"Some weeks ago E.ON's CEO Bernhard Reutersberg confirmed that a basic agreement had been reached with Gazprom on changing some important conditions for gas supplies under the existing long-term contract. He was referring to the decoupling of part of Russian gas purchases from oil prices and linking them to spot prices, and to a greater flexibility with regard to the volumes of gas supplied.
Amendments to E.ON's contract are just one part of wider changes that are taking place in the European gas trade. Some days earlier, ENI made an announcement regarding amendments introduced to its contract with Gazprom and also regarding more flexible gas prices (as the Wall Street Journal reported in its article from 13 February). There are indications that a similar deal will be reached within the next few weeks with Gaz de France (e.g. simultaneously with the French company's entrance into the Nord Stream consortium), especially since Reuters wrote on 19 February that, according to some sources in the Russian company, "Gazprom […] had agreed to allow a European spot price element in deals with most European customers".
Russian Deputy Prime Minister Igor Sechin had suggested that price discounts and even some changes to the take or pay clause are possible for another important buyer of Russian gas – Turkey. Interfax revealed on 9 March that amendments of contracts – concerning either prices or volumes - are being negotiated by several other European companies, inter alia, Austria's EconGas, the Czech Republic's RWE Transgas, Hungary's E.ON Foldgas, and also WIEH and Wingas, which are joint ventures between Gazprom and German companies.
All this seems to indicate that we are witnessing an important change in Gazprom's energy strategy in the EU. A change, furthermore, that has somehow been provoked by gas market conditions and pressure from the main partners of the Russian exporter.
Gazprom, until recently rigid in the rules it once set for gas trading, is becoming more flexible (both in prices and in volumes), and has agreed to open and change some conditions of long-term gas contracts. And it has decided to modify something that used to be rather constant and unchangeable in EU gas trading – the linkage of gas prices to oil/oil products.
This indicates that the Russian company – severely hit by last year's slump in gas demand and facing the risk of competition from unconventional gas in a few years time - is trying to partially adapt to the changing market conditions and wants to defend its market share in the EU. It wants also to increase the competitiveness of Russian gas and to strengthen the position of its main European partners.
In its attempts to do so it is using considerably different means than it has previously applied. It is – slowly and selectively - adjusting its strategy to both the present situation and the more liberalised environment in the EU gas market.
Gazprom's decision seems to be good news for European consumers – with the present market conditions allowing for pricing connected to the spot market, this means a reduction (on average) in Russian gas prices. A section of gas supplies from Gazprom should in coming years be cheaper and available at a price close to the market price which, in turn, is more volatile than the traditional oil-indexed price included in long-term contracts (which usually lag 6-9 months behind oil price fluctuations).
Gazprom's move will probably allow Russian gas to regain its share of the EU market and a reinforcement of the position of some of the main companies trading Russian gas in Europe (such as E.ON and ENI but also BOTAS). These in turn could, inter alia, make it easier to fill Nord Stream with gas.
Contract amendments by Gazprom also mean that the company is getting partially involved in liberalised market competition. As such, the Russian move might be regarded as an important element (and possibly a trigger) of wider changes in gas trade in the EU. The biggest producer and exporter of gas is somehow following the path of other exporters - spot prices have already been introduced into E.ON's long-term contracts with Dutch and Norwegian companies.
At the same time, Gazprom's decision is to some extent changing the conditions on the market and as such may influence the strategies of other gas providers to the EU. Algeria's Sontrach has already been commenting on the Russian move and indicating possible changes in its future agreements.
It is not obvious what the longer term effect of these changes will be. The question remains whether this decoupling of the gas price from the price of oil may go further, and become a dominant form of gas pricing within the EU. There is also the question of the future shape and role of long-term gas contracts – are they going to remain the main form of gas trading in Europe? Also, have the developments of recent weeks been aimed at sustaining their role, or on the contrary, will there be a visible shift to short term deals? And finally – is Gazprom's behaviour the beginning of greater changes leading to the adaptation of the liberalised market rules of the game, or merely a unique move, a reaction to last year's developments, a way to get through the next few difficult years?"
