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08/12/2016

Russian gas price seen falling by up to 35% in Europe

Energy

Russian gas price seen falling by up to 35% in Europe

A Gazprom building. Russia, 2013.

[Thawt Hawthje/Flickr]

The price of Russian gas for most of the European Union and Turkey could fall by up to 35% this year, plunging oil prices, Russia’s Vedomosti newspaper reported on Friday (13 February,) citing forecasts by the country’s Economy Ministry.

The newspaper said the average price of gas supplied by Russian state-owned company Gazprom could be around $222 per 1,000 cubic metres for countries the company labels part of its “far abroad”.

Gazprom defines “far abroad” countries as the European Union, minus former Soviet republics Lithuania, Latvia and Estonia, but including Turkey.

Sales to Europe account for more than half of the revenues of Gazprom, which generates around 8 percent of Russia’s gross domestic product.

Gas prices in Gazprom’s long-term contracts are pegged to those of oil with a six- to nine-month lag. Global oil prices fell almost 60% between June and January, mainly on a supply glut.

On Friday, the price of Brent crude oil rose above $60 per barrel for the first time this year. Last June, oil was trading at a peak of more than $115 per barrel.

Sergey Kupriyanov, a spokesman for Gazprom, said it was too early to predict the final Russian gas price for Europe, which covers a quarter of its gas needs with supplies from Gazprom.

“One could tell that with certainty at the end of the year,” he said. A spokeswoman for the Economy Ministry declined immediate comment.

Vedomosti cited an unnamed official at the ministry as saying that its forecasts could be altered during planned reviews in April and September.

Energy union

Falling prices for Russian gas imports could upset EU plans to set up an Energy Union, due on 25 February.

Energy security has been a priority of policymakers since a 2009 gas dispute between Russia and the Ukraine disrupted supplies to the EU, making supply diversification a key objective of the Energy Union.

The final proposal will cut across a number of policy sectors including energy, transport, research and innovation, foreign policy, regional and neighbourhood policy, trade and agriculture, said Maroš Šef?ovi?, the Vice-President of the European Commission in charge of the Energy Union.

>> Read: Single supervisor mooted for Energy Union, as Šef?ovi? pushes ‘holistic’ approach

However, Europeans should not get their hopes too high, the International Energy Agency (IEA) has warned recently, saying the EU will remain dependent on Russian pipeline gas imports for the “foreseeable future”.

As domestic fossil fuel production continues to decline fast, especially in Denmark and the Netherlands, gas imports are expected to increase between 2020 and 2030, according to the IEA’s 2014 review of EU energy policy.

Background

Russia’s gas export monopoly Gazprom sells its gas to EU clients under secretive bilateral deals. 

An illustration on how Gazprom uses the price of gas as a political weapon was provided in the context of the unfolding Ukraine crisis.

Ukraine was paying Gazprom a price of $400 per thousand cubic metres (tcm)under an agreement signed under former Prime Minister Yulia Tymoshenko, back in 2009.

Moscow dropped the price to $268.50 after then-President Viktor Yanukovich turned his back on a trade and association agreement with the European Union last year, but reinstated the original price after he was ousted in February.

The EU Energy Union is part of the political response to the threat to EU gas supplies.  The majority of Russian gas imports to the EU, about 30% of its annual needs, goes through Ukraine. In 2009, Russia turned off the taps, causing shortages in the EU.

Plans for the Union have developed beyond questions of security of supply to encompass issues such as fighting climate change.