In 2008 Gazprom sold abroad 280.9 billion m3 of natural gas. Deliveries to Russian consumers amounted to 287.0 billion m3. It is not difficult to figure out that the volumes of gas sold abroad account for almost half of Gazprom’s marketable gas.
In 2008 Gazprom’s earnings from gas exports beyond the FSU (excluding excise tax and customs duties) were RUB 1,430.5 billion, 63.8% up versus 2007. Earnings from gas sales to the CIS and Baltic States were RUB 356.5 billion, 32.2% up versus 2007.
Gazprom is one of the primary suppliers of natural gas to European consumers and accounts for roughly one third of aggregate gas imports to Western Europe. Export deliveries of gas from Russia began in the mid-1940s. In 1968 gas deliveries were launched to Western Europe under a contract with Austria’s OMV. Today Russian gas is supplied to 31 countries inside and outside the FSU.
In 2008 Gazprom sold 184.4 billion m3 to Western Europe: deliveries grew by 9.4% versus 2007. As of today, the largest buyers of the Russian blue fuel are Germany, Turkey and Italy.
In 2008 gas sales to the CIS and Baltic States accounted for 96.5 billion m3. The biggest gas volumes are delivered to Ukraine, Belarus and Kazakhstan. Gazprom plans to expand the geography of supplies and have a stronger hold on the markets in Europe and Asia-Pacific.
Gazprom’s key international partners are: E.ON, Wintershall, Verbundnetz Gas and Siemens (Germany); Gaz de France and Total (France); Eni (Italy); Botas (Turkey); Fortum (Finland); Gasunie (Netherlands); DONG (Denmark); Statoil Hydro (Norway); OMV (Austria); CNPC and PetroChina (China); GAIL (India); PdVSA (Venezuela); MOL (Hungary); PGNiG (Poland); Kogas (Korea) and transnational Shell.
Gazprom exports gas to Central and Western Europe mainly under long-term, up to 25-year agreements concluded as a rule based on intergovernmental agreements.
Long-term arrangements are the basis for steady and reliable gas supplies. Only long-term deals can guarantee the producer and exporter returns on multibillion dollar investments in major gas export projects, and assure steady and uninterrupted gas deliveries for the importer in the long term.
Long-term agreements with the key customers typically contain a “take or pay” provision, meaning that the customer agrees to pay for a certain minimum amount of gas even when a lesser amount was physically used. For prominent gas suppliers, such as Gazprom, this is an indispensable guarantee of the buyer’s responsibility.
Yes, they do. Export supplies are significantly more expensive. In 2008 Russian blue fuel was supplied to Western Europe at the prices 4.7 times higher then those for Russian consumers, and to the CIS and Baltic States – 2.2 times higher.
In 2006 Gazprom completed a transition to the market based price setting principles for gas consumers in all of the CIS and Baltic countries. As a result, gas prices for the CIS region have grown two-threefold and are gradually reaching European levels. At the same time, when building price offers for each country, consideration is given to a degree of its integration with Gazprom’s gas business. Special attention is paid to developing market based cooperation with the major countries transiting Russian gas to Europe – Ukraine and Belarus. At present, there is a clear differentiation between contracts for gas supply to Ukraine and contracts for gas transit via its territory. The market principles of relationships are fixed in a five-year gas supply and transit contract signed with Belarus.
The transparency of Gazprom’s relationships with transit countries is beneficial to all parties and indispensable for securing the reliability of Russian blue fuel deliveries to European consumers.
The price level for European consumers depends to a considerable extent on the cost of gas transportation services. Gazprom sells its gas at the border of the importing country to local distributors, who then supply it to consumers. The end-consumer price includes the cost of gas transportation via low pressure pipelines, the maintenance of which is several times more expensive than in Russia, and taxes.
Gazprom’s marketing policy provides for optimizing the costs of gas transit to Western Europe and gaining access to the end consumer. For this purpose, the Company is activating various forms of participation in the European gas distribution business.
For instance, back in 1993 Gazprom and Wintershall established the joint venture – WINGAS – owning around 2,000 km of pipelines in Germany and Europe’s largest Rehden underground gas storage facility (over 4 billion m3). Gazprom presently owns 50% minus one share in this joint venture. Thus, with an interest in WINGAS, Gazprom effectively owns a stake in Germany’s gas transmission networks.
Under the agreement with ENI, Gazprom export, a subsidiary of Gazprom, was entitled to independently sell over 3 billion m3 of gas on the Italian market.
Gazprom holds an equity stake in Estonia’s Eesti Gaas, Latvia’s Latvijas Gaze and Lithuania’s Lietuvos Dujos. Thanks to Gazprom’s participation in the management of gas companies in the Baltic States, its presence in these gas markets has become more solid.
Gazprom’s strategy of gaining access to the end consumer is spreading to the CIS market. ZAO ArmRosgazprom is supplying gas to the Armenian market and selling it to each and every category of end consumers. In 2008 the company supplied 2.1 billion m3 of gas that is 11.2% more than in 2007. Since April 1, 2008 a subsidiary called Gazprom sbyt Ukraina has been directly supplying gas to industrial consumers in Ukraine. In 2008 3.3 billion m3 was supplied.
The Company’s international business activities are carried out in full compliance with the legislation in force in the countries of Gazprom Group’s operation. Recent changes in the European Union legislation aimed at liberalization of the gas market influenced both organizational issues of the business activities and contracts for gas supply to the EU member states. Executing the new regulations Gazprom’s companies removed the restrictions imposed on reselling the Russian blue fuel from the contracts.
Liberalization of the European gas market implies spot trading development. Taking it into consideration, Gazprom via Gazprom Marketing & Trading sold 7.3 billion m3 of gas in 2008 on the trading floors of the UK, Belgium, the Netherlands, and France which is around 9% more than in 2007.
Supporting the EU efforts to shape a single European energy market, Gazprom believes – and major European energy companies share this opinion – that the basic architecture should be comprised of longterm agreements for blue fuel supply.
European importers are committed to their long-term agreements with Gazprom. Gaz de France has renewed its gas import contract until 2030. E.ON Ruhrgas (Germany) – until 2035, Wintershall (Germany) – until 2030, Gasum (Finland) – until 2025, RWE Transgas (Czech Republic) – until 2035, ENI (Italy) – until 2035. Contract extensions until 2027 and new arrangements were agreed on with Austria’s EconGas, GWH and Centrex. Contracts were concluded with Romania’s Conef Energy for 2010-2030, Switzerland’s WIEE for 2013-2030, Germany’s WIEH up to 2027, and Czech Republic’s Vemex for the period till 2013.
Gazprom keeps in sight the legislative initiatives under consideration in the EU and constantly takes part in discussing the issues that may have a negative impact on the natural gas market and impair the conditions for all the players. In particular, the proposal to prohibit natural gas suppliers from investing in big gas transportation projects causes concern. This may lead to underfunding and an increase in transportation costs.
As for new markets, OAO Gazprom’s marketing strategy provides for increasing supplies of both pipeline gas and LNG. Gazprom Group has been consolidating its positions on the LNG market since 2005 within spot and swap deals effectuated by Gazprom Marketing & Trading. The total volume of LNG sales on a spot deal basis from 2005 to 2008 reached 1.2 million t (1.7 billion m3).
Taking the increased scope of LNG trade and marine freight into consideration, a special subsidiary company, Gazprom Global LNG, was established in August 2008 to do the LNG business.
In order to be an early entrant into the LNG market, OAO Gazprom has studied the opportunities of taking part in the existing LNG projects by means of acquisition or asset swap. In 2007 Gazprom became one of the Sakhalin II project participants. Within the project Russia’s first LNG plant was put into operation in February 2009. Under long-term agreements the entire output of the plant is to be supplied to consumers in Japan, South Korea and North America. The first LNG carrier from Sakhalin arrived in Japan in April 2009.
In addition, agreements for LNG supply from Sakhalin were signed with Shell Eastern Trading LTD and Gazprom Global LNG in April 2009. Pursuant to these agreements, Sakhalin Energy will supply some 1 million t of LNG per year to each of the purchasers over 2009-2028. At the same time, a 20-year agreement was signed by Gazprom to supply an equivalent volume of pipeline gas to Shell in Europe. The agreement will allow to consolidate Shell’s positions on the European gas market and the ones of Gazprom on the US market due to the fact that Shell, in return, will entitle Gazprom’s subsidiaries to utilize regasification facilities at the Energia Costa Azul LNG terminal (Baja California, Mexico), as well as gas transmission facilities ensuring gas supply to the South California market.
