Russia Allows Changes to Natural Gas Prices in Europe

Natural gas prices in Europe are in the middle of a structural transition away from oil indexed contracts to contracts dependent on the spot price of natural gas. This transition has already occurred in more liberalized markets such as the United Kingdom, but now Russia is being forced to change its contract structure toward spot prices of natural gas. On May 23, Italian energy company Eni signed a deal with Gazprom in which, for the first time, Gazprom allowed the price to be determined by the spot market for natural gas instead of being linked to oil prices.

Russia has long fought to keep the price formulation linked to oil prices, as that arrangement is more lucrative. While Italy is the first country for which Moscow had to give up this pricing mechanism, it certainly will not be the last. With new supplies of liquefied natural gas coming online in places like Australia, Mozambique and the United States by 2020 — not to mention liquefied natural gas from Gazprom's Russian competitors Novatek, Lukoil and Rosneft and LNG import terminals in places like Poland and Lithuania — Gazprom will have to continue to open up to the more market-oriented pricing mechanism. Even with new supplies coming online, Russia's market share will not be threatened, but Moscow's ability to use natural gas prices and supplies as a political tool will diminish over time, particularly in countries outside its immediate borders.