Gazprom has given warning that European consumers should expect stiff increases in natural gas prices as the soaring cost of oil feeds through into contracts for the sale of Russian gas into Europe. The cost of wholesale natural gas will rise by between 15 and 20 per cent next year, Alexander Medvedev, the deputy chief executive of Gazprom, said. He added that even greater increases could follow if the European Commission pushes through measures to break up Europe’s gas grid. The Russian gas giant is at loggerheads with the Commission over its plans to strip European gas companies of their pipelines. The “unbundling” proposal, which is opposed by other monopoly suppliers such as Gaz de France, would affect Gazprom’s investment in downstream gas distribution in Germany.  “The proposal will inevitably create a situation where prices will grow,” he said. “Liberalisation doesn’t work in such infrastructural industries as power generation and especially gas.”

The soaring price of crude oil, which this week flirted with $100 per barrel, will soon feed through into natural gas prices, stoking inflationary pressures in Europe. British consumers are unlikely to be spared the effects of a Russian price increase as the two markets are linked by an inter-connector pipeline between Norfolk and Belgium. In Britain’s free-for-all competitive gas market, contracts for gas are bought and sold daily on a futures exchange. However, Russian gas is sold under long-term contracts with big European energy companies such as Ruhrgas, owned by E.ON, and Gaz de France.

The price of gas sold under these contracts is not linked to a spot market but is indexed to a basket of alternative fuels, mainly crude oil and heating oil. Typically, the price is adjusted quarterly and is based on the average price of the fuel basket over the preceding six to nine months. Because of the time lag, the surge in crude oil has yet to affect European gas prices, but consumers already smarting from the soaring price of petrol will feel the full impact of expensive energy in their domestic fuel bills next year. Gazprom’s argument with the Commission over the unbundling of gas pipelines is set to intensify. The proposal to strip utilities of their physical infrastructure strikes at the heart of Gazprom’s strategy to extend its reach downstream into Europe. The Commission wants more competition and has taken steps to develop new supplies from Central Asia, promoting Nabucco, a vast pipeline project linking Baumgarten, a gas hub in Austria, to central Turkey.

http://business.timesonline.co.uk/