Gazprom risks losing half of export revenue as gas prices keep falling

Gas prices in Europe are falling rapidly due to quarantine restrictions. By the weekend of May 30th-31st, the cost of sale contracts will fall to zero or become negative, as it was with WTI oil a month ago, some traders surveyed by Reuters report.

According to The Bell, it is due to the weak demand in the European market caused by the coronavirus pandemic. In addition, the world’s largest liquefied natural gas producer, Qatar Petroleum, said that it does not intend to reduce supplies to Europe. Costs of production recovery may be too high.

European storage facilities are already 70% full, although last year this figure was 56% in the same period. By July, they may be fully filled. Just because there is too little space left in American oil storage facilities on April 20-21st, the price of the WTI brand in one of the types of contracts fell to minus $1.55.

“Gazprom sells gas for export at prices above the European spot rates thanks to long-term contracts where pricing formulas are not transparent,” The Bell specifies.

“Interfax has calculated that for Gazprom the profitable level of gas sales to Europe is about $100 per thousand cubic meters. The company now calculates the average annual price at $133, but in March the real export price was $125 per thousand cubic meters. In order to cut losses, Gazprom began to reduce its supplies to Europe. In January-April this year they fell by 21.4% compared to the same period in 2019. However, against the background of increased supplies from Qatar, the reduction will not stop the price decline.

At the end of April Gazprom estimated its losses in export revenues that happened due to the drop in prices at $19 billion — a decline of almost half compared to 2019. The decline in Gazprom’s export revenues will also lead to lower federal budget revenues, although the share of gas revenues is much lower than oil revenues.