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. Last Updated: 07/27/2016

Gazprom Disputes Gas Glut Forecast

VedomostiGas consumption in Europe is expected to be down 5 to 7 percent this year.

Gazprom on Tuesday challenged a recent forecast that the world gas market would be flooded with cheap supplies through 2015, claiming that the glut in Europe would end by 2012.

Deputy chief executive Alexander Medvedev made the optimistic statement at a gas conference in Moscow, adding that the company’s prices would become competitive again by that time.

The estimate runs counter to the International Energy Agency’s conclusions in its World Energy Outlook, issued last week. Excess global supplies will last at least through 2015, having far-reaching consequences for suppliers such as Gazprom that rely on the European and Asia-Pacific markets, the agency said.

Such suppliers will come under pressure to make long-term contracts more attractive, cut prices to stimulate demand and remove their linkage to oil prices, it said.

Medvedev said Gazprom would not revise its oil-based pricing, despite the gas market’s current weakness. Gas consumption in Europe will have dropped by a record 5 percent to 7 percent by the end of this year, he said.

Gazprom’s “take or pay” contracts stipulate that customers import a certain amount of gas, regardless of whether they ultimately need that much, or pay a fine. The penalties have been waived for Ukraine so far this year, but other European consumers will be forced to pay.

Making things more painful for Gazprom, consumers are moving to buy a greater portion of their gas on the spot market, supplied with liquefied natural gas, taking advantage of its pricing flexibility. Gazprom is only just entering the LNG market.

Gazprom said last week that European customers bought at least 8 billion cubic meters of gas less than required under their contracts. That is more than the annual imports of 6.5 bcm by Slovakia.

E.On Ruhrgas board member Jochen Weise was less precise about market prospects, saying at the conference that Europe would see excessive supply for the “next few years.” He said gas prices under long-term contracts, such as Gazprom’s, were likely to rise by 25 percent, compared with spot prices, in the next three years.

Domenico Dispenza, chief operating officer at Eni’s gas and power unit and president of Eurogas, an association of European gas companies, urged Gazprom in a speech at the conference to take a “more flexible approach” to prices in order to compete with Algeria, the Netherlands and Norway.

Despite these concerns, Gazprom is betting on larger exports next year. It expects that its exports outside the former Soviet Union will rise 13 percent to 160.8 bcm, Medvedev said.

Export revenues could come in at $51 billion next year, compared with an expected $42.5 billion this year, he said.

The export volumes that Medvedev named are the minimum required by Gazprom’s contracts with consumers, rather than the estimate of how much the market will really demand, a source familiar with the situation said, Interfax reported.

Gazprom’s European exports this year are expected to amount to 142 bcm, down 20 percent from the previous year.