Long-term concerns over Gazprom dispute with Belarus

Author: Lianna Brinded

Market participants warn of possible long-term European gas import concerns, after Gazprom slashes gas supplies to Belarus over a debt payment dispute, echoing the European gas import crisis of 2009

Gazprom's dispute with Belarus may signal potential supply problems in the long term, though European gas imports will not be affected immediately, according to analysts. Gazprom, Europe's largest gas supplier, cut supplies to Belarus today (June 21) following a failed round of debt repayment talks.

"Gazprom has said that supplies to the West will not be restricted, but the markets will be watching with interest, fearful of a repeat of the crisis that saw supplies shut off in 2009," says Andrew Horstead, head of energy research at energy and carbon consultancy Utilyx.

The immediate impact though is likely to be limited given seasonal demand is low and most of Gazprom's exports transit through Ukraine, with only 20% via Belarus. But any cuts especially if they affect supply beyond Belarus, are likely to heap further pressure on Russia's reputation as a reliable exporter at a time when Gazprom is facing falling demand from Europe and competition from liquid natural gas (LNG) and US-produced shale gas."

Other market participants like Andrew Moorfield, head of oil and gas at Lloyd's Banking Group agree that "this is sabre rattling and we don't foresee any immediate impact on gas prices."

"Gas prices have been depressed and we forecast this will continue," he adds.

Gazprom, also the world's largest gas producer, began reducing deliveries to Belarus by 15% at 10:00 am Moscow time (07:00 am GMT) today and may cut supplies by up to 85%, depending on "how constructive talks are", added Gazprom's spokesman Sergei Kupriyanov in a statement. The company added that exports beyond Belarus won't be affected as there is currently spare capacity in the pipeline system and supplies to Poland can be diverted via Ukraine.

Gazprom says Belarus owes $192 million for deliveries, as Belarus has paid for the gas at a lower price than Gazprom charged. Russian Prime Minister Vladimir Putin said in March this year that Belarus will receive $4.2 billion in Russian subsidies this year through lower-than-market gas prices and tax-free oil deliveries.

"On paper the situation between Russia and Belarus should not really affect the market as there is enough spare capacity in the system to cope," says Craig Lowrey, consultant at financial risk consultants JC Rathbone Associates. "I think that if it drags on without a resolution then it could be a cause for concern. The immediate consideration for the market that I have is that there has been a focus of late on bullish drivers in the market rather than bearish ones - and this is another such bullish factor that could provide a short-term boost to prices."

Whether the negotiations will be dragged out, still hangs in the balance. "Gazprom has a clear commercial interest to settle the issue as soon as possible," says a source familiar with the negotiations. "However, Belarus is failing to live up to its contractual obligations and shows no intention of paying for the gas it has already consumed. Gazprom is approaching this situation in a reasonable and open manner, but it cannot continue supplying Belarus with free gas. The Belarusian side formally accepts their debt but no progress has been made in negotiations so far. Gazprom has raised the issue of timely gas payments with Belarus for quite a long time already."

Russian gas makes up over 20% of European gas imports and certain countries, such as Germany, are reliant on Russia for more than one third of their gas needs. When Russia cut off gas supplies to Ukraine for the second time in January 2009 the effects were felt directly in Eastern Europe, generating fresh fears over the reliability of Russian supply.

Despite some market participants fearing an echo of previous crises between Russia and Belarus affecting the markets, some players are assured that exports will be unaffected.

"Export deliveries are unlikely to be affected," says JP Morgan's Cazenove. "The Yamal-Europe pipeline is owned and operated by Gazprom and we expect no impact on export deliveries to Germany. Beltransgaz transits gas to Poland and Lithuania and, theoretically, there could be potential disruptions. We, however, expect the dispute to be over before exports are affected."

When Energy Risk spoke to Gazprom's European arm about possible affects to European trading and supply, a spokesperson said "the negotiations are still ongoing; we will inform the market on the outcomes of the negotiations as soon as there's more clarity on the situation".


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