Europe

The main goals of Gazprom in the European market are retaining its leadership position, ensuring reliable gas supplies, and improving the efficiency of its marketing activities.

European countries have been among the key consumers of Russian gas for over 40 years. Gazprom is the largest exporter of natural gas to the European market.

[COPY] Более 40 лет Россия является надежным поставщиком природного газа в Европу

Over the course of 2016, the Gazprom Group sold 228.3 billion cubic meters of gas to Europe (including both exports from Russia and sales of gas purchased by the Group abroad). The net revenue from gas sales (net of excise tax and customs duties) totaled RUB 2,140 billion.

In 2016, Russian gas exports to Europe (under contracts of Gazprom Export and Gazprom Schweiz) reached a record high of 179.3 billion cubic meters, exceeding the 2015 figure by 19.9 billion cubic meters (12.5 per cent).

Gazprom’s activities in the European gas market are underpinned by long-term contracts with oil-pegged prices and take-or-pay clauses. The Company also uses new forms of trade based on short- and medium-term sales, swap operations, and spot contracts.

Unified export channel

The unified export channel is the backbone of Gazprom’s export strategy. Pursuant to the Russian law on gas export, Gazprom has an exclusive right to export gas via gas pipelines. The law allows the Company to pursue a coordinated production and marketing policy and serves as an additional legal guarantee of reliable gas exports from Russia.

Long-term contract system

Gazprom exports gas to Central and Western Europe mostly under long-term contracts of up to 25 years, usually based on intergovernmental agreements.

Long-term contracts with oil-pegged prices and take-or-pay clauses are fundamental to stable and sustainable gas supplies. No other contract can guarantee that producers and exporters will get returns on multibillion investments in major gas export projects and that importers will enjoy secure and uninterrupted gas supplies in the long term.

At present, Gazprom’s portfolio of signed long-term contracts provides for gas sales to Europe in the amount exceeding 4 trillion cubic meters over the contract period.

The main features of the long-term contracts are as follows:

  • price formula taking into account the oil prices of the previous six to nine months;
  • clauses forbidding the unilateral termination of contracts unless caused by prolonged force majeure events;
  • take-or-pay terms for significant contracted volumes, stipulating that buyers should pay for all contracted gas, whether offtaken or not, but may later withdraw the unconsumed volumes at a surcharge upon receiving the minimum annual volumes contracted for the specified year.

In essence, the long-term contracts are service contracts that allow buyers to exercise flexibility with regard to daily volumes and annual supplies, while the seller has an obligation to deliver the pre-paid take-or-pay volumes. Moreover, long-term contracts provide a guarantee of gas deliveries over a substantial period of time. Spot gas, meanwhile, is a fundamentally different product, which makes direct comparisons between contract and spot prices unjustified.

Oil-indexed contracts, however, continue to be relevant. Oil indexation is an essential means of long-term business planning for the benefit of both gas purchasers and sellers. It provides for investment continuity and stability in the gas sector in the vertical dimension from wells to end consumers. Oil indexation, which has proved to be useful in the course of more than 40 years of global gas market development, is also employed by other major exporters. In current conditions, oil products act as a universal deflator in the gas price formula, placing the gas price in the context of other feedstock prices.

Average gas selling price in Europe (net of VAT, excise tax and customs duties)

  Year ended December 31
2012 2013 2014 2015 2016
RUB/1,000 m3 11,969.8 12,137.9 13,487.2 15,057.3 11,763.3
USD/1,000 m3 385.1 380.5 349.4 245.6 176.0
EUR/1,000 m3 299.8 286.3 264.5 221.5 159.0

The data were not derived from financial statements and were calculated based on exchange rates as of the end of the relevant period.

European gas market

The dynamics of Russian gas supplies to Europe depend on a number of factors, including rates of economic growth and indigenous gas production, prices for other energy sources – particularly in the power industry – and gas prices in other international markets.

Natural gas sales by Gazprom Group in Europe in 2016, billion cubic meters
Country Volumes
Under contracts of Gazprom Export and Gazprom Schweiz
Austria 6.1
Bulgaria 3.2
Bosnia and Herzegovina 0.2
United Kingdom 17.9
Hungary 5.7
Germany 49.8
Greece 2.7
Denmark 1.7
Italy 24.7
Macedonia 0.2
Netherlands 4.2
Poland 11.1
Romania 1.5
Serbia 1.7
Slovakia 3.7
Slovenia 0.5
Turkey 24.8
Finland 2.5
France 11.5
Croatia 0.7
Czech Republic 4.5
Switzerland 0.3
Overall 179.3
Other sales by Gazprom Group 49.0*
Total 228.3**

* Trading operations and gas sales to end consumers inclusive of LNG.

** Under consolidated financial statements of Gazprom prepared in accordance with International Financial Reporting Standards.

Enhancing reliability of gas supplies to Europe

Gazprom implements a set of measures to enhance the reliability of its gas supplies to European consumers, including systematic efforts for contracting gas transmission capacities, optimizing and redistributing the contracted capacities, executing swap deals, and mitigating flow interruptions and other emergencies.

With a view to further improve supply reliability, Gazprom initiated the Nord StreamNord Stream 2 and TurkStream gas transmission projects.

Nord Stream, the first gas pipeline in history to establish a direct connection between the Russian and European gas transmission systems, reached its design capacity in 2012. Nord Stream 2 will be put in operation before the end of 2019.

TurkStream is a new export gas pipeline stretching from Russia to Turkey across the Black Sea. The first string of the gas pipeline is intended for Turkish consumers, while the second string will deliver gas to southern and southeastern Europe. Construction of TurkStream started in 2017.

The use of underground gas storage (UGS) facilities in Europe also helps considerably increase the stability of export supplies and boost Russian gas sales.