America’s Gas Shale Market Forces Gazprom To Rethink Strategy

Russian gas giant Gazprom is expecting European gas demand to rebound this year, but is rethinking its ambitious gas export plans to the United States amid the ongoing shale gas "revolution" in that country.

After a year in which Gazprom lost market share in Europe and saw its export revenues shrink on weaker demand and lower prices, the Russian gas giant held its first board of directors meeting in 2010 recently and focused on a review of the company's near-term export strategy.

Gazprom is expecting a rebound in European gas demand this year — or at least an increase its own gas exports to that market — but is warily eyeing the impact of the surge in U.S. gas production on gas markets in both North America and Europe.

Rising shale gas production in the United States is rapidly changing the export outlook for Gazprom, forcing it to review and perhaps revise its plans for major production and export projects such as the Shtokman LNG project.

It also coming off a year in which Gazprom not only saw its gas exports to Europe fall but lost market share in the continent to competitors. Last year was not kind to Gazprom, beginning with a commercial price dispute with Naftogaz Ukrainy that mushroomed into a two-week gas supply halt to 18 countries, and ending with the Russian company negotiating with its major European import partners on the delicate matter of "take-or-pay" penalties for their reduced offtakes below minimum annual levels. In between, Gazprom saw the bubble burst on rising European gas prices (although a recovery is under way) and was forced to shut in some gas production, as well as push back timetables for several major new fields, including the Bovanenkovskoye field in the Yamal Peninsula.

This year is off to a better start, if only because the company managed to avoid a New Year's gas dispute with Ukraine. A political deal reached in November by Russian and Ukrainian politicians to reduce Ukraine's gas import obligations in 2009 and 2010 (in the context of that country's sharp economic contraction and subsequent weaker gas demand) helped reduce the risks of a new confrontation.

Gazprom is confident Naftogaz will pay its gas bill by the deadline, avoiding triggering a potential politically tinged dispute between the two firms. In an effort to put the past behind it, Gazprom has reportedly written off the 4.5 Bcm of gas (worth US$1 billion) that it was not able to deliver to Europe via Ukraine last year as a result of the January dispute.

Gazprom said its declaration of force majeure during the January 2009 dispute with Ukraine absolved it of having to deliver this gas to Europe, which — in the overall context of Europe's weaker total gas demand last year—actually allowed the Russian firm's import partners to reduce the size of their fines under take-or-pay principles. Preliminary operational results for Gazprom showed it supplied Europe with 140.2 Bcm of gas in aggregate, down 12.3% year-on-year, with European importers together taking 8 Bcm of Russian gas below minimum required levels under take-or-pay. Germany's E.ON has agreed to pay Gazprom US$140 million for its own unused gas last year.