Europe must accept that oil-linked long-term contracts for gas are the mainstay of the industry and cannot be abandoned, the deputy head of the state-backed Russian energy firm told IEA ministers on Tuesday.
Gazprom deputy chairman Alexander Medvedev dismissed as an “illusion” the notion that spot pricing for gas is the way of the future, and said spot prices were proving their limitations in the US. He also reiterated Russian criticism of European efforts to reduce dependence on Moscow in gas supply, and warned against overly subsidising renewable energies.
“Oil-indexed , long-term contracts that ensure the basic supply volumes from Russia, Qatar, Norway and Algeria… are exactly the mechanism that protects all the parties, since the gas market is not like, for example, the fish market, where you can catch, sell, and make a profit in one day,” Medvedev said.
“Two-and-half years of abominably low spot prices in Europe have created the illusion that gas has lost its link to oil once and for all. This is not true. It could not happen because oil-indexed contract prices serve as a benchmark for price arbitrage on the continental market. Spot-price trading is incapable of giving correct price signals to the market due to the small volumes and low liquidity.
“US prices are so low they do not cover operating costs and in our opinion this situation will not last long. The situation there will return to normal and will make the US market attractive again,” said Medvedev.
A number of European companies, including Italy's Eni, have been seeking to renegotiate the prices they pay Gazprom for gas in view of declining LNG prices from other suppliers.
Medvedev also hit out at Europe's efforts to reduce Gazprom's dominance. “Natural gas has become a hostage of geopolitics in which there is an artificial demonisation of Gazprom,” he said. “Sometimes it seems that if even the export of bananas or coal were the largest source of budget revenues for Russia, it is in this area that political games would be played. We do not believe that there is an energy security problem in the EU.”
While it is acceptable for governments to support fledgling forms of renewable energy, this should not be at the expense of gas, he said.
“It is only in combination with gas generation – capable of quickly and economically meeting peak demand – that these unpredictable sources of renewable energy can provide a reliable, stable, sustainable, long-term and, most importantly, an economically sound solution for energy consumption problems,” said Medvedev.
“Although any worthy project should be supported at its start, including governmental support, it is important to ensure that this does not damage similar valuable undertakings. In this context I would like to mention the current model of European energy subsidies. Subsidisation of one type of generation – providing access to network and maintenance of artificially low prices – predictably undermined investment incentives in other types of energy generation and so may destabilise the whole system.”