Why Russia’s Grip on Europe’s Gas Markets Is Weakening

  • Date: 30/01/15
  • Stephen Fiedler, The Wall Street Journal

The collapse of oil prices—added to the weight of Western financial sanctions—has hammered Russia’s economy. But Moscow is also suffering from the fall in prices of another important energy export: natural gas.

Gas represented 14% of Russia’s export revenues in 2013, compared with 54% for crude oil and oil products. But its gas is more important to Europe and Ukraine.

Gas is more than a commodity for Moscow: It has been a political tool that has helped it assert its influence in Central and Eastern Europe and beyond. Because of pipeline architecture, some European Union countries have had few alternatives to buying gas from Russia.

But its grip over Europe’s gas markets is weakening. As natural-gas prices have fallen in the European market—less dramatically than oil but still by at least a quarter—Moscow’s revenues have tumbled. In the longer term, further losses in Russia’s pricing power and market share in Europe appear inevitable.

Russia has itself largely to blame. The Soviet Union treated gas as a commercial commodity and deliveries were unaffected by tensions between East and West. Under President Vladimir Putin , gas exports became a political instrument, and Russian disputes with Ukraine caused stoppages in supplies in 2006 and 2009 to Ukraine and to EU countries to its west.

That set the European Union to work to “depoliticize” gas, including splitting gas transport from production, said Kristine Berzina of the German Marshall Fund think tank in Brussels. That meant companies like OAO Gazprom , the state-owned Russian gas monopoly, could no longer engage in both, at least in the EU.

Other trends undermined Russia’s gas dominance, curbing European demand. U.S. exploitation of shale and other unconventional gas reduced U.S. coal imports and caused European coal prices to collapse. Coal, rather than gas, became the fuel of choice in Germany for base-electricity generation—needed when the country’s solar and wind farms weren’t producing.

Many Gazprom export contracts are linked to the price of oil, with a lag of several months. That means that the oil-price fall is now feeding through into gas prices. On Thursday, as Gazprom reported a 62% drop in net profit for the third quarter of 2014, analyst Alexander Kornilov from Alfa Bank said Gazprom’s average gas prices this year will likely slip to between $200 and $250 per thousand cubic meters, from $352.70 in the first three quarters of 2014.

EU buyers of gas are demanding still-better deals. Just Wednesday, Gazprom announced a change in its agreement with Austria’s OMV to provide more favorable terms to the buyer.

Even Ukraine has shifted.

Full story

Recent Popular Articles


We use cookies to help give you the best experience on our website. By continuing without changing your cookie settings, we assume you agree to this. Please read our privacy policy to find out more.