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Gazprom’s Pain Is Only Just Beginning

Gazprom’s net profits dropped a whopping 60 percent in the third quarter of 2014. A weak ruble and a protracted supply dispute with Ukraine combined to wreak havoc on the Russian gas major’s bottom line, but the worst is yet to come. Gazprom has long linked its long-term European contracts to the price of oil, but built into that connection is a lag of roughly six months. Seven months ago crude was selling for more than double what it is today, which means 2015 could be even worse for Gazprom. The WSJ reports:

Gazprom said volume delivered to Europe in the first nine months of 2014 slipped 3%, although ruble revenue was flat because the dollar had strengthened from a year earlier. The average price of $352.7 a thousand cubic meters for the first three quarters of 2014 will likely slip to a range of $200 to $250 this year, said Alfa Bank analyst Alexander Kornilov.

That’s a huge discount coming Europe’s way, but for Gazprom it means it may be time for a period of retrenchment. “Ongoing and any further decline [in oil prices] may adversely affect our business, results of operations, cash flows, financial condition and potentially our capital program,” said Gazprom. In other words, it’s time to take a scalpel to the budget, and if prices stay this low, a machete may be required. Just don’t expect much sympathy from Europe.

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