Streetwise Professor

Gazprom’s customers are continuing their fight against its pricing practices.  Apparently never having heard of Marshall Field (“the customer is always right”), Gazprom is blaming the buyers for their stupidity and mistakes:

OAO Gazprom said it isn’t responsible for its customers’ “strategic mistakes,” signaling Russia’s gas-export monopoly may not compromise in a pricing dispute with European utilities.

“In 2010, strategic mistakes were made in assessing the market outlook, with hopes for very cheap gas and further collapse of spot prices,” Sergei Komlev, head of pricing and contract formation at Gazprom’s export division, said in an interview at his Moscow office. Buyers are seeking “one-off help, given the difficult situation they found themselves” in.

. . . .

“Some of our partners expected they’d be able to sell gas to their clients cheaply by mixing Russian and spot gas, which turned out to be wrong,” Komlev said. “The first thing our clients have to do is admit the mistake they have made during the sales campaign of 2010. The general market obsession with low spot prices has proved to be a wrong strategy.”

This is so much gibberish.  Gazprom’s customers’ problem is that its prices are linked to oil prices (gasoil and fuel oil prices, actually, on a lagged basis), and oil prices have diverged from world gas prices.  Yes, perhaps the increase in spot prices has hit European customers, but these prices are still well below the oil-based Gazprom price.  For instance, the gas price at the TTF hub in the Netherlands is about $350/mcm, and has hovered around that level since December of last year (The price quoted in Bloomberg is per MWh, which can be converted to a price per MCM).  In contrast, the German Border Price for Russian gas is about $450 (it was $400+ last month).

Gazprom’s sweetheart spokesman Komlev (check out the video–and note the liar’s look down and to the left when answering the question about whether Russian gas prices are too high) has this to say:

“A deep connection between oil and gas prices has remained and even grown stronger.”

The gap between spot and contract prices isn’t as “gigantic” as it was in the past two years and will narrow closer to winter because of seasonal demand, Komlev said.

The only thing deep is the manure Komlev is spreading.  Well, that and his homey from ING Financial:

“The problem with the spot market is that it is not liquid enough and spot prices are highly volatile,” Igor Kurinnyy, an oil and gas analyst at ING Financial Markets in London, said by e-mail. “The oil link in Gazprom’s price formulas will stay in place for the time being.”

Insofar as a “deep connection” is concerned, the data clearly say otherwise.  Gas and oil prices have diverged.  And if there’s such a deep connection, then it should be a matter of indifference to Gazprom as to whether it prices off of oil or off of spot prices.

I guess not.

As for liquidity, (a) liquidity is increasing, (b) liquidity would increase substantially if Russian gas were priced off of spot, and (c) there are numerous markets in the US where large quantities of contract gas are priced off of spot prices with modest levels of liquidity.

Gazprom’s testiness over its pricing mechanism reflects the fact that it is increasingly under siege, and not just from European utilities.   Gazprom has played divide-and-conquer for years.  It has repeatedly tried to scare the Europeans by threatening to sell gas to the Chinese.  But that’s no longer working.  The Chinese are bargaining hard, and have lined up large quantities of gas from Central Asia.  So in order to try to put pressure on the Chinese by convincing them that they’ll send gas elsewhere, the Russians are reaching out to one of the charter members of their Coalition of the Losers, North Korea (other members–Venezuela, Syria, Libya–whoops, scratch that one), with a truly risible proposal to build a pipeline through North Korea to sell gas to South Korea.  Like the South Koreans are going to put themselves at the mercy of Kim Jong Il and the nutocracy to the north.  And like the Chinese need the gas.  I’m sure they’re rolling on the floors in Beijing.

So it can’t play the Chinese against the Europeans.  It can’t play the Koreans against the Chinese. The threat from the spot market is growing with gas supplies around the world. So Gazprom is left to treat its European customers like Otter treated Flounder:

Time and the markets are not on its side. It can insult now, but more options are becoming available, which will put increasing pressure on the oil-linked pricing mechanism. Which means that the company will have to come up with somebody a helluva lot slicker than Komlev to make their case in the future–because it will have no case.