Natural Gas Undervalued: Gazprom's Medvedev

By Halia Pavliva

Feb. 13 (Bloomberg) -- Natural gas is undervalued and its price less susceptible to producer influence than oil because long-term contracts dominate the industry, said Alexander Medvedev, deputy chief executive officer of OAO Gazprom.

European consumption of the fuel will probably grow faster than previously forecast, Medvedev said in an interview with Bloomberg News in New York. He said the continent may need an additional 150 billion cubic meters of gas by 2025.

A 15-member group of natural gas producers, which includes Russia, Iran and Qatar and is known as the Gas Exporting Countries Forum, agreed Dec. 23 to coordinate forecasts, investments and relations with consumers in an attempt to bolster their influence in world markets.

“Objectively, natural gas is undervalued,” Medvedev said. “The era of cheap energy is over.”

Natural gas futures on the New York Mercantile Exchange have dropped 21 percent this year and are down 69 percent since a 2008 high of $13.694 per million British thermal units reached July 2. Gas for March delivery fell 0.9 percent today to $4.447 per million Btu at 1:59 p.m. in New York.

Asked about the purpose of the gas-producer group, Medvedev said that “what is really important is to have a dialog with consumers about the fuel and environmental aspects of its use.”

Gas Supply

Medvedev said consumer concerns that the group may seek to influence the gas price were unfounded. “It’s a joke,” he said, adding that long-term contracts prevent manipulation of output. The gas group pumps about 40 percent of global natural-gas supply, and Gazprom is the world’s largest natural-gas producer.

The Organization of Petroleum Exporting Countries, formed in 1960, didn’t gain substantial influence over crude oil prices until the 1973 oil embargo and after U.S. crude output had peaked, Edward Kott, a commodity analyst at Louis Capital, said in a report Feb. 5. OPEC accounts for about 43 percent of global oil output.

The gas price is linked to the price of oil, which is also undervalued, Medvedev said. “Oil at $85 per barrel is more justified than $45 per barrel,” he said.

Crude oil for March delivery surged 10.3 percent to $37.48 a barrel at 1:07 p.m. on the New York Mercantile Exchange. Yesterday, the contract fell 5.5 percent to $33.98, the lowest settlement since Dec. 19. Oil futures are down 19 percent this year.

Output Cuts

Russia, whose major export earner is oil, is not a member of OPEC and the government has repeatedly said it is not planning to become a member of the organization.

Medvedev said that “both weather and technology” make it impossible for Russia to cut oil production when prices fall, as OPEC countries do. “It’s one story to cut oil production in the Middle East, and it’s a totally different story to do so in Siberia,” he said.

The global financial crisis may mean an opportunity for Gazprom to purchase more assets at low prices, including in North America, Medvedev said, declining to comment further. The company may borrow money for the purchases from Russia’s state-owned banks at low interest rates, he said. Before state-run Gazprom, based in Moscow, looks into purchasing more assets, “the dust should settle a little bit,” Medvedev said.

Gazprom is dedicated to secure stable supplies to its consumers in Europe after the supplies via Ukraine were halted for several days in 2006 and again last month, Medvedev said. Gazprom supplies a quarter of European Union gas, 80 percent of which is shipped through Ukrainian territory.

Supply Stability

Ukraine, which sends most of Gazprom’s gas exports to Europe, should initiate a gas consortium with European partners and Gazprom, to guarantee stability of the supplies, Medvedev said. Ukraine pumped 119 billion cubic meters of Russian gas to Europe last year, according to NAK Naftogaz Ukrainy, representing 80 percent of Gazprom’s shipments to the European Union.

“There is no doubt about the stability of Ukraine’s gas transportation system,” said Oleksandr Hudyma, a top energy aide to Prime Minister Yulia Timoshenko, in a phone interview, adding Ukraine’s government objects to Russian proposals for a consortium.

Gazprom, which meets 70 percent of the gas needs of Ukraine, stopped supplies to the neighboring country in January over a price dispute. The conflict caused shortages in 20 European countries for more than two weeks amid freezing temperatures.

Gazprom has no plans to sell its 50 percent stake in Swiss- registered trader RosUkrEnergo AG, which was the sole importer of gas to Ukraine from 2006 and which has now been excluded from that role, Medvedev said. RosUkrEnergo owes Gazprom about $500 million, he said.

Ukrainian billionaire Dmitry Firtash owns 45 percent of RosUkrEnergo and his business partner Ivan Fursin the remaining 5 percent.

To contact the reporters on this story: Halia Pavliva in New York at hpavliva@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net