Why could Ukraine's natural gas tension drive urea prices down? (Part 7 of 9)
A more competitive market
Gazprom (Russia’s natural gas giant) subsidizes its domestic natural gas consumers by charging higher prices for exports. But over the past few years, Gazprom had missed the American shale gas revolution, the rise in the Chinese market, and the global surge in LNG (liquified natural gas)—a way to transport natural gas using ships. It now likely needs to reduce natural gas prices and become more efficient in order to retain market share.
Gazprom maintained its higher prices while losing customers as buyers searched for alternative supplies, which were limited at first but which rose due to a natural gas boom in the United States and more natural gas contracts fixed in the spot market, as opposed to oil. Ukraine also became an unreliable customer, which was supposed to take at least 41 billion cubic meters of natural gas under the 2009 supply contract, but only took 33 billion, according to the New York Times. Kiev refused to pay $7 billion in take-or-pay charges in 2012. The Ukraine’s president is also busy trying to find alternative sources of gas, including opening up the country for shale gas.
Ukraine to develop shale
In November, Chevron signed a 50-year agreement with the Ukrainian government to develop oil and gas in the Western part of the country, following an earlier deal with Royal Dutch Shell. President Viktor Yanukovych said that the two deals “will let Ukraine satisfy its gas needs completely by 2020.” The European Commission also launched an investigation into whether Gazprom might be hindering competition in Central and Eastern European gas markets, possibly breaching EU anti-trust rules.
Domestically, Grazprom’s political influence is waning. Over the past few quarters, the Russian government has made the natural gas market much more competitive, allowing smaller companies to gain market share at home. The Ministry of Economic Development proposed increases in domestic gas tariffs to 5% for industrial customers, starting in 2014, a downward revision from the initial proposal of 15% annually until 2016 amid inflation, while Gazprom said that wasn’t enough to fund new developments.
Browse this series on Market Realist:
- Part 1 - Why protests in Ukraine could matter for CF, AGU, POT, and TNH
- Part 2 - Why Russia and Ukraine’s politics will affect natural gas trade
- Part 3 - Russia’s pipeline interest in Ukraine increased natural gas prices
- Commodity Markets
- natural gas
- liquified natural gas
- natural gas prices