There’s something of a perfect storm brewing out there for Gazprom, and things look like they’re going to get worse for the Russian company before they get better. The FT reports:
[Gazprom] is facing up to the prospect of a prolonged spell of low gas prices. Analysts say Gazprom will be forced in the next few years to scale back its investments, which include grand political projects such as pipelines to China and Europe, or to dramatically increase its leverage.In this austere environment, Gazprom is under growing pressure from critics both at home and abroad, with some domestic opponents pressing for a break-up of the company. It helps the critics’ cause that Gazprom’s financial performance is deteriorating — in Russian roubles, operating profit fell 6 per cent last year. For the first time in at least a decade, analysts predict Gazprom will report negative free cash flow this year as its operating profit will not be enough to cover spending. […]Gazprom’s own budget, drawn up at the start of the year, envisages that its export prices will fall this year to the lowest level in a decade, and this is forcing the company to pay more attention to its spending.
Gas prices have been sliding lower, driven by both supply and demand forces. On the supply side, a flood of supplies of LNG from the United States, Qatar, and Australia are producing something of a global glut, and Europe—Gazprom’s most important market—has been tracking those discounts closely as it hopes to diversify away from its Russian supplier and the strings that so often come attached with its wares.On the demand side, things are looking similarly grim for Gazprom, and changing conditions in Europe are once again at the center of the Russian firm’s woes. Nick Butler writes for the FT:
Gas demand in 2015, despite a fractional uptick on the 2014 figure, was 20 per cent below the level reached a decade ago. Unless something changes radically, Europe has passed the point of peak gas consumption…The reasons for this are obvious. In the absence of a carbon price, coal is cheap and in countries such as Germany it retains crucial political support because of the jobs it involves. Renewables are subsidised. So gas is squeezed, especially in the power sector because efficiency gains and slow economic growth have kept total electricity demand down.
Consider, too, that Gazprom has historically linked the prices of its gas to oil in the long-term contracts it’s signed, so you can add the bearish crude market to the company’s long list of pressing problems. And because Gazprom is state-owned, its troubles necessarily become Putin’s concern, as well.