Russian Oil and Gas - Gas Export Revenues Pushing Records

The conflict in Ukraine and the related risks for the gas market pushed TTF spot to a new record high of nearly $4,000/mcm on March 7, though quotes have dropped to about $2,000/mcm currently. Gazprom's export dynamics are actually improving, while the abnormally strong spot gas prices have pushed the company's average realized price even higher. In the current market conditions, we think the average realized price could reach $1,000/mcm this year, triple the 2021 level. Europe does not have enough flexibility to replace Russian gas at this point unless the elevated gas prices put a serious dent in global gas demand. It is also worth highlighting here that European consumers have to pay for the minimum take-or-pay volumes (165-170 bcm annually - just below Gazprom's exports in 2020-21) regardless of how much gas they actually receive. The US ban on Russian energy has no direct implications for Russian gas, as the US does not purchase any gas from Russia.> Gazprom prices its gas exports to Europe predominantly based on a basket of TTF forwards, fixing the pricing in advance. The most important pricing benchmarks include TTF one month ahead, three months ahead, six months ahead and one year ahead forwards (with corresponding timing lags). While the spot component in the sales mix is negligible, fears of gas flow disruptions have pushed up the short end of the forward curve. Given the current market conditions, we estimate that Gazprom's average realized price for gas exports to Europe could jump above $1,000/mcm for the month of April (from close to $800/mcm in March) and set a record of around $1,000/mcm for the year (tripling y-o-y). Taking into account the material time lag in Gazprom's export pricing approach, the average price for this year has to a large extent already been determined. > In light of recent remarks from the IEA and European officials about Europe potentially cutting its reliance on Russian gas, it is worth highlighting that Gazprom's share in European gas consumption stood at more than one third in 2019-21, and the company accounted for more than 50% of European gas imports. Given the tight global gas market balance and the lack of new LNG capacity coming to the market, we believe Europe will find it impossible to reduce its consumption of Russian gas in the short and medium term unless global gas consumption drops substantially (a scenario we would not completely rule out given that gas prices are currently at demand-destructive levels). On the other hand, to boost the share of LNG in consumption, Europe will have to compete for existing cargoes destined for Asia, which will likely keep prices elevated. The construction of new LNG capacity takes four to five years from the approval of the FID. > Gazprom's gas exports to Europe were down 46% y-o-y in January (after being down 37% y-o-y in December), as its customers opted to use as much gas from storage as possible. The decline eased to only 26% y-o-y in February, while a recovery in Ukrainian transit volumes to the minimum contracted level in March (doubling m-o-m) suggests an even smaller y-o-y decline this month. We expect export volumes to start increasing after the end of the heating season (typically starting in early April). We estimate Gazprom's long-term contracted minimum annual take-or-pay obligations at 165-170 bcm, just slightly below the 2020-21 levels.> The amount of gas in European storage currently stands at 27 bcm, which is close to the historical minimum. The situation is not particularly critical at the moment, as most years the heating season ends about a month from the current date. However, at some point the storage will need to be refilled, so we could see stronger than usual demand in the summer time.> We estimate Gazprom's gas export revenues at about $300 mln per day currently. We project the company's 1Q22 revenues from non-CIS gas exports at $22 bln, which would be a quarterly record. In 2Q-4Q22, quarterly revenues could double versus 1Q22, on our estimates, on the back of stronger volumes and pricing, leading to full-year revenues at an unprecedented $170 bln. The company's take-or-pay contracts allow consumers to push back gas offtake to future periods while still paying for it this year.