase of spot gas prices is extremely attractive not only to Gazprom, but also to LNG suppliers, including the United States. However, experts believe that the prices for spot gas in Europe have increased temporarily - due to a shortage of raw materials in Europe, but for the powerful expansion of liquefied gas to Europe, the prices in the EU and other target markets are to become equal. "First of all, for additional LNG volumes to enter Europe, it is necessary that prices for LNG in Asia slightly exceed gas prices in Europe, otherwise the bulk of liquefied gas will be delivered to the Asian market. So far, such a situation (when prices in Europe and Asia are close), we can see only during small time intervals," says Alexander Sobko, analyst at the Energy Center of the Skolkovo Business School.

As EADaily reported earlier, in April-September last year, LNG supplies from the USA to Europe amounted to only 9.7% of the total volume of export of liquefied gas - 867 million cubic meters. At the same time, Asia-Pacific countries imported three and a half times more - 2.9 billion cubic meters. This winter, gas prices in the region reached $390.

For competition to be started between LNG from the US and the Russian pipeline gas one more condition should be fulfilled, experts believe.

"The prices on the European spot itself should be lower or equal to the prices for long-term contracts," Alexei Grivach believes.

Alexander Sobko says that if prices in Europe are close to prices in the Asia-Pacific region, theoretically, the competition between LNG and pipeline gas can begin at almost any price, since production at most of the LNG plants will be continued even if its full cost is not paid off.

"Simultaneously, at ultra-low prices (below $4 per million BTU ($142 per thousand cubic meters), the US LNG will not be produced, and Gazprom will still be able to economically justify exporting gas to Europe," says Alexander Sobko.