Russia’s Gazprom prefers price over volume in first EU gas auctions

By ELENA MAZNEVA and ANNA SHIRYAEVSKAYA
Bloomberg

Gazprom sold about a third of the natural gas offered in its first-ever auction for European buyers, instead targeting higher prices amid a regional glut and plunging commodity costs.

The world’s biggest exporter signed deals with 15 traders for more than 1 billion cubic meters of gas to be delivered in Germany this winter, its export unit said Thursday in an e-mailed statement. Gazprom offered 3.24 billion cubic meters of gas, or about 2% of the planned exports to Europe this year, to 39 bidders from Vitol to Goldman Sachs Group.

The auction prices were higher than Gazprom’s average contract rates, as well as European market prices, the company said without elaborating.

“The goal to test a new sales mechanism on the European market has been successfully achieved,” Elena Burmistrova, head of Gazprom Export, said in the statement. “The expediency of putting this practice on regular stream and applying it to other western and eastern European delivery points, as well as to other gas instruments, is confirmed.”

The European Union’s appetite for Russian gas, which meets about a third of its needs, has rebounded since the middle of the year as most of its contracts are linked to oil. The state-run exporter’s price at border with Germany fell to $6.66/MMBtu in August, the lowest level since December 2009, according to the International Monetary Fund. Gazprom mainly links its gas to oil prices with a lag of six to nine months.

“Gazprom clearly sought a higher price,” said Maxim Moshkov, an oil and gas analyst at UBS Group in Moscow. “They wanted to study the market, to see how the oil-linked price correlates with market rates -- there was no point to sell at a lower cost as Gazprom has sufficient demand in Europe.”

Dutch gas for day-ahead delivery on Title Transfer Facility, continental Europe’s biggest hub, traded at 19.35 euros per megawatt-hour, or $6.4/MMBtu, at 4:52 p.m. London time. The contract slid 2.8% in the past year.

Winter gas in UK, Europe’s biggest market, for delivery from October through March traded at 44.08 pence/therm ($6.81/MMBtu), after plunging 31% in the past year, on ICE Futures Europe.

The Russian gas on the German border slumped 36% in the past 12 months, the IMF data show.

The auction price will be higher than Gazprom’s average rate as gas at hubs fluctuated less than the oil-linked prices, Gazprom's deputy CEO Alexander Medvedev said Monday when the auctions started.

Other bidders include Gunvor Group, Glencore and Novatek Gas & Power, according to Gazprom Export. The companies all declined to comment.

The auctions complemented Gazprom’s decades-long system of oil-linked gas pricing and the system of long-term supply contracts. The Russian gas exporter has since 2010 agreed to price concessions to some EU clients, including links to spot prices in the contract formula.

“The auction results have once again confirmed that Gazprom’s focus on hybrid pricing based on the combination of oil-linked and hub-based pricing was right,” Gazprom Export said in the statement.

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