Russia: Can the the gas empire strike back?

Russian gas exports face serious challenges from weak gas demand in Europe, the rise of more flexible European gas pricing systems, the unconventional gas boom in North America, and China’s aggressive hunt for alternative gas supplies. These factors are all dramatically changing the global gas landscape in ways largely unfavorable to Russian exports. Accordingly, the Kremlin faces weighty strategic decisions that will determine whether the Gas Empire can strike back.

Natural gas consumption in Europe and the Former Soviet Union (including Russia itself), which are Russia’s core gas markets, has stagnated for the past decade. Russian gas export volumes peaked in 2005 and have trended downward since. Yet Gazprom – Russia’s monopoly gas exporter – continues to insist on an outdated pricing system that links the price of Russian gas exports to crude oil prices, even though crude oil and natural gas prices are diverging dramatically in many areas.

Oil-linked pricing has kept the price of Russian gas high since global crude oil prices rallied in 2004, massively increasing Gazprom’s revenue and masking the reality that Russia was selling less and less gas to Europe. In 2012, Europe accounted for nearly two-thirds of Russian gas exports by volume and 12 percent of the country’s total exports by value, according to the Russian Central Bank.