June 18, 2012 / 3:21 PM / 5 years ago

Gazprom sees buyers for S. Stream gas despite cost

4 Min Read

* Gazprom to avoid Ukraine for gas transit to Europe

* Ebbing European reserves makes room for new suppliers

* Gazprom says U.S. gas market dysfunctional

* Says link between oil and gas prices to be reinforced

By Henning Gloystein

LONDON, June 18 (Reuters) - Natural gas flowing through the South Stream pipeline from Russia to Europe will be more expensive than hub-traded gas but will win customers by ensuring them a more secure and flexible supply, Gazprom said on Monday.

Russia's gas export monopoly aims to supply over 60 billion cubic metres a year, an estimated 10 percent of Europe's annual demand, through the South Stream pipeline to Austria or Italy from 2015. Gazprom plans to make its final investment decision on the project by the end of the year.

"Our estimate is that the difference (between hub-priced gas and South Stream supplies) is $2 per million British thermal units," Sergei Komlev, head of contract structuring and price formation for Gazprom Export, said during the World National Oil Companies Congress in London.

Gazprom would supply the piped gas in long-term contracts, which provide more security and supply flexibility than spot gas through a hub, he said. The contracts, which are indexed to oil prices, ensure customers get as much or as little as they need.

Critics of South Stream say the pipeline, at a cost of around $20 billion, is too expensive and also too big for a market that is already well supplied and has few growth prospects.

Russia so far relies heavily on Ukraine to pump its gas to Europe, but disputes between them on transit fees have resulted in several supply disruptions in past years. The North and South Stream pipelines were both designed to avoid Ukraine.

Europe would have "stable pipeline supplies that directly connect to the country with the world's biggest gas reserves", said Klaus Langemann, a manager at Germany's Wintershall.

Langemann said he expected Europe's demand to pick up in future.

"We are very optimistic about the future of gas and are developing the pipeline infrastructure in Europe because we think that demand here won't stagnate but develop," he said.

Wintershall, controlled by German chemical giant BASF , is a partner in South Stream as well as in the existing North Stream pipeline, which pumps gas across the Baltic Sea into Germany.

Rising Competition

Gazprom's Komlev said that declining domestic gas production in Europe would mean that demand for imports would rise.

"Decreasing European production opens up space for new producers to supply Europe. and I think there is enough space for every producer in the European market," he said.

Recent large gas discoveries in the eastern Mediterranean and the prospect that the United States could begin to export excess shale gas as early as 2015 have led many analysts to predict a gas glut, which will lower prices and slash revenues for producers such as Russia.

The development of new so-called unconventional gas exploration methods, known as 'fracking', have led to a boom in U.S. gas supplies and a sharp drop in North American gas prices.

Consumers hope that North American gas exports will lead to lower prices from hubs such as Britain's National Balancing Point (NBP), and customers are putting pressure on Russia to allow more spot gas pricing into the calculations for its long-term supply contracts.

But Gazprom says the U.S. glut will be temporary and that the link between oil and gas prices will remain intact.

Komlev said the North American gas hub pricing model was dysfunctional, because the unconventional gas boom and the resulting price collapse threatened its own industry.

"Lots of money went into the industry and not much is coming out. They are literally going broke by trying to get rich," Komlev said. "How can this be a model for the rest of the world?"

Komlev also said the price link between oil and gas would be reinforced in the future due to direct competition in the transportation sector from gas-fuelled vehicles and through liquefied natural gas bunker fuels.

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