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Gazprom tiff masks demand woes
Russia's efforts to extract more money from Ukraine by cutting off natural gas supplies sent the fuel to a three-year high in Europe, and set up prices for a steeper decline.
- Bloomberg
- Published: 23:31 January 12, 2009
- Russia has reached an agreement with the European Union to deploy monitors to ensure the flow of gas via Ukraine.
- Image Credit: Reuters
Moscow: Russia's efforts to extract more money from Ukraine by cutting off natural gas supplies sent the fuel to a three-year high in Europe, and set up prices for a steeper decline.
Gazprom, Russia's state-controlled gas monopoly, and Naftogaz Ukrainy, Ukraine's state energy company, signed an accord yesterday to renew shipments to Europe through Ukraine.
The global recession is reducing demand just as new liquefied natural gas terminals open, increasing the capacity for imports. The post-winter thaw usually drives spot prices lower, and the cost of most European gas is tied to months-old oil prices, which have plunged 72 per cent since July.
Natural gas "will drop like a stone," said Thierry Bros, an analyst at Societe Generale, France's second-largest bank, in an interview from Paris.
Patrick Heather, UK-based BG Group's former gas-trading chief, says prices probably will weaken to 47 pence a therm ($7.13 per million British thermal units) after the dispute between Ukraine and Russia ends. Gas for immediate delivery in the UK dropped as much as 16 per cent to 56.50 pence a therm yesterday, according to prices from ICAP.
Deutsche Bank, Merrill Lynch and McKinnon & Clarke forecast, on average, 47.9 pence a therm during the second quarter in the UK, Europe's biggest market. Futures on the ICE exchange show prices dropping to 46 pence a therm by June.
A drop would sting Gazprom, while reducing costs for consumers and power companies, including Essen-based E.ON Ruhrgas, the largest buyer in Germany, and France's GDF Suez, based in Paris.
Only a prolonged cold spell across the continent, field shutdowns in the North Sea or a failure by Gazprom to restore gas flows to Europe would likely prevent a slump in prices.
Russia halted shipments through Ukraine last week, cutting off deliveries to at least 19 other European countries, in a dispute over prices and gas transit costs.
Czech Prime Minister Mirek Topolanek, acting for the European Union, brokered a three-way agreement for international monitors to partly resolve the conflict by checking flows into Ukraine's pipelines. Once shipments resume, filling the pipelines may take three days, E.ON Ruhrgas spokesman Kai Krischnak said.
Europe relies on Russia for 25 per cent of its gas, most of which passes through Ukraine, according to Gazprom. Demand rose 23 per cent in the past decade as power generators turn away from coal, which generates more carbon emissions linked to global warming.
Russia sold gas at subsidised prices to former Soviet states since the collapse in 1991. Gazprom's policy now is to raise prices to what it considers the market level, rather than forgo revenue to build political ties.
"With the monitors it will be very clear what's going on," Ronald Smith, head of research at Alfa Bank in Moscow, said in an interview. With its economy slowing and gas prices peaking, Russia has an incentive to make sure shipments continue, he said.
Gazprom plans as much as 10 trillion rubles ($320 billion) for projects to bring gas to market over the next 11 years, including developing deposits in Siberia and the Arctic.
"Gazprom is now struggling for cash," said Karen Sund, founder of consulting firm Sund Energy. "They need large funds for new investments in both fields and infrastructure, and they are testing the limits of goodwill with several of their buyers."
Warmer-than-normal weather in October and November allowed Italy, Germany and neighboring countries to pump record amounts of gas into underground storage.
Halfway through the heating season, Europe's natural-gas stockpiles are about the same as a year ago. Inventories at Europe's seven biggest trading hubs were 38.6 million cubic metres on January 5, or 74 per cent full, compared with 73 per cent a year ago. Five of those were 99 per cent full by early November.
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