OREANDA-NEWS. October 1, 2009. The Board of Directors took notice of the information relevant to the principles and scheme of natural gas exports by Gazprom, as well as the Company’s strategy in the environment of reduced gas consumption abroad.

The Company’s Management Committee was tasked to continue the efforts aimed at raising Gazprom’s export efficiency, while preserving the system of long-term contracts as the basis for its export activities.
Background

Gazprom is the largest natural gas supplier to Europe meeting 25–28 per cent of the regional gas demand.

Gazprom’s export strategy is aimed at retaining strong presence on the European market provided that it is underpinned by the gas sales profitability.

When arranging supplies, Gazprom relies on the following main principles:
— Gas marketing based on long-term contractual arrangements.

The gas industry is very capital-intensive and implies the need to invest in the construction and operation of large-scale projects for hydrocarbons production and transmission. These investments may only be ensured through long-term mutual contractual obligations between the supplier and the consumer.
— “Take-or-pay” obligations.

The basic structure of current long-term contracts for natural gas exports beyond the FSU includes such elements as the annual contracted quantities, the multi-component pricing formula, the flexibility of daily gas offtake, the purchaser’s “take-or-pay” obligation, etc.

The “take-or-pay” principle is applied on an annual basis and usually means the minimum contracted quantities (MCQ) that the purchaser is to take during this period. If the purchaser fails to take the MCQ in full, he is obligated to partially pay the price of the untaken gas.

At the same time, the “take-or-pay” principle provided for in contracts enables the purchaser to re-distribute the gas offtake between calendar quarters.
— Natural gas prices are pegged to oil basket prices.

Natural gas export supplies beyond the FSU under long-term contracts are based on the prices that are pegged to oil prices, which rules out pricing manipulations and makes gas prices more predictable (owing to forecasts and forward oil price quotations).

In addition, Gazprom is an active player on the European spot market. However, volatility of supply and relatively small amounts of natural gas traded at European hubs still prevent them from turning into a real substitute of the long-term contractual system.

Nowadays, only long-term contracts meet the strategic interests of all the gas market players, since these contracts provide for multi-year gas offtake obligations and ensure goods delivery to the consumer in the desired amount and with the required supply flexibility on a daily and yearly basis.

Preservation of the export structure based on long-term contracts and observance of the relevant gas pricing principles, as well as gas delivery and offtake rules are Gazprom’s crucial tasks during a temporary gas demand reduction on foreign markets provoked by the global financial crisis.