Gazprom about to start price war in global gas market

It may seem like a gas price war, but analysts say that such a strategy may be economically rational for Gazprom: already low prices in the European gas market mean it could relatively easily push prices to a level at which it would be unprofitable to ship LNG from the U.S, according to The Financial Times.

The argument in favor of a price war is simple, the report notes. Just as Saudi Arabia is the main swing producer for the global oil market thanks to its ability to ramp up production if needed, Gazprom is the main holder of spare capacity in the global gas market.

Read alsoEC wants access to Gazprom's contracts details with European customers – mediaAccording to Gazprom executives, the company has about 100 bcm of spare production capacity – thanks largely to investments made on over-optimistic assumptions about future gas demand – equivalent to almost a quarter of its production and about 3 % of world output.

And just as Saudi Arabia has been concerned about the prospect of U.S. shale oil producers eroding its market share, Gazprom faces a similar prospect in the gas market, according to the report. The flood of cheap gas unleashed by the U.S. shale boom has prompted a wave of U.S. LNG projects in recent years.

Read alsoRussia's Gazprom considers stress scenarios of $20-25/barrelFinally, like Saudi Arabia in oil, Gazprom is one of the lowest-cost gas producers. According to calculations by James Henderson, Russian oil and gas specialist at the Oxford Institute for Energy Studies, the cost to Gazprom of delivering its gas to Germany is $3.5 per mmbtu (million British thermal unit) – compared with an estimated $4.3 per mmbtu break-even for U.S. LNG supplies despite U.S. gas prices trading near 16-year lows.

As noted in the publication it would seem to make sense for the Russian company to push down prices to keep U.S. LNG out of the market.