* 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 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
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
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
"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.
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
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.