Gazprom Cuts Gas Export Prices for 2013, but Targets Increased Volumes

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Written by Richard Finlayson, Senior International Editor for Industrial Info Resources (Sugar Land, Texas)--In the arm-wrestling scenario in which Russian supplies gas to Ukraine, the price of Russian gas is currently calculated based on an 11-year contract that was signed between the state-controlled utility Gazprom OAO (OTC:OGZPY) (Moscow, Russia) and state utility Naftogaz (Kiev, Ukraine) in January 2009. That price is determined once per quarter, based on the average price of petroleum products for the previous nine months on the European market. A 30% discount is applied to this price, but at an amount no more than $100 per 1,000 cubic meters. This deal was granted in 2010 for the extension of the lease of the Russian Black Sea fleet base in Crimea for 25 years.

In Ukraine's opinion, the base price of $450 outlined in this formula is inflated and should be about $250. However, reports Interfax, the country's two years of attempts to amend the price have not met with success.

Industry observers think that Russia could reduce the price in exchange for full or partial ownership of the Ukrainian gas transport system, and/or Ukrainian membership in the Commonwealth of Independent States (CIS) customs union.

Now, with gas consumption a cost factor during the economic downturn, Gazprom expects that Ukraine will pay an average annual natural gas price of $352 per 1,000 cubic meters in 2013. The Russian utility expects to deliver 40 billion cubic meters of gas to Ukraine next year.

Tightening budgets during the economic downturn have caused European gas consumers in general to cut back on gas purchases. Consumers have confronted Gazprom about the high prices it charges, which are well above the average price on the spot market.

Currently, Gazprom supplies about 33% of Europe's overall gas requirements, and European sales account for 80% of Gazprom's income, which represents a major slice of the government's income.

In response to market forces and customer pressure, sources say that Gazprom will cut its long-term contract prices in 2013 down to levels that are comparable with general spot market prices. This means that it will sell gas at $370 per 1,000 cubic meters, compared with the $400 it has charged this year. But the strategy is that by reducing prices, the company targets exports of 152 billion cubic meters in 2013, compared with the 140 billion cubic meters in 2012.

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