The dramatic fall in gas prices over the past year has dented revenues and investment plans of OAO Gazprom, the world’s largest gas producer.
In June Alexander Medevev, deputy chief executive of Gazprom, said he expects an 11% drop in exports this year to 142.1 billion cu m and a 38% drop in export revenues to $40 billion.
European customers are expected to pay over $2.80/thousand cu m for Russian gas in 2009. Medvedev said despite the crisis, gas consumption in Europe was higher in fourth-quarter 2008 and first-quarter 2009 than in the warm spring of 2006-07. “Temperatures play a bigger role than GDP dynamics,” he said.
The company doesn’t expect to return to 2008 production levels until after 2012.
“I think they are right,” said Jonathan Stern, director of gas research at the Oxford Institute for Energy Studies. “Gazprom is dependent on the global and national economy, and there is nothing that they can do to change that picture.” In 2020, gas is expected to constitute 82% of the group’s net income with oil being 14% and power, 4%.
With Gazprom being inextricably tied to the Kremlin and a major political tool in its foreign policy, the company has benefited from the government’s drive to exert greater control over the energy industry.
Chris Weafer, a strategist at Uralsib Bank in Moscow, said this was a major transition year for Russia as Vladimir Putin’s presidency had focused on stability and restructuring. Now his successor, Dmitry Medvedev, wants to push a controversial reform agenda and attract foreign investment. This, however, has been delayed by the economic crisis and the conflict with Georgia.
“For Russia to get out of the commodities boom-to-bust cycle, the government will need to more clearly adopt policies—monetary, fiscal, and budgetary—to make that happen,” Weafer said.
Investment program
Gazprom outlined a 920.4 billion-ruble ($26.3 billion) spending plan for 2009, but it will set priorities for its projects in the turbulent market. Top production ventures are Zapolyarnoye, Bovanenkovskoye, Urengoiskoye, Shtokman, and Severo-Kamennomisskoye fields.
With major projects in frontier areas being capital-intensive and technically challenging, there have been concerns about delays. Bovanenkovskoye gas field’s start-up has been postponed from the third quarter of 2011 to the third quarter of 2012 because of the global economic crisis.
In a memorandum on bond placement, the company said the deadlines for the $20 billion Shtokman gas-condensate project could be reviewed “depending on the situation on the natural gas market.” A company spokesman told OGJ there had been no decision to delay the 23.7 billion cu m/year Shtokman pipeline gas and LNG development, which is due to start in 2013, and the works are progressing according to the initial plan. “An updated investment decision on Shtokman is scheduled to take place in March 2010,” she said.
Andrew Neff, senior energy analyst with IHS Global Insight, said over the next 3-5 years Gazprom would have to reconcile its long-term upstream investments with demand projections that have radically changed over the last year. “Gazprom has to diversify its own export markets as well by making inroads into Asia-Pacific and North American gas markets. Also, the economic downturn and the pressure on oil indexation in Gazprom’s European gas contracts could force Gazprom to abandon oil indexation in favor of some other pricing mechanism.”
Neff said Gazprom should research and identify a new gas price mechanism to replace oil indexation or take steps to defend it.
In Russia, the company sells gas at regulated prices for heat and power. The practice has curbed available capital for reinvestment in the industry and reduced efficiency incentives internally, according to a report by KPMG LLP. “However, in November 2006 the Russian government decided to incrementally increase domestic prices towards market levels. Ageing fields and insufficient export pipelines are also a concern going forward.”
Establishing trust
One major challenge for Russia is regaining Europe’s trust as a reliable gas exporter considering its strained relationship with Ukraine, a key transit country for Russian gas carried by pipeline to Western Europe. Gazprom currently supplies 25% of Europe’s gas but aims to have a 29% market share in 2020. The spats with Ukraine have forced Gazprom to pursue other supply routes, such as the proposed 30 billion cu m/year South Stream pipeline with Eni SPA and 27.5 billion cu m/year Nord pipeline.
Pushing Ukraine and other former Soviet Union countries to pay market prices is a major headache. Ukraine is struggling to pay for the gas because of the impact of the financial crisis on its economy. In January Gazprom stopped supplies for 20 days because the countries could not agree on future gas and transit prices. Gazprom lost well over $1.1 billion in direct revenues because of the dispute. In response to erratic payments, Gazprom in June threatened to cut gas again if Naftogaz Ukrainy, Ukraine’s national gas company, did not pay for the gas.
The European Commission urged Ukraine to reform its gas industry and is working with international financial institutions, Ukraine, and Russia to reach an agreement on payments.
Presence overseas
Gazprom is an example of an NOC contributing to its country’s economic growth.
“NOCs are more proactive and innovative on their relationships with the future in mind, and they are investing in countries to access reserves such as China and Russia in Africa and Latin America,” said Johan Nell, head of upstream at Accenture.
One of its latest deals was the signing of a protocol in June with Nigerian National Petroleum Corp. to form a joint venture, named Nigaz, to conduct gas exploration, production, and transportation and to build power generation facilities in Nigeria. The venture could be worth up to $2.5 billion. Other areas of importance are North Africa, Latin America, and Asia.
