RUSSIA'S EMERGING BUSINESS MODELS FOR GAS EXPORTS TO EUROPE

European gas market liberalization is driving gas suppliers to revise their model for sales into the European market. Russia's move through the gas value chain faces a mixed reception in Europe. Some European midstream players are heartened by opportunities to enter the Russian upstream and, resonating with the European Commission's competition agenda, Gazprom represents a new entrant in the market. However, Gazprom's downstream activities perpetuate the bilateral framework for gas agreements, which potentially challenges Brussels' competition objectives. Building on its long-standing relationship with European offtakers, Russia is introducing several innovations in the Western European gas market: 1

*Direct sales contracts. Gazprom has recently signed agreements for direct gas sales to end consumers while extending long-term contracts with midstream players. This allows Gazprom to take a portfolio approach to pricing. Gazprom's position as a retailer also furthers the European Commission mandate for greater competition.

*Asset investments. In the past two years Gazprom has moved to acquire storage and gas distribution assets in Western Europe. The former will allow Gazprom to better meet consumers' demand profiles and the latter will help Gazprom secure demand by locking in a customer base.

*Trading and marketing ventures. Building on the company's trading and marketing activities in Europe, Gazprom is developing a new kind of marketing entity. Gazprom's wholly owned marketing and trading companies will sell directly to consumers, in anticipation of retail margins' improving.

*Upstream-downstream investment swaps. Experiences in Germany and Italy might herald a new trend whereby Gazprom takes positions downstream in Europe and European players invest in the Russian upstream.

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1. This report takes the example of Russia; subsequent reports will examine the position of other suppliers that are taking similar steps.

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