U.K. Cutoff of Gazprom Would Hit Companies, NHS With Price Surge

(Bloomberg) -- As calls grow for the U.K. to cut off Russian companies over the invasion of Ukraine, few realize how costly that could prove for thousands of businesses as well as schools, libraries and parts of the National Health Service that rely on Gazprom Energy for their gas.

The retail brand of Gazprom Marketing & Trading Ltd., a subsidiary of Russian state-run Gazprom PJSC, is one of the country's biggest gas suppliers, providing more than a fifth of U.K. commercial gas volume. If its retail contracts collapsed, buyers could face huge price increases.

Gas wouldn't automatically be cut off but the regulator would bump purchasers to other providers with much higher prices. Commercial contracts usually keep a price steady for their duration.

This means that, unlike much of the solidarity with Ukraine heard around the world which comes with little direct cost, cutting off Gazprom's retail brand would come with real consequences for businesses and public entities.

“A failure the size of Gazprom would put a significant strain on the Treasury and ministers will need a clear exit plan for the short term,” said Darren Jones, a lawmaker for the opposition Labour Party, who chairs the business Parliamentary committee. “The secretary of state must ensure that his review of energy security includes industrial and commercial customers, as well as residential customers.”

The company's trading arm has been shunned by longstanding partners and is being pushed out by its London landlord over Russia's war in Ukraine. If Gazprom isn't able to trade in the British market or customers boycott their retail business, that threatens to force companies through what is known as the supplier of last resort by regulator Ofgem.

Gazprom M&T didn't respond to a request for comment. The company has made no public indication that it won't be able to serve business customers.

“Nothing has changed in relation to Gazprom Energy's ability to supply its customers and we continue to honour our contractual obligations to our customers with the same level of commitment as always,” the company said in a statement on its website. “We source our gas through commodity exchanges in exactly the same way as our competitors, and we do not depend on gas supplies from Russia.”

Read: Russia's Gas Giant Shunned by European Traders and Landlord

Gazprom Energy supplies 21% of U.K. non-domestic gas volume and has more than 100,000 meter points, according to its website, and had 23 million pounds ($30 million) worth of contracts with the NHS last year, according to public sector data platform Tussell. The gas volume delivered by the supplier is roughly equivalent to the combined gas and power provided by Centrica Plc's business retail arm and Bulb Energy Ltd., according to data from the companies.

The supplier's ultimate parent company, the largest gas exporter in the world and Russia's largest company, is still providing high volumes of gas to European utilities through pipelines, which is sold on in the U.K.

“If Gazprom's London-based trading arm were to fail, we would likely see immediate problems in its retail business,” said Tony Jordan, an energy industry consultant at Auxilione. “That could expose business customers to current record-breaking market levels.”

Businesses tend to sign long-term contracts with fixed prices. If their supplier goes under and they're put through Ofgem's process, they face the volatility of the current market. With wholesale prices hitting records on Friday, it's possible many businesses would be unable to absorb that financial hit.

This week already, three local councils, in Suffolk, Shropshire and London, said they'll cut short their gas supply contract with Gazprom Energy. There's not yet any legal requirement for any Gazprom unit to stop operating in the U.K., but companies tied to the Russian state already won't be able to issue debt or equity in the country following sanctions.