Caught on wrong foot, Gazprom sees market go elsewhere

Gazprom has been the major exception amongst global gas producers in the economic downturn. It has lost market share in Europe, keeping prices high, while rival producers, like Qatar, have sold gas more cheaply.

Overestimating the demand for gas in Europe – and then pushing up prices – has backfired on Gazprom. For the first time in the past decade, Europe’s largest energy supplier cut its exports by 20% and axed production by a quarter.

Artyom Konchin from Unicredit, says it has been caught on the wrong foot by a demand slump

“Consumption was a lot lower this year and they couldn’t sell all the gas that was contracted. A lot of customers switched over to spot gas which was many times cheaper than what Gazprom has in the contracts. So they either didn’t take out the full amounts that were contracted or tried to find some other ways around to save money.”

While Gazprom blames a drop in energy demand – the biggest in Europe since the Second World War – other producers are reaping their benefits. Qatar boosted exports by 66% in just nine months.

European customers chose not to buy under contract – but switched to the spot market where prices were cheaper.

Dmitry Lyutagin, Chief analyst at Veles Capital says the glut in the gas market could have been avoided with better co-ordination.

“Market operations of the major gas exporters should be coordinated to avoid the misbalance of supply – as we saw when Qatar flooded Europe with Liquified Natural Gas. As a result Gazprom’s market share dipped from 25% to less than 20%. That was the result of the uncoordinated policies of the main players. That’s why we need organisations such as newly formed Forum of the Gas Exporting Countries. “

With new reserves arriving on the European market and growing interest in unconventional gas production – total gas sales aren't expected to rise again before 2013. While European governments have talked about diversifying their sources of gas the 2009 demand slump has prompted action at Gazprom’s expense.