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№ 10 (October 2012)

NOVATEK Will Supply Gas to EnBW, Bypassing Gazprom Export Monopoly

   NOVATEK has made the first move to evade the law on Gazprom’s export monopoly: it concluded a contract on selling gas on the European market via its Swiss subsidiary, Novatek Gas&Power.

By Svetlana Kristalinskaya

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   The company reasons that it needs some experience in gas export to be gained by the moment when Yamal LNG is introduced in the European market. Still, the experts suppose that sooner or later NOVATEK, being supported by the government, will breach the export monopoly.  

   In the middle of July the German energy concern reported the conclusion of a 10-year contract on gas supply of 1.9 billion cu. m. every year.  With reference to unidentified sources, the German media reported that this supplier was the Russian independent gas producer – NOVATEK; after that the company’s stock price rose  by 5% and now keep steadily growing after May’s fall provoked by the Finance Ministry’s plans to raise taxes.  

   The principle question analysts posed at the time of contract signing concerned NOVATEK’s source for the gas it proposes to sell.  Also questioned was whether Gazprom would participate considering it has monopolized Russian gas export since 2006. The media presumed that the deal might involve both an agent agreement with Gazprom and a swap of supply.

   Mark Jetway, NOVATEK's Financial Director, subsequently confirmed that Novatek Gas&Power had concluded an agreement with EnBW. He denied the excistance of any agent agreement with Gazprom. He emphasized that it was just a trading contract and NOVATEK generally intended to expand its trading activities in the European market. EnBW will receive the first supply in October 2012.

   NOVATEK’s subsidiary, Yamal LNG, had previously signed an agent agreement with Gazprom Export. The agreement related to the export of liquefied natural gas produced in Yamal and stipulated that Gazprom Export – for a 1 to 2  % fee – supply the gas to NOVATEK’s customer.  However, Gazprom Export could buy up to half of the gas if it offered a price being equal to or higher than that offered by the customers NOVATEK found.

Why Does EnMW Need Gas?

   EnBW stated that the new contract enabled it to optimize its portfolio and considerably expand the midstream market niche that included gas import contracts and the assets related to gas infrastructure, storage and trade. Moreover, the contract on high volume and long period will provide EnBW’s economic security by saving it from unpredictable gas supplies.

   About a half of the energy EnBW generates comes from nuclear. But the company has fallen victim to the German government’s decision to close its nuclear stations by 2022 in the wake of the Fukushima disaster in March 2011. As a result, some of EnBW's nuclear power plant units closed immediately and those remaining will be put out of operation gradually. The company has already announced that it is going to build new gas energy facilities in Dusseldorf, Karlsruhe, Lubmin and, probably, Stuttgart. For this purpose, as EnBW reports, the company is negotiating strategic alliances with gas companies.

   Interestingly, in the summer 2011, German media published unconfirmed reports that NOVATEK was negotiating with EnBW about acquiring the latter’s shares of German gas importer, Verbundnetz gas (EnBW had a call option for 48% of VNG shares). Last summer, Leonid Mikhelson, Head of NOVATEK, confirmed that such negotiations had indeed taken place and that Gazprom (which owns 10.5% of VNG) wasn’t opposed. NOVATEK however wasn’t satisfied with the price.

   When presenting its 2012–2020 strategy, in December 2011, NOVATEK, demonstrating a considerable increase in production volume, made no secret of itsfuture intent to export pipeline gas. Standing by the picture with a dashed line running through the land from NOVATEK’s deposits to Europe, Mikhelson answered analysts’ questions saying that solving the issue of the company’s gas export would be probably easier than buying a minor share in a European gas-consuming company. Apparently, the idea will have to advance by small steps though: Gazprom’s hand in the European market has been greatly weakened with  LNG supply from Algeria and Qatar; thus, facing another competitor is hardly what Gazprom wants.

