Who was the world's biggest natural gas producer last year? Surprisingly, perhaps, not Russia. The US overtook it thanks to mushrooming production from “unconventional” sources, such as shale gas. Much has changed since Russia's Gazprom monopoly talked a few years back of becoming the world's first trillion-dollar energy company by market value.
The recession slashed European gas usage last year and weakened the medium-term demand outlook. Thanks to the shale gas boom, moreover, the US has much less need for imported liquefied natural gas than previously projected. So LNG is being diverted to Europe, sending “spot” gas prices tumbling. That threatens the formula in Gazprom's long-term take-or-pay contracts with European customers that links its gas price to (once again robust) oil prices.
Now Gazprom has agreed to tweak some previously sacrosanct contracts for a three-year “crisis” period. Up to 15 per cent of sales to customers such as Germany's Eon Ruhrgas, Italy's Eni and France's GDF Suez will be linked to spot prices. Gazprom says the temporary move preserves the “base principles” of its contracts. It touted rather more buoyant European demand forecasts at recent international investor roadshows than the multi-year supply glut foreseen by, among others, the International Energy Agency. The spot gas market, it argues, is too small to dent Gazprom's position; shale gas production has big environmental risks. Moscow-based VTB Capital suggests the contract changes will reduce 2010 revenues by less than 0.5 per cent.