Monday, November 16, 2009

Gazprom-Rising Costs-Dwindling Sales


by Roman Kupchinsky

Gazprom, the Russian gas giant, has been caught in a financial vise throughout 2009. It’s main market in Europe for gas shrank by 32 percent in the first half of 2009. Part of this can be explained by reduced demand due to the world economic crisis, yet Gazprom’s competitors have increased sales of pipeline gas and LNG to European customers during this same period. Norway increased its sales by 12 percent from January to August, and in August volume rose by 51 percent. Qatar increased LNG sales by 58 percent in January-August and in August by 173 percent. Algeria increased its sales to Europe by 7 percent as did Trinidad and Tobago.

The main reasons for these increases have been the overabundance of gas in the United States due to large shale gas production and the fact that LNG spot prices were lower than Gazprom’s price. Gazprom management however remains optimistic about the future demand for its gas and predicts that soon it will once again export 240 billion cubic meters (bcm) of gas and that this figure will remain stable until 2030.

Oil and gas analysts are not convinced. The Russian daily Kommersant quoted Valery Nesterov from Troika Dialogue as saying that if Gazprom manages to sell 180-200 bcm yearly up to 2030 the company would be highly successful. Gazprom is also facing unexpected increases in gas production and transmission costs.

According to the East European Gas Analyst, “Compared to the average costs of 2008, the reported gas production cost of Q2-2009 was up 33% and transmission cost per 1000 cubic meters of marketed gas soared 36%. Note that the growth from Q1 to Q2-2009 cannot be explained by the drop in production and sales.”

How these projections will impact Gazprom’s Nord Stream and South Stream pipeline projects is difficult to say. Some analysts claim that by 2012 pipelines and LNG terminals might have to ship some 200 bcm of gas less than they presently do.

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