Spot Trade Vs Long-Term Contracts

   The total volume of gas bought and sold by EnBW amounts to 5.7 billion cu. m. per year (Germany’s overall annual consumption is about 90 billion cu. m.); the main bulk is used by industrial facilities and power stations. The company also possess gas storage facilities for 270 billion cu. m.. Like many other German concerns, EnBW’s margins are falling because of high gas prices. In 2011 the concern’s gas sales revenue grew by 1.7% and reached €1.8 billion , while the physical sales volume grew by 7.1%.

   Gas supply to Germany is based on long-term contracts pegged to the oil price with a six-month lag. In April 2012, the gas price at the German frontier rose to about €306 for thous cu. m. Another remarkable supply source is the spot market, such as The Dutch Title Transfer Facility (TTF) and NetConnect Germany (NCG). Though the spot prices grew in the first half of this year, still they remained lower than those of long-term contracts – about €241 The forward market prices with supply in 2013 are up to about €265 for thous cu. m.

   Skolkovo Energy Center notes that, over three recent years, there has been a clear trend to rapid development of the spot gas trade in the continental Europe. At the year-end 2012, the physical spot volumes on all the European trade platforms reached 250 billion cu. m. of gas (47% of the total gas consumption in Europe); and it referred to the real supply trade – not resale. The experts recommend Gaszprom to be more flexible when dealing with European consumers that ask the concern for discounts and increase of the spot component of the contracts.  

   EnBW announced that the average price of the yearly contract with Novatek Gas&Power was about 600 million euros. Thus, the contract VWAP for 10 years is set as €315.8 for thous cu. m. (or about $380-$390 thous)  It should be noted that in 2011 the average price of Gazprom’s long-term contracts on the European markets was $383.4 for thous cu. m. and for Germany – $379 for thous cu. m..

   Probably, NOVATEK is ready to play by the European rules, since, according to EnBW, “the contract pricing formula is based on and reflects the increased importance of the wholesale market for the gas pricing; thus, the formula takes into account of the market fluctuations.”

   According to Skolkovo Energy Center, in 2010, 84.1  billions cu. m. of gas were sold in NCG and 106.5 billion cu. m. – in TTF. That means there are quite liquid hubs where, as the experts suppose, Novatek Gas&Power may buy gas to resell it to the German company with a certain margin.

   The volumes NOVATEK is going to handle in the European market will amount to shy of 1% of the gas traded on the spot European market and about 1.3% of Gazprom’s supply to non-CIS states. About a quarter of EnBW’s current portfolio will be attributed to Novatek Gas&Power’s share.

NOVATEK Gets More Aggressive

   It should be said that the top managers of NOVATEK used to declare loudly that they were going to lobby the acquisition of the rights to gas export if the Ministry of Finance increased the mineral extraction tax for the company up to Gazprom’s level by 2015. And though NOVATEK has managed to hurl back that tax increase, the intention to export gas persists. Besides, NOVATEK actively pushes up the gas sales in the most attractive markets bringing together big industrial consumers; but the most important point is that NOVATEK has got the privileges to implement the first Russian Arctic project for gas liquefaction – Yamal LNG. Meanwhile, Gazprom failed to wheedle similar privileges out of the government when implementing its Shtokman Project. Consequently, Yamal LNG can be launched earlier than Shtokman Project and enter the European and Asian gas market. The Shtokman’s launch date has already been adjourned until 2019, while Yamal LNG is still going to start at the end of 2016.

   According to the analysts of VTB Capital, the missing tax privileges for the Shtokman Project indicate the government’s negative attitude towards Gazprom, though Yamal LNG Project raises even more questions as compared to the Shtokman in terms of economic feasibility. “We find it a clear proof of a special attitude to NOVATEK to the prejudice of Gazprom,” say the experts.

   Speaking at the annual general meeting, Aleksei Miller, Gazprom CEO, declared that Gazprom would proceed with pursuing the law on gas export both for the pipeline and liquefied gas.  Nevertheless, the Russian gas producers have got another strong lobbyist – Rosneft Corporation that has received from the government great gas resources on the Arctic shelf and now intends to develop them in cooperation with the foreign oil-and-gas majors – ExxonMobil, Statoil and  Eni. Thus, the expert believes that, sooner or later, Gazprom’s export monopoly will be breached and President Putin never contradicted it by the way.

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