WILL RUSSIAN NATURAL GAS LONG-TERM CONTRACT PRICES REMAIN OIL PRICE DETERMINED AFTER THE END OF OIL-INDEXATION?

摘要

OverviewUntil the end of the 2000s natural gas trading in continental Europe had been built on long-term gas sales andpurchase contracts (LTC) between major outside gas suppliers and European buyers. The dominant pricing schemeof LTCs was oil price indexation. In the last couple of years however the structure and pricing of LTCs havechanged through re-negotiations and recontracting. We expect mid-term (3-10 years) gas commodity contracts toremain part of the EU’s gas wholesale trading structure up to at least the mid 2030’s. We argue that LTC pricing willremain location and contract dependent and adjust to the closest competitive threat for the seller (liquid hub for moreinterconnected regions; LNG or competing pipeline for more isolated regions).This transition in LTC pricing isstrongly related to increasing supply competition.The objective of the paper is to identify the most important determinants of Russian LTC pricing strategy under thecurrent market conditions. We investigate to what extent Gazprom long term contract prices are determined bystrategic considerations, its market position and to what extent oil price can be expected to remain a significant LTCprice determinant.MethodsWe used a wide variety of methods to understand recent Russian LTC pricing strategy. We presented several casestudies for countries being heavily dependent on Russia supplies but decided to diversify by investing into newinfrastructure which allowed access to alternative gas sources. We wanted to the capture the pricing response ofGazprom to these kinds of competitive threats.We also tested the hypothesis that Gazprom’s LTC prices are adjusted to the closest competitive price (HUB price orLNG) plus transportation cost to the investigated country based on 2016 data. In a time-series comparison between2010 and 2016 we also related the evolution of European LNG prices, and Russian LTC prices relative to each other,to show that they are heavily interlinked.Additionally, we also conducted a panel regression analysis to measure more factors of price determinationsimultaneously. For the regression we constructed, a new measure called the the Exposure-index (E-index) whichdecribes the extent of an otside being pivotal to supply a certain contry/region. Our hypothesis was that countrieswith higher exposure would face higher prices after we control for all other relevant factor.For LTC and LNG price data we used the Eurostat international trade database and the European Commission’sQuarterly Natural Gas Reports. The transportation tariffs were based on own calculation.ResultsOur preliminary result can be summarized in two important findings. First, we showed that Gazprom indeed followsstrategic pricing to some extent. Several case studies suggest that Gazprom reacted with drastic price cuts in thosecountries where the completion of a new infrastructure (LNG regas terminal or cross-border pipeline connection)created a credible threat to undermine its market position. We also showed that LNG prices and Russian LTC pricesare strongly correlating, as LNG is one of the most important competitor of LTCs. There is week evidence, that inwestern European countries Gazprom pricing its long-term contracts a little below the price of the closestcompetitive LNG source plus transportation cost from this terminal.It is important to note however that strategic pricing was only observableto a limited extent. We also tried to explainRussian LTC prices but with the E-index with limited success, even when different subsets of countries wereexamined. These findings imply that while Gazprom reacts to strategic threats the pricing mechanism of Russia is notdominated by its local market power.From the panel regression we also concluded that Brent oil price remained an important determinant of Russian LTCpricing even most recently. This result is somewhat surprising as the European gas market is in a transition from oilindexed prices toward hub based pricing. The result is even more surprising in the light of the fact that the impact ofmarket power (E-index) on LTC pricing was not significant. We suggest the explanation is an indirect one bypresenting evidence on the strong correlation between European hub prices and Japanese LNG prices, ltter beingheavily dependent on oil price.ConclusionsOur research presents evidence that the pricing of the Russian LTC contracts and the related EU gas wholesalepricing is transforming. However we also showed that the role of Brent remained a very important price determinantof Russian LTCs through two channels. First, on less liquid EU markets LTC oil-indexation remains a significantdeterminant of the pricing mechanism (direct channel). On some other markets LNG puts a significant competitivepressure on Russian natural gas. Since, however, European LNG prices are heavily dependent on the LNG price inJapan, which is strongly linked with oil prices, oil price also has a strong influence on Russian pricing through thisindirect channel.