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Streetwise Professor

November 26, 2012

And They Said It Couldn’t Be Done!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:03 pm

By “they” I mean Gazprom, and by “it” I mean pricing long term European gas contracts off of a spot gas index, rather than an oil index:

Norway’s Statoil ASA signed a 10-year gas supply deal with Germany’s Wintershall AG, based on spot gas prices that challenged Russian gas export monopoly OAO Gazprom, which insists on oil-linked prices despite European Union opposition.

Statoil agreed on Tuesday to supply Wintershall, the natural gas unit of chemicals firm BASF SE, with 45 billion cubic metres of gas worth $17.4-billion (U.S.) at current prices, in a deal aimed at creating a flexible gas market in northwestern Europe.

“This is the first contract of such magnitude and length in continental Europe,” Statoil executive vice-president Eldar Saetre told Reuters.

Government-controlled Statoil, Europe’s second biggest gas supplier after Gazprom, is now selling about half of its gas under spot terms, including more than 40 per cent of its European gas, Mr. Saetre said.

As I’ve often written, there will be a positive feedback effect here.  More index-linked pricing will enhance the liquidity of the spot market and the spot indices, making gas hub indexed pricing more viable, and on and on.  Note this:

Analysts at SocGen said oil-indexation was already down to 55 per cent of total volumes of gas sales in Europe, and that spot indexation would be the dominant form of pricing by 2014.

The tipping point is nigh.  So Gazprom can hold its breath insisting on oil linked pricing until it turns blue, but competitive pressure and the insistence of buyers and the increasingly evident absurdity of its denigration of gas index pricing will eventually force it to capitulate.

This is one source of trouble for Gazprom.  Another source is the shale gas revolution.  It’s not right to say that there’s gas under every rock, but it’s not too much of an exaggeration to say there’s gas in every rock, and becoming easier to access every day.  Like in Algeria.

Other sources of trouble are closer to home.  Like Ukraine (“Little Sovok”) threatening to cut purchases of gas from Russia (“Great Sovok”).

And as Anders Aslund points out, at home proper-through an insane investment program pushed by Putin.  Even though North Stream is operating below capacity, it is plunging ahead with South Stream (gas supplies to be named later) and adding additional capacity on North Stream at a combined cost in the $50 billion range.  It is also moving forward on a massive greenfield production and LNG project in Siberia (cost-$40-$65 billion) to supply China.  You know, that big Asian country that Russia has failed to negotiate a deal with for traditional piped gas despite 5 (or is it 6?) years of bargaining: but hey, they’ve agreed on everything but price!

So, Gazprom is supposed to complete a gargantuan production and LNG project on spec, and negotiate the terms with the Chinese later, after the investment is sunk?  How do you say “holdup” in Russian?  And did I mention that Gazprom has never delivered on an LNG project?

That makes sense how, exactly?

The only way it makes sense is as a means of tunneling resources out of Gazprom into well connected pockets from steel pipe makers to Putin.  But that’s the epitome of good sense in Russia.

Aslund is right that the world’s most malign company-Gazprom-is in desperate straits.  Indeed, the splurge suggests that they know the game is up and are tunneling while the tunneling is good.  Maybe Putin realizes the game is up, and as Aslund suggests, is putting his chips on Rosneft instead, and in the meantime is directing an insane capital investment program to move as much money out of Gazprom as possible.  (Sechin’s ascendence is bad news for Gazprom as well: the bad blood between him and Gazprom is well known.  Thinking of which also reminds me of how insane BP was to go to Sechin to help them out with their Kovytka problem with Gazprom.  What could they have been thinking?)

This is all quite encouraging.

Who says there’s no good news?

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2 Comments »

  1. Methinks BP’s just stumbling from one disaster to another. Case study in bad management and bad incentive structures. Still a major short.

    Comment by markets.aurelius — November 26, 2012 @ 5:17 pm

  2. BP is to oil what Lucent was to technology.

    Comment by Sotos — November 27, 2012 @ 9:43 am

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