Gazprom warns natural gas prices could triple by 2009

By bne IntelliNews June 10, 2008

Derek Brower in Deauville, France -

Already struggling under rapidly rising energy costs, Europe is facing further crippling rises as Gazprom said Tuesday, June 10 that natural gas prices in Europe could rise to as much as $1,500 per 1,000 cubic metres (cm) by 2009 on the back of strong international oil prices. The company's boss, Alexei Miller, added that prices for its exports to Europe had already increased to $410 per 1,000 cm, compared with the company's earlier expectations of $400 per 1,000 cm this year.

Speaking to a posse of invited journalists in the sleepy Norman resort of Deauville, Miller said he expected oil prices to reach $250 per barrel next year. The head of Gazexport, Alexander Medvedev, suggested that with gas prices in Europe linked to the oil prices, that would yield a gas price of $42 per million British thermal units, or $1,500 per 1,000 cm.

The figure struck some analysts attending the briefing as "speculative," but a Gazprom spokesman suggested to bne that both the forecast oil price and the formula to calculate the resulting gas price were being used internally by the company.

While the price warning will come as a shock to the EU, which imports over 150bn cubic metres a year (cm/y) of gas from Gazprom, the company is in little mood to compromise. Miller said he was "concerned about protectionist tendencies" in the bloc, and took a swipe at a clause that Brussels introduced into its energy liberalisation programme last year that could prevent the Russian gas monopoly from buying assets in the EU. "I ask how wise is it that the Commission invented this clause," he said, adding that it could prevent "much-needed investments to satisfy the demand security of gas supply of our European customers." He likened the clause to "creating a barrier to the Gulf Stream, because the Gulf Stream [also] warms up all of Northern Europe."

He added that Gazprom is "not the only company that thinks so" and that it would coordinate with its [European] partners to oppose the clause in order to prevent an "energy deficit and de-industrialisation" in Europe. French and German companies oppose some of the EU's liberalisation programme, which would force them to separate parts of their businesses to increase competition.

Reliable friend

Diversification of import options was sensible for the EU, Miller said. But it was based on the erroneous assumption that Russia is not a reliable supplier. And he noted that attempts to develop alternative imports of gas from Central Asia had served only to increase the price of gas from countries in that region. "We call this a Caspian paradox - they thought that this would increase competition," he said of Western politicians who have sought agreements in the region. "But it brings the opposite result - consumers compete and not the sellers."

Miller also said that Austria and Slovenia were now ready to commit themselves to the South Stream gas pipeline - one of two new export projects Gazprom wants to build to Europe. The South Stream project would "complement" the Nabucco project, he said, referring to a Brussels-backed pipeline development that would import gas from Central Asia directly into Central Europe, avoiding Russian territory. Austria's OMV first told bne in April that it was considering joining the South Stream project; the company is also head of the consortium building Nabucco.

Speaking about TNK-BP, meanwhile, Medvedev said that, "if this asset were to be sold, we would be interested in buying it." But he reiterated the line that has emerged from the Kremlin, which over the weekend suggested it would let the shareholders in the company resolve the dispute on their own. "Today is corporate conflict inside the company," Medvedev said. "We hope it will be solved and then we will consider it."

TNK-BP is currently tearing itself apart in a shareholder battle as the Russian side - made up of Len Blavatnik's Access, Viktor Vekselberg's Renovo and Mikhail Fridman's Alfa, which forms the AAR consortium - fight BP over who remains in the company. AAR complains that BP treats TNK-BP ike a subsidiary; BP is understood to favour getting AAR to sell out to Gazprom.

Speaking about Gazprom's plans in the upstream, Miller said the company would spend $30bn this year, with the bulk to be concentrated on the Yamal Peninsula, and on new fields in Eastern Siberia and the Arctic Shelf. The Shtokman field, in the Barents Sea, would be on stream by 2014, supplying the Nord Stream pipeline to Germany.

Miller said the company would also become the world's largest within the next seven to 10 years, when market capitalisation, which stands at $360bn now, would likely reach $1 trillion.

Medvedev also told bne that the company hoped to trade all of its exported gas in rubles "within two to three years."

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