U.S. Shale Forcing Gazprom to Lower Gas Export Price by 2016

By Ben Priddy, April 25, 2013

WEB EXCLUSIVE, Moscow. Russia's Ministry of Economic Development released a report this month predicting that competition from North American shale gas exports will force Gazprom to lower its export prices by 2016. The report, issued April 12, outlines scenarios for Russian socio-economic development over a three year period. In remarks on April 24, Economic Development Minister Andrey Belousov stated that crude oil prices will also likely fall to $90-95 per barrel in 2016-2017, according to Russian news outlet Prime. However, rising competition on the global gas market between Russia, the United States, and countries of the Middle East will have the greatest midterm impact on Russia's energy industry, according to the ministry's report.

Gazprom's current export prices to "far abroad" markets (markets outside of the former Soviet Union) are "inadequate," the report says, and the Russian company must take into account the relative cost of gas in foreign markets, particularly the cost of cheap U.S. gas.

According to the Ministry of Economic Development's outlook, prices for Russian gas in Europe will gradually decline to $329 per 1,000 cubic meters by 2016. Currently, the average price of Gazprom gas in Europe is $399.9 per 1,000 cubic meters, according to the report. By comparison, the Henry Hub spot price for natural gas in the United States is $157 per 1,000 cubic meters and the UK's National Balancing Point spot price is $363 per 1,000 cubic meters, Russian newspaper RBC Daily reports.

Russia's Ministry of Economic Development expects average gas prices in Gazprom's export markets to reach a peak of $411 per 1,000 cubic meters by 2014. However, starting in 2015 the ministry predicts that the cost of producing unconventional gas in the U.S. and elsewhere will decline and production volumes will increase. As a result, the Russian company will have to compromise on its pricing schemes in order to remain competitive, according to ministry's recent report.

The United States has experienced a gradual decline in gas imports since 2011 due to rapidly rising shale gas production. Last year, gas imports from Canada and Norway comprised only 5 to 6 percent of total U.S. consumption, according to data from the U.S. Energy Information Agency (EIA), also cited in the Russian ministry's report. According to the EIA, overall global gas demand will grow by 9 percent by 2016. However, economies in East Asia are expected to experience even higher growth. China alone is expected to average a 10 percent increase in gas demand each year to 2016. In addition, the EIA predicts that China and India will account for more than 25 percent of global gas demand growth during this period.

As a result, the Russian ministry writes that competition between Russia, the United States, and gas producers in the Middle East over access to Asian energy markets in particular will increase rapidly. The race for new global LNG capacity to supply Asia is already heating up. Several U.S. LNG export licenses are awaiting government approval, while South Korea's KOGAS already signed a supply