Gazprom – Is 2016 the Year for a Change of Pricing Strategy in Europe?

Gazprom’s pivot to Asia has stalled and it must now continue to focus on Europe as its key export market. However, stagnant demand and increasing availability of LNG supply are set to put the company’s market share under pressure from 2016. To date Gazprom has responded to competitive threats by making reactive adjustments to its pricing methodology and contract structures, but if it is to defend its export volumes in future it may have to take a more proactive stance. This Comment discusses the competitive position of Russian gas in a new lower price environment and examines whether a more actively competitive strategy can benefit both Gazprom and the Russian government in the short and long term. From a number of commercial and political perspectives the logical commercial answer could be yes, but only if Gazprom adopts a new contract model and also commits to trading on European hubs at spot prices in a more wholehearted fashion. Evidence for gradual moves in this direction are emerging and could accelerate in 2016, and although we do not expect Gazprom to actively catalyse a price war we do believe that market forces could lead to this outcome as a logical conclusion for a low-cost producer with significant supply flexibility.

By: James Henderson

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