European consumption of Russian gas had been expected to decrease in face of competition from coal, LNG, and shale fuels. Alternative fuel sources, combined with the slowdown in European economies, was supposed to reduce the demand for Russian gas, which is priced at a premium to the market.
Faced with these forces, Gazprom has initiated a series of price cuts for its European customers. In 2012 they reduced prices 7-10% on average, even returning money via "retroactive payments" to customers with long-term supply contracts. These rebates totaled $3.22 billion. In June 2013, Gazprom export chief Alexander Medvedev announced that prices would be further reduced, but "The price correction will be even less than in the previous round of talks." Medvedev estimated the new reductions would total less than $800-$900 million. Medvedev also said that the company would cut prices in new contracts in which the price of gas is tied to the price of oil. As a result, the average gas price for Europe would decline to approximately $375 per 1,000 cubic meters, from the 2012 price of $402. (Of course, not all European countries benefit from this action: Ukraine is stuck with a long term contract with a price of $440 per tcm.)
As a result of these actions, in the first eight months of 2013 Gazprom shipments to Europe and Turkey increased 14%, to the highest level since 2010, according to Gazprom Export. The reasons are price (the premium over the spot price dropped 66% over the previous 12 months) and the failure of LNG supplies to materialize. "The European gas market is shifting again, to a certain extent, from a buyer's market to a seller's market because of a sharp decline in LNG supply," said Sberbank analyst Valery Nesterov.
The increase in demand is providing Gazprom a rationale to limit further price concessions. Gazprom, and its owners (the Russian government) rely heavily on the European market for its revenues--and the Russian budget relies on the income. 50% of the Russian government's budget comes from energy export revenues; with the decline in price for Gazprom's product, the funds are coming more from Rosneft's sale of oil. 80% of energy export revenues today are due to oil, not natural gas. according to the Atlantic Council's senior fellow Dr. Frank Umbach. This has led to a shakeup in the Kremlin's hierarchy, with Rosneft's Igor Sechin increasing in influence at the cost of Gazprom's Alexey Miller.
