Majority of Gazprom's European sales hub-indexed

The majority of Russian state-controlled Gazpromexport's sales to Europe, excluding the Baltic states, and Turkey in the first nine months of 2019 were made under long-term contracts indexed to gas hub prices.

Some 56.7pc, or just over 80bn m³, of the firm's aggregate 141.6bn m³ sales to the region in January-September last year were made under hub-indexed contracts. About 16.5pc was sold under traditional purely oil-indexed agreements and another 15.5pc under quasi oil-indexed contracts that may contain hub-linked elements, such as corridors linked to the Dutch TTF.

The remaining 11.3pc was sold through the firm's electronic sales platform — which only started operations in September 2018 — or through trading operations.

The figures indicate a continuation of a substantial shift to greater hub-indexation in Gazprom's supply contracts.

Gazprom had said in October 2018 that around 35pc of its contracts were indexed to gas prices, with 20pc purely oil-linked and the remainder a combination of the two. And the share of oil-linked contracts had still been around 30pc a year earlier and even higher previously in 2017.

The firm had said in May 2017 that the share of its agreements with hub-indexation or combining elements of hub and oil-indexation was "just in excess" of 50pc, with pure oil-linked contracts making up the remainder .

Gazprom said in late 2018 that it expected the share of hub-indexed contracts to rise. This may have been partly because it had to review existing contracts in recent years as a consequence of its 2017 settlement with the European Commission that concluded an antitrust investigation. The settlement introduced hub-based price review clauses into several of the firm's long-term supply contracts. And it obliged Gazprom to renegotiate price terms with several counterparty firms that held largely oil-indexed supply contracts.

That said, while the most recent data refers to the share of different pricing mechanisms in sales over a particular period, previous Gazprom statements may have referred to the proportion of the different formulas in the firm's overall contracts.

And little incentive for strong take by firms holding purely oil-indexed or quasi oil-indexed contracts may have contributed to sales under these pricing mechanisms accounting for less than one-third of Gazprom's overall sales in January-September 2019 (s ee oil-linked sales graph ).

Hub prices across much of Europe are likely to have held well below crude-linked import costs for much of last year — partly depending on indexation periods — which may have provided an incentive for firms to minimise receipts under oil-indexed contracts as much as possible, where such an option existed ( see European front-month prices graph ). Strong supply — driven by brisk LNG receipts — weighed heavily on European hub prices for much of 2019, while LNG deliveries also cut into Gazprom's European market share last year ( see LNG share of demand graph ).

Gazprom said this week that linkages in its contract portfolio to "month-ahead plus products and price formation of the basis of historic forwards and oil indices" led to a premium of $1/mn Btu (€3.14/MWh) in relation to month-ahead prices. But the firm's achieved price for month-ahead sales still fell by 38pc in 2019 as European hub prices dropped, it said.

Sales through Gazprom's online platform may have partly offset lower oil-linked and hub-linked sales, with some 10.5bn m³ sold for delivery during the period.

Oil-linked sales concentrated in eastern Europe, Turkey A substantial share of Gazprom's oil-indexed sales were likely made to eastern Europe and Turkey last year, where many firms still hold purely crude-linked supply contracts with the Russian company, and access to an alternate supply source is more limited than elsewhere in Europe.

The firm is known to have 100pc oil-linked contracts with several firms in countries for which it provided the price-linked portfolio data including Poland, Romania, Bulgaria, Greece, Turkey, Serbia, Bosnia-Herzegovina and North Macedonia ( see table ).

Total Gazprom supply to these markets in January-September 2019 was 24.9bn m³ , slightly above sales of 23.4bn m³ under purely oil-indexed contracts, only 16.5pc of overall sales in January-September 2019.

But oil-linked sales to these countries could decrease in coming years as contracts may be renegotiated or expire, and as new supply sources become available.

Poland's state-controlled PGNiG initiated arbitration seeking a revision to the price terms of its 100pc oil-linked supply contract, the result of which remains outstanding.

The firm's 10.2bn m³/yr contract with Gazprom expires at the end of 2022, and the Polish firm has said on repeated occasions it plans not to renew the contract, although it has stopped short of saying it plans to take no direct Russian supply at all.

Bulgaria's state-owned Bulgargaz is still negotiating a revision of its supply terms under its 2.9bn m³/yr contract with Gazprom pursuant to the European Commission antitrust settlement, and told Argus earlier this month it is seeking the introduction of significant hub-indexed pricing elements in its contract.

Gazprom also has a range of purely oil-linked contracts with Turkish firms, including a 4bn m³/yr arrangement with state-owned Botas scheduled to expire next year.

Increased access to LNG supply and pipeline gas from other sources, such as from Azerbaijan, could reduce the amount of Russian supply in eastern European countries. Bulgargaz started taking LNG supply through Greece last year, saying that costs were much more competitive than imports under its Russian supply contract. And some of its LNG supply may have been sold on to Romania, traders had said earlier.

LNG import capacity in eastern Europe could rise in the coming years with a number of new terminals expected to come on line. These include the 1.2mn t/yr Krk terminal in Croatia and the 4.2mn t/yr Alexandroupolis terminal in Greece , while the 3.6mn t/yr Swinoujscie terminal in Poland is to be expanded to 5.4mn t/yr by 2022.

And Bulgarian and Greek access to Azeri gas delivered through the Trans-Adriatic Pipeline (Tap) — which is to come on line later this year — could provide another source of supply for the region. Tap is currently considering an expansion of its capacity up to 20bn m³/yr or more from its current 10bn m³/yr capacity.

By Paul Martin

Select central and eastern European contracts with Gazprom Firm/country Expiry Price Volume (bn m &#179; ) Take-or-pay obligation (%) PGNiG (Poland) 31 Dec 2022 Oil-linked 10.2 85 Private firms (Turkey) 2021 onwards Oil-linked 10.0 80 Botas (Turkey) 2021/2025 Oil-linked 20.0 80 Bulgargaz (Bulgaria) 31 Dec 2021 Oil-linked 2.9 80 LNG share of European demand rises bn m³ European front-month prices fall €/MWh Russian supply vs demand GWh/d CEE gas demand wanes GWh/d Oil-linked sales fall in 2019 bn m³

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