Russian state-owned natural gas firm Gazprom had a rough go of it last year, to say the least, as net profits fell 86 percent. The FT reports:
Gazprom, the world’s biggest gas producer which accounts for about a fifth of Russian government revenue, reported on Wednesday that net income attributable to its shareholders for 2014 fell to Rbs159bn ($3.1bn) from Rbs1.1tn in 2013.
A weak ruble goes a long way towards explaining this plunge in profitability, but so too can the company’s decision to shut off gas to Ukraine, one of its biggest customers. So far thanks to a lag in the pricing model, the fall in the price of oil—a benchmark that Gazprom looks to when setting its own gas prices—isn’t yet reflected in the company’s balance sheets. In fact, Gazprom reported that the average price at which Europe bought its gas was up 11 percent in 2014. But as the FT explains, the bearish crude market could start affecting the Russian company in 2015:
[W]ith the value of Brent crude having fallen more than 40 per cent since last summer, analysts expect Gazprom to receive significantly lower prices for its gas through the course of this year as the full impact of falling oil prices is felt by the company.
At the same time, the European Commission’s antitrust charges against the company, announced last week, could force it to change its pricing structure.
We shouldn’t overstate the precariousness of Gazprom’s position. After all, Europe still relies on Russia for some 30 percent of its gas supplies. That’s an enormous market for Gazprom, and with one massive deal with China already signed and another on its way, the company isn’t looking short on buyers.
But it is finding those buyers are no longer as pliant as they once were. The conflict in Ukraine seems to have galvanized the European establishment into looking in to alternatives to Russian gas (like LNG). The anti-trust case being brought against Gazprom could undercut its ability to price-gouge some of its customers. In the east, China seems to have secured favorable terms for its own supplies from Russia.
Meanwhile, on the production side of things, Russia is hamstrung by Western sanctions that prevent it from fully exploring unconventional reserves (read: shale) in Siberia. With its conventional fields maturing, Russia’s energy future depends on these new plays, and sanctions dim the outlook.
For Gazprom, 2014 was a bad year, 2015 could be worse, and the years after aren’t holding much promise, either.