Gazprom gives half-nod to poor outlook
By Vladimir Socor
Gazprom's board of directors held its traditional start-of-year meeting on
January 26 to set policies for 2010. The decisions by the Russian gas monopoly
focus on marketing policy, rather than investment into field development.
This focus increases the probability of a gas shortfall in Russia in the
short-to-medium term and can only bring that situation nearer. The chosen focus
reflects the company's financial constraints and limited capacity for
investment. The board's decisions are an inevitable result of Gazprom's
shrinking production, exports, and profits during 2009, when the stagnant
trends of the preceding years turned into outright decline.
The Russian government's statistical authority (RosStat) shows
gas extraction in the country at 584 billion cubic meters (bcm) in 2009, down
by 12% from 2008. Gazprom's own report shows exports to "far abroad" countries
(in Europe outside the former USSR) at 140 bcm, again down by 12% from 2008.
For its part, the technical authority, Central Dispatcher Administration of the
Fuel and Power Complex (TsDU TEK), reports gas extraction in Russia at 582 bcm
in 2009, down by 12.4 bcm from 2008. Total exports (including the "near abroad"
countries of the former USSR) were 167 bcm in 2009, down by 10.3% from 2008.
Use of natural gas within Russia itself amounted to 429 bcm in 2009, down by
6.6% from 2008.
According to Gazprom's vice president and GazEksport head Aleksandr Medvedev,
speaking at the end of 2009, Gazprom's full-year revenues for 2009 could have
fallen from 111.5 billion euros (US$155 billion) in 2008 to 72.5 billion euros
in 2009, and its profits from 21.5 billion euros in 2008 to 11.5 billion euros
in 2009.
This week, the company announced a better-than expected 33% gain in
third-quarter profit to $5.75 billion after it paid less tax and after the
ruble weakened against the US dollar. Revenue in the period declined 8% to 18.5
billion euros.
The decline in Gazprom's exports and profits would have been even steeper were
it not for "take or pay" obligations in Gazprom's long-term contracts with
European buyers. German and other European companies can buy gas on the
fast-growing liquefied natural gas (LNG) and spot markets at lower prices than
Gazprom's. However, long-term contracts with Gazprom on a take-or-pay basis
constrain those companies' freedom of choice. Some of them, notably E.ON
Ruhrgas, are now seeking ways out of those constraining arrangements, into
which they had earlier allowed themselves to be lured.
Gazprom's board meeting announced a set of policy goals and decisions for 2010:
1. Maintaining Gazprom's existing share of European markets.
2. Entering "new markets" through pipeline construction and Russian LNG
development.
3. Preparing to meet growing demand for gas in Russia itself.
4. Improving payment collection from consumers ("payment discipline").
5. Switching to market principles of gas price formation with all users,
"without exception".
6. Developing alternative routes of gas delivery [from Russia] "for an
effective management of gas flows", and diversifying the directions of export
pipelines
.
Moreover, Gazprom has announced a 25% increase on spending for its internal
gasification program in 2010, "with an emphasis on gasification of the
village".
Those guidelines partly acknowledge, and conceal, Gazprom's pessimistic
outlook. Under the first point, Gazprom retrenches from the goal of expanding
on European markets to that of maintaining its share. Points two (alluding
mainly to China) and six, however, presuppose vast pipeline construction
projects, which Russia would be unable to finance without external support.
Meanwhile, Moscow can only expect German-mobilized credits for Nord Stream,
which is only one of Russia's exorbitant pipeline projects. Points five and six
reflect a sense of urgency about remedying Gazprom's financial situation.
However, payment discipline remains unrealistic, given Russia's social
discipline. And the implied goal to raise prices for consumers "without
exception" would conflict with the Russian government's political and social
agenda, which mandates deeply discounted gas prices for Russian household
consumers, at Gazprom's expense.
One striking omission from the list is investment in new field development.
Gazprom and, apparently, the Russian government lack the necessary financial
resources for such development. Their declared spending priority is pipelines,
rather than production to fill those pipelines. While gas production stagnates
in the short and medium term, pipeline planning continually expands, with
theoretical export pipeline capacities vastly outpacing the anticipated
production in Russia. That production will continue stagnating for as many
years as are needed (possibly a decade) for developing gas fields beyond those
past-their-peak from the Soviet era.
The economic recession in Europe and in Russia itself since the second half of
2008 has temporarily reduced demand for Russian gas. Falling demand has
concealed the Russian gas shortfall and postponed its consequences until the
post-recession period.
Once external and internal demand recovers, however, Gazprom and the Kremlin
will no longer be able to side-step the dilemma they were already facing on the
eve of the recession. They will face that dilemma in an even more acute form,
having to decide which consumers among Gazprom's multiple consumers (internal
and external) to prioritize over others.
Vladimir Socor is a senior fellow and long-time senior analyst with the
Jamestown Foundation. He was formerly a senior research analyst with Radio Free
Europe/Radio Liberty in Munich, and is a specialist in the non-Russian former
republics of the USSR, CIS affairs and ethnic conflicts.
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
