Russia has room to play Saudi oil game with EU gas, VEB says
KRASNOYARSK, Russia (Bloomberg) -- Russia has the capacity to target volumes over prices in its natural-gas sales, replicating Saudi Arabia’s oil strategy, according to state-owned Vnesheconombank’s chief economist.
The Saudis compete with other crude suppliers by boosting oil production and cutting prices, Andrey Klepach of VEB, as the state bank is known, said Friday. “We could play the same role in gas, as we have the capacity for boosting gas exports and production,” he said in the Siberian city of Krasnoyarsk.
Struggling with its longest recession in two decades amid a slump in oil prices, Russia is testing worst-case scenarios as it develops long-term strategies for energy, its main money-making industry. Gas supplies to Europe may be priced close to the lows seen in 2005 for the next decade. according to the Energy Ministry’s “stress” scenario.
Russia increased its dominance in Europe’s gas market last year, where it met 31% of demand as crude’s plunge made oil-linked prices more attractive. While the battle for customers is expected to intensify on rising LNG supplies, including from the U.S., Gazprom said earlier this month it saw no need to change policy and start a “price war.”
Facing limited demand in Russia and other post-Soviet states, Gazprom says it has capacity to produce as much as 617 Bcm of gas a year, which is 47% higher than its output last year. The company forecasts its average price in Europe may drop more than 30% this year to $169 per 1,000 cubic meters (about $4.7 per million British thermal units) if oil remains at about $35/bbl.
“Russia will have to struggle for its market share one way or another,” said Andrey Polischuk, an oil and gas analyst at Raiffeisenbank AO in Moscow. Gazprom is gaining market muscle due to low oil now but may need to change its marketing policy to keep the price in line with competitors when crude rebounds, he said.
The exporter won’t cut prices as deeply as the Saudis have let oil fall, and will probably stick to greater reliance on spot prices or easing take-or-pay obligations for clients, like it did about five years ago, according to Polischuk.
Pipeline gas from Europe’s largest suppliers, Norway and Russia, will remain competitive in the region due to lower costs of bringing it to the market, Tor Martin Anfinnsen, senior V.P. of marketing and trading at Statoil ASA, said this month. “Where the prices are today, we are not dramatically far away from the marginal cost of U.S. LNG to Europe.”
Gazprom spends about $2 per million British thermal units to lift the fuel in Siberia and deliver it to Western Europe, and it also pays 30% of the contract price in export duties to Russia’s budget, Alexander Kornilov, an energy analyst at Aton LLC in Moscow, said by phone.
U.S. LNG suppliers need as much as $6.9 per million British thermal units to buy gas on the market, cool the fuel to its liquid form, deliver it to Europe and re-gasify, James Henderson, an oil and gas industry analyst at the Oxford Institute for Energy Studies, said by email Friday. “However, producers would be prepared to sell down to the cash cost—excluding liquefaction—which is about $3.4 now.”
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