Gas auctions: a new instrument in Gazprom’s policy

Gazprom Export (a subsidiary of Gazprom) held a gas auction for European customers between 29 August and 2 September. Eleven contracts, mainly with gas traders and small consumers, were signed as part of the auction. This was already the third auction of this kind held in the past twelve months: the first one took place on 7–10 September 2015, and the second on 15–17 March this year. The first auction only envisaged supplies via the Nord Stream gas pipeline, the second one was targeted at the Baltic states, while the last one envisaged supplies to an increased number of delivery points than that set at the time of the first auction: Greifswald, Gaspool and Olbernhau but also in Baumgarten and Arnoldstein.

Commentary

• The sale of gas at auctions is essential for Gazprom in the context of the recent problems in Russia-EU gas relations. On the one hand this provides a response to the charges brought against it by the European Commission (EC) as part of the anti-trust proceedings launched in September 2012. One of the main reservations was that Gazprom uses a crude reference basket as part of contract price formulas and thus does not take gas market trends into consideration to a sufficient extent. Since the prices of the gas offered on auction turned out to be higher than those set under long-term contracts, Gazprom will certainly use this as an argument in its dispute with the EC.

• On the other hand, auctions are an important argument in Gazprom’s efforts to be given the right to use the OPAL gas pipeline located in Germany to full capacity (at present, it can only use 50% of the capacity due to the EC’s decision based on regulations of the so-called Third Energy Package, and this prevents the Nord Stream gas pipeline being used at full capacity). No transaction that would provide supplies via the OPAL gas pipeline was concluded as part of the auction last September or the one which ended on 2 September this year. Gazprom will certainly use this lack of interest as an argument in its claim that it should be allowed to use OPAL to full capacity. The EC was expected to decide on this issue already in July this year, but the deadline for passing the decision was pushed back once again.

• The auctions can also be viewed as preparations for more serious long-term changes in the Russian trade strategy with regard to its European customers. The changing situation on the European gas market, in particular the growing role played by gas hubs and gas exchanges, alongside the growing competition among exporters is forcing Gazprom to make its trade policy more flexible. Nonetheless, in the short term perspective the auction mechanism will most likely be treated as an addition to the fulfilment of Gazprom’s export obligations under long-term contracts (small amounts of gas have already been sold at the auctions: 1.2 billion m3 at the first auction, 0.42 billion m3 at the second, and 2 billion m3 at the third). However, as the long-term contracts currently in force will expire and given the low level of interest in entering into new ones, the volume of Russian gas sold at auctions may increase significantly.