Via Stratfor (subscription required), interesting analysis of Gazprom and how the impact that falling demand for its natural gas supplies  has led the Kremlin to target foreign and domestic natural gas suppliers for their market shares.  As the report notes:

“…Russia’s natural gas industry is continuing to suffer large setbacks, with production falling by 17 percent in the first four months of 2009 as compared to a year earlier, according to figures published May 27. The Moscow Times has reported that Russia’s natural gas giant, Gazprom, has taken particularly large blows as its production dropped by 34 percent in the first 10 days of May and exports have plummeted by 56 percent in the first quarter of 2009.

There are a multitude of reasons for the grim figures, not least of which is the ongoing economic recession that has significantly decreased natural gas demand both domestically and in Gazprom’s primary export market, Europe. Also, the natural gas standoff between Russia and Ukraine left supplies cut off for nearly three weeks in January, giving Europeans more reason to accelerate their efforts to diversify away from Russian energy supplies, which were under way even before the cutoff. These developments all occurred during one of the warmest winters on record, reducing the need of natural gas for heating and leaving many countries’ storage facilities full to the brim.

Given these circumstances, the Kremlin has been developing a strategy to cope with Gazprom’s deteriorating situation, which has, in turn, created myriad financial problems. Russia’s federal budget, for example, did not take into account lower natural gas exports or lower prices, much less a combination of the two. This has resulted in Russia’s first deficit in years, projected by President Dmitri Medvedev to be no less than 7 percent of gross domestic product, while many other officials predict that it could exceed 9 percent (Gazprom’s production and exports account for more than 20 percent of budget revenues).

Moscow has reduced its solution to these problems down to one strategy: Save Gazprom at all costs. Gazprom is first on the Kremlin’s priority list of companies to prop up, as the state energy champion serves many strategic functions, ranging from cash cow to an effective political lever with Europe and the former Soviet states. This basically means that any natural gas suppliers with ties to Russia that is not Gazprom — whether based domestically or abroad — is at risk of being targeted by the Kremlin, and there are already signs that the Kremlin is taking action against suppliers.

Foreign Suppliers: Turkmenistan

One energy provider that has begun feeling the effects of the Kremlin’s plan is Turkmenistan. Ashgabat’s relations with Moscow have been tense ever since a natural gas pipeline between the two countries burst in early April. Even though the pipeline was repaired shortly after the rupture, Russia has yet to restart importing natural gas from Turkmenistan. This is because, with natural gas demand down, Moscow is shifting activity away from Turkmenistan in favor of Gazprom’s domestic fields.

When the global economy was growing and energy prices were high, Gazprom could not supply both the Russian domestic market and its export contracts, so it imported natural gas from Turkmenistan to fulfill its obligations. But with demand levels in free fall since their peak in 2008, and the Europeans using less Russian natural gas even without considering the recession’s effects, Gazprom simply has no need to import supplies from Turkmenistan. In fact, it is possible that Russia may never resume importing Turkmen natural gas, because European demand for Russian natural gas may never recover as other options come on line.

This leaves Turkmenistan in a precarious position. Without Russia as a customer, it would only export a relatively small amount of natural gas (less than 10 percent of current total exports) to Iran. With an economy that is overwhelmingly dependent on energy exports, Ashgabat would need another partnership to set up an export route that taps it supplies, and though such projects have been discussed, they are still in the planning stages and are largely unrealistic. Turkmenistan’s only other hope would be that European and Russian demand for natural gas surges very quickly — an unlikely development considering the depth of the European recession. And Ashgabat would still have to compete with the other Central Asian energy providers, Kazakshtan and Uzbekistan, whose exports have remained relatively stable thus far.

Domestic Suppliers: Novatek

Another natural gas provider — this one a Russian firm — that looks likely to suffer from the Kremlin’s preferential treatment of Gazprom is Novatek. Novatek is the second-largest natural gas producer in Russia behind Gazprom, but commands much less attention than the state-owned behemoth. Novatek, an independent company, flies under the radar because it is solely geared toward the domestic market (only Gazprom is legally allowed to export supplies) and its production numbers — though still significant, at 31 billion cubic meters (bcm) for 2008 — are tiny compared to those of Gazprom, which produced 550 bcm the same year.

But this has not stopped the Kremlin from setting its sights on Novatek, as Gazprom needs an increased market share on the domestic front. Novatek is not fully state