February 8, 2013 7:50 pm

Gazprom sets aside $4.7bn for rebates

GAzprom logo seen on a building©Bloomberg

Gazprom is setting aside $4.7bn to cover potential price rebates to European customers this year, reflecting the pressure on the Russian gas monopoly from rapid changes in Europe’s gas market.

Gazprom is being hit by knock-on effects of the shale gas “revolution” that has transformed the US from net gas importer to prospective exporter.

Large quantities of liquefied natural gas from suppliers such as Qatar, once intended for the US, have been diverted to Europe. That has driven market-traded or “spot” gas prices down to levels sometimes below those Gazprom charges in its long-term supply contracts to European customers, which are linked to crude oil prices.

The state-controlled group has had to amend some contracts in recent years to include a spot price component in the price formula, forcing it to hand retroactive discounts to customers.

Last year Gazprom set aside $4.4bn to cover such discounts, but ultimately paid out $2.7bn, the company told an investor day in Moscow.

A person close to Gazprom said this year’s $4.7bn was a maximum estimate of potential refunds resulting from contract adjustments, plus some flexibility already built into the agreements.

“It is not a change in the long-term contracts as such, but it is using the flexibility which was there and shows that the long-term contracts are not as inflexible as many people think,” this person said.

Gazprom did not plan to reduce prices to European customers per se, he added.

“What we are committed to is adapting pricing formulas to objective changes in market conditions,” the person said.

Gazprom is also facing pressure from a European Union antitrust probe into its practices in central and eastern European markets.

The company told investors it expected to report a 15 per cent drop in net profit to $38bn for 2012, on full-year sales down 5.1 per cent. Dividends for 2012 are likely to be a fifth lower than 2011, but to rise again in 2013.

Analysts said an expected rise in spot prices might benefit Gazprom.

“We think Gazprom’s prices will be the same as the spot price over the long term,” said Ivan Mazalov, a fund manager at Prosperity Capital Management, adding he did not think spot prices would drop much below current levels.

People who attended the investor day said the company, whose shares fell 20 per cent last year, had given little reason for optimism about a change in strategy.

The company is attempting to diversify, through projects such as a new LNG plant in Vladivostok and trying to secure contracts with Asian customers including China. But management did not signal strategy changes in Europe, said Ildar Davletshin, an analyst at Renaissance Capital.

“Gazprom’s presentation implied that all these problems are short-term and that they will remain the biggest and lowest-cost producer.

“There was no real sign that they realised that changes are coming and may have to address this,” he said.

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