Gazprom threats, to music

Moscow Military District Glee Club sings of gas squeeze

It’s that time of year again when all across Europe — particularly in the east — people start fretting about gas supplies from the energy superpower next door.

Traditionally, it all kicks off with a pay dispute between Russia and Ukraine, though that looks like it might be averted this year. However, there’s a new mismatch on the cards: Russia v Belarus. It’s hard to predict whether this will turn out to be the usual hardball haggling and get resolved before its consequences spread; or, like last year’s set-to with the Ukraine, it escalates and has severe consequences for several countries when the taps are turned off.

In any case, it is good to know that the Russians have a sense of humour about it all, albeit a dark one. I guess this winning song from the Moscow Military District’s glee club is their satirical equivalent of something like Mel Brooks singing Springtime for Hitler…but with an edge as those are real soldiers in real uniforms.

It’s a gas, gas, gas

The prospects for the world gas market may look better long term, but near-term forecasts keep getting gloomier.

To wit, Deutsche Bank analyst Elaine Dunphy, in assessing the outlook for Statoil in a Dec. 7th research note, sees problems ahead for Norway’s state-owned company, which is Europe’s second-largest gas producer, after Gazprom, with a market share of about 15% (total 2008 sales 45.2 billion cubic meters).

The basic problem, according to Ms Dunphy, is that while Statoil has seen rising gas sales and profits through the third quarter of this year, “reality may be about to bite”. By reality she means that some of its big European gas buyers – industry, power generators, etc., which are concentrated in western Europe – are expected to require about the same volume of gas next year at a time when supply is increasing, leading to pressure for a change in their contracts to reflect a weaker gas market.

About two-thirds of Statoil’s gas sales are covered by long-term contracts (mostly to German and French buyers,  see here for link to Statoil’s interactive pipeline map), according to which prices are set with reference to oil prices. While oil prices have rebounded strongly this year, those contract prices have been slow to respond to gas market fundamentals. Another third of Statoil’s gas is sold into the UK with reference to spot gas prices, where the weakness is reflected clearly in futures prices; for example, the March 2010 UK natural gas futures contract listed on I.C.E. has collapsed from about 56p per therm in May to about 30p/therm in early December. This means that Statoil customers whose contracts are oil price-based are demanding a change in the contract terms or else they’ll exercise their options to take minimum amounts of gas and cover the rest of their needs on spot markets.

In common with most analysts, Deutsche Bank sees European gas markets oversupplied through 2012 at least. While long-term demand for gas is growing worldwide – especially in terms of long-term contracts for liquefied natural gas (LNG) – that demand is struggling to keep pace with rising supply. (See the EIU’s December gas outlook).

In Europe, in particular, rising supply from the Norwegian Continental Shelf will contribute to the glut, while the addition of re-gasification infrastructure to handle LNG imports has increased buyers’ options. This is a situation that is not expected to be fully alleviated until about the middle of the next decade. (See graph below).

A dilemma for Statoil is whether it will give into the market pressures and change long-term contract terms in order to hold onto European market share, or decide to leave gas in the ground and lose market share in order to maintain margins.

Ms Dunphy at Deutsche Bank says there are “too may moving parts” to determine how it will pan out for Statoil, but she expects that the company will decide to sell less gas – she figures a volume decline of about 7% from 2010 through 2012.

Gazprom, on the other hand, has eased contract terms for Ukraine some and is negotiating with Turkey and others. Statoil has less flexibility in terms of the markets it serves and if it holds out on easing its contract terms and goes for lower volumes that, in turn, might help the market overall but allow Gazprom and others to capture some of its market. So, it depends on which bullet Statoil decides to bite.