TER: How do you view opportunities for investors in the Russian natural gas market?

AB: The Russian market and the European market are very different from the U.S. market. The U.S. gas market is predominantly a spot market, with about 95% of total U.S. gas supplies being bought on spot terms and only about 5% on a long-term contract basis. In Europe it's the other way around, and the difference is due to the fact that Europe does not have as much infrastructure as the United States does.

The U.S. has an extensive gas pipeline network, very transparent pipeline access rules and plenty of underground storage facilities. That's a massive infrastructure to maintain the spot trading in gas. The infrastructure does not really exist in Europe. There are certainly pipelines, but underground storage is quite limited and there are no clear third-party access rules. For these reasons, Europe is really a long-term contract market.

There is a small but growing share of the spot market and it is natural that investors are concerned these days, inasmuch as there seems to be quite an abundance of gas around the world and they worry that excess gas supplies will make their way into Europe and displace existing suppliers such as Gazprom.

The Gazprom share price since the start of the year certainly has suffered relative to other Russian hydrocarbon producers, and certainly relative to the oil companies. I believe one of the reasons it's suffered was the concern that there was going to be too much gas coming into Europe and that Gazprom production could be affected negatively. In reality, I think those concerns have been significantly exaggerated. The spot volumes of gas, LNG cargoes, cannot really displace the long-term contract gas with pipeline gas for the reasons I mentioned. Gazprom also is protected through its long-term contracts, which on average have the duration of about 30 years. They provide a very long-term framework for gas supplies into Europe and have minimal off-take commitments associated with those contracts, with the off-take commitments actually growing.

This year, those off-take commitments are close to 140 billion cubic meters. Next year they will be 160 billion cubic meters and growing to 168 billion cubic meters by 2020—and that's not taking into account the new additional supplies that could go into Europe through the new pipelines that are likely to be built.

The North Stream and South Stream pipelines will potentially further increase Gazprom supplies into Europe; that's part of the reason why I have a view that Gazprom's market share could grow. But even in the absence of these new projects, Gazprom supplies into Europe will grow on the basis of the existing contracts. Therefore, I think the concerns about LNG volumes displacing Gazprom's gas in Europe are a little bit exaggerated.

TER: Are you following other gas company plays in Russia?

AB: Yes. There are a couple of others. The second largest gas producer is Novatek, but the key issue that Novatek and other gas producers face is inability to export gas. The Russian domestic gas price is significantly below not only the European price, but even the netback of that European price. So once you deduct the transportation costs and deduct the export duty, the European price probably remains around three times higher than the domestic gas price.

Gazprom, of course, not only has access to the European gas market, by law Gazprom is the monopoly exporter of gas out of Russia. So all the other Russian gas producers—there are plenty of them—are hurt by their inability to export gas. At the same time, the domestic gas price has been increasing in the past few years and that has attracted a large number of new players into the gas market and has resulted in quite a lot of new capacity coming on stream as far as the gas production is concerned.

In some cases, of course, new capacity is being built now with the new fields to be commissioned over the next two to three years. These other gas producers in Russia, in the absence of the ability to sell gas to Europe, have to compete ever harder for domestic customers. We expect their ability to charge a premium over the regulated level—which certainly was the case over the past few years—to disappear. So if one chooses to invest in Russian gas producers, I would favor Gazprom because it can sell gas to Europe and because its production and pricing prospects are much more visible than in the case of so-called independent gas producers.

TER: Most North American discussion about Russia's natural gas exports centers on European countries being the primary importers—almost to the point that Russia has a monopolistic control. What is your perspective on that?

AB: First of all, it is not true. Europe consumes around 600 billion cubic meters of natural gas and Russia supplies about 150 billion cubic meters on average. Gazprom is the only Russian supplier to Europe and it is a considerable player in Europe, but certainly by no means the monopoly supplier of gas. We believe that Gazprom's market share probably will grow over time, but it will remain significantly below even 30% of the European market. So Gazprom's an important player, but not a dominant player at all.

TER: What's the biggest misconception North Americans have about Russian oil or gas production or markets?

AB: This year, I think certainly the biggest misconception on the oil side is that Russian oil production is going to collapse. As we discussed, I don't think that's the case. We've actually had similar issues about gas production. If you go back two to three years, there was significant concern that Gazprom in particular had not been investing enough to maintain production levels. That was a misconception.

Certainly Gazprom had enough production capacity then. Now there seems to be another misconception that there is too much gas around and that Gazprom won't be able to sell as much gas as it wants because it's going to be displaced by LNG in Europe in particular. As I said earlier, I don't believe that is the case because Gazprom is protected by the long-term contracts, which have minimum off-take commitments. Therefore, we think the volumes that Gazprom will supply to Europe are pretty stable. They're not really affected significantly by changes in spot market prices and they're certainly not as volatile as market sentiment, particularly among U.S. investors.

By arrangement with: www.theenergyreport.com

Post your comment  (0)

Connect:

Post to Twitter

Post to Facebook