The SPIMEX Gas Exchange: Russian Gas Trading Possibilities

The sale and purchase of Russian gas in the post-Soviet era has been dominated by the need for Gazprom, the dominant player, to sell to consumers at a regulated price. Since 1998 other producers, known in Russian legal terminology as the independents, have been able to sell gas at market prices, but these prices have always been heavily influenced by the regulated price because of the dominance of Gazprom’s volumes. Initially independent producers sold gas at a premium to Gazprom, due to the fact that the regulated price was set at a low level to provide a boost to industry and a subsidy to residential consumers, with the result that their sales volumes were limited and only went to customers with a need for extra gas to cover surplus demand, even at premium prices. However, during the past two decades regulated prices have risen significantly (see figure 2 below), largely due to pressure from Gazprom which asserted its need for higher revenues to underpin investments in new fields. The consequence has been that by 2012 independent producers were able to compete with Gazprom on price and win customers who historically had wanted to only pay low, regulated prices. Indeed, since 2012 independents have won significant market share from Gazprom and now account for around half of all gas sold on the domestic Russian market. This increasing price competition has underlined that the regulated gas price has effectively reached an equilibrium, at least partially reflecting the balance of supply and demand in Russia. However, the search for a market mechanism to reflect this situation has continued, with almost all transactions to date being bilateral deals between buyer and seller, largely on the basis of long-term contracts. Various means to relate gas prices in Russia to market reality have been tried since 2000, with varying degrees of success, but in 2014 the launch of a gas exchange in St Petersburg by SPIMEX, the St Petersburg International Mercantile Exchange, has offered the latest, and most serious, opportunity for a true market price to be established. This can have important consequences in Russia, where the SPIMEX price could eventually provide a benchmark for the domestic wholesale gas price and could also provide a foundation for further liberalisation of the gas market. Given the location of the exchange at one end of the Nord Stream pipeline, it could also impact the trading of gas exports to Europe. This latter opportunity remains some way from realisation, but nevertheless the development of more active gas trading in St Petersburg is a growing reality and deserves the attention of the wider gas community given its potential to connect two major gas markets and the possibility that it could play a role in easing relations between Russia and its gas customers to the west.

By: James Henderson , Tatiana Mitrova , Patrick Heather , Ekaterina Orlova , Zlata Sergeeva