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Gazproblems
Gazprom’s Future Is Looking Grim

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.

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  • Proud Skeptic

    Karma

  • GS

    Could not be happening to a more deserving bunch.

  • M Hayne Hamilton

    Obama was presented this opportunity when Rusia invaded and occupied Crimea and portions of eastern Ukraine. He should have approved the Keystone pipeline, removed all export limitations on US LNG, oil and distillates, organized a European summit to encourage private capitol to build the import facilities and distribution infrastructure to eliminate European dependence on Russian energy. He should have immediately reinforced NATO response forces in Eastern Europe in order to make belligerence unacceptable to Putin. He should have supplied Ukraine with all necessary equipment to fight for their nation. Obama did absulutely nothing to extract a price for the first cross border invasion by one sovereign nation against another since WW II, in spite of solemn treaty agreements which prohibited Russia’s ruthless aggression. Hayne Hamilton

  • http://winterings.net/ Alex K.

    “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”

    From the point of view of a Gazprom shareholder, it would be the company’s best decision in two decades: to cut down on new projects driven by Moscow’s political priorities rather than shareholder value. All that Gazprom needs to do to generate a steady cash flow to shareholders is literally sit back and pump the gas that comes at a low marginal cost thanks to past over-investment in production. But what’s best for the regular shareholders (who own about 45% of the stock) contrasts with the wishes of the majority owner, the Russian state. That’s the number one problem with Gazprom.

    “Unless something changes radically, Europe has passed the point of peak gas consumption…”

    True but not strictly relevant. What matters to Gazprom – and Norway and LNG exporters – is the difference between demand and indigenous production, i.e., the implied demand for gas imports. Since Dutch output is declining and shale gas is not materializing, imports might actually be close to flat going forward. The next question is whether Gazprom can increase its market share in the EU thanks to its supply flexibility and low marginal cost. This OIES paper discusses Gazprom’s options.

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