bne IntelliNews -
Russian gas group Gazprom's experimental series of spot sales of natural gas to Europe has so far failed to draw bidders, with no purchases reported since the first batches of more than 3bn cubic metres of gas went under the hammer on September 7.
While the first two days of inaction indicated that potential buyers found the price too high, the gas giant's willingness to explore the auction route has generated much speculation about its sales tactics for the future.
Gazprom management assures that it will continue to hold auctions and include its other routes in such sales, deputy chairman Alexander Medvedev said after the start of the first spot sale in the company's history.
"The European gas market changes constantly and, meeting its challenges, we want to test the new form of trading the gas and see what benefits it can bring to seller and buyers," Medvedev said.
Gazprom will announce the results of the sales on September 10, which may shed some light on whether it genuinely views the mechanism as a means of balancing long-term contracts, or is merely dabbling with a pre-winter seasonal experiment before reverting to contracts.
Seen to play by the rules
The new sales scheme shows that Gazprom will try to defend its European market share and wants to be seen to be willing to play by European rules, as EU partners are against long-term contracts. It is also Gazprom's chance to restore the business ties that suffered during the sanctions wars that erupted after Russia's annexation of Crimea in March 2014.
But traders were left wondering whether Gazprom will simply keep the share of spot sales low just to please EU buyers before it reverts to contract-based sales once winter is over.
Gazprom will try to sell 3.24bn cubic metres of gas before September 10, which comprises 2% of its average annual gas sales in Europe, VTB Capital analysts estimate. Even if the auction price exceeded the company's gas price under long-term contracts, the auctions would not still "lead to any significant changes in EBITDA", they said in a note.
For now, the Russian company gives the impression it is test driving a new mechanism, to be followed up with more if it proves to be profitable. However, none of the 39 auction participants, who expected the price to be lower than under the long-term contracts, were keen to buy on the day.
Gazprom CEO Alexei Miller said in June that the auction is an additional mechanism of the company's work on the European market, and not an alternative to long-term contracts. But the higher price of the gas on offer compared with contract prices still had analysts guessing about the company's intentions.
Agata Łoskot-Strachota, a specialist in Russian oil and gas at the Centre for Eastern Studies (OSW) in Warsaw, said it was too early to tell if Gazprom really is making a concession to the EU or just "playing the game".
"We must see the effects of the auctions and if they have any continuation. And then we cannot exclude that it can be both – presented as a concession to EU demands and at the same time a tool," the expert told bne IntelliNews in an email. "I believe Gazprom will use both its old modes of behaviour as well as the options created by the EU liberalising the market to pursue its own goals."
All about margins
The current contract gas price for Germany, for example, is $230 per thousand cubic metres. Medvedev said "the results of the auction will be higher than the weighted average value of the portfolio (of gas contracts)," Kommersant daily cited the company official as saying on September 7.
Meanwhile, Gazprom expects the average export price for the year to fall between $237-$242 per thousand cubic metres. Without specifying auction prices, Medvedev also confirmed that Gazprom will seek to maximise these, rather than sales volumes. However, observers say a botched run at the spot sales market may curb the company's pricing ambitions.
"Gazprom failed to sell any gas at first auction yesterday because of too high prices," added Łoskot-Strachota. "If it learns and aligns pricing strategy to the realities of the EU market, then it could sell additional gas quantities above contract prices which could definitely help its income."
Some experts believe there will be more sales eventually, since gas prices are still lower after months of oil price correction and the heating season is now approaching. Yet this still may fall short of the profit margin sought by Gazprom, whose managers managers want to test if the scheme resolves regulatory issues with EU and bypasses the restrictions of European watchdogs, Alfa Bank analyst Alexander Kornilov told bne IntelliNews.
"The spot sales to Europe will load the Nord Stream [pipeline], which is now not operating at full capacity, and if it works, I think these auctions can become regular," Kornilov added.
Medvedev also said other Gazprom routes may be involved in auction sales at a later stage, but that for now Nord Stream, which runs from northern Russia under the Gulf of Finland to Germany, is the ideal variant as it has free capacity. Of the company's two other routes to Europe, the Yamal-Europe pipeline is working at full capacity almost constantly.
Ukraine transit solution?
The auctions also create a potential means of resolving the problem of gas transit to the EU via Ukraine as tensions between Moscow and Kyiv continue unabated. Moscow says it will stop supplies to the EU via Ukraine by 2020, but this can be unworkable in practice, especially with an anticipated spike in Chinese gas orders to balance European ones still failing to materialise. With auctions, however, a European company that buys gas from Gazprom becomes a supplier and takes all responsibility for transit, keeping Russia's hands "clean" of direct dealings with Ukraine.
Gazprom shares added 1.42% by the middle of September 8 trading session, slightly ahead of the MICEX Index, which grew by 1.23%. In H1, Gazprom posted better than expected financial results, with net profit up 50% on the year to RUB675.9bn ($10bn) in H1, as total sales increased by 1% y/y to RUB2.9 trillion.
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