Falling gas demand as a result of milder weather and the economic downturn in Europe will put pressure on Russian gas export monopoly Gazprom to reduce its tariffs, Russian energy investment bank Xenon Capital Partners said. About 40 percent of the European Union's gas imports are supplied by Russia, while 80 percent of Gazprom's revenues come from European customers as it lacks major buyers outside Europe.
"If we see a real decline in European gas demand, then Gazprom will be forced to give way and reduce its prices," Hamid Gayibov, Managing Director at Xenon told Reuters in an interview.
The EU's gas market could have around 60 billion cubic metres (bcm) excess supply in 2011, and the system is likely to remain similarly long in 2012, according to Reuters research and analyst data. This compares to a length of around 10 bcm in 2010.
"I think most people accept that Europe's economy is effectively already in recession. If this leads to a real short-/mid-term decline in European gas demand, then Gazprom will increasingly be facing requests for contract price re-negotiations by its European partners," Gayibov said.
"However, the decision that Gazprom will ultimately make will likely be driven by its long-term strategy with respect to the desired size of its presence in the European gas market," he added.
Many European gas supply companies are suffering from long-term gas deals with suppliers such as Gazprom or Statoil , which link their import rates to oil prices, while supply firms are forced to sell gas to customers at lower retail prices linked to the freely traded spot market.
Gazprom has so far rejected renegotiation of its long-term deals, but is in arbitration with major European customers such as Germany's Germany's E.On Ruhrgas and Poland's PGniG over its gas prices.
In an arbitration procedure, the price dispute is referred to an independent arbitrator, nominated by the parties to review the case.
Gazprom has also made concessions to Italy's Edison SpA and Greek gas company DEPA. Gayibov said Europe's rising liquefied natural gas (LNG) capacity would also put pressure on Russian gas export prices.
"As LNG becomes more competitive it will put Gazprom under pressure to reduce its own export prices, and also to become able to arbitrage between Europe and Asia through creating its own LNG capacities and building pipelines to Asia," he said.
"This will especially be true should the US become a major LNG exporter in the next few years," he added. Gayibov said LNG was a bigger concern to Russian gas exports than shale exploration. "Europe will not see shale gas production on a scale like the US and I don't think European shale gas production will fundamentally impact the relationship between Europe and Russia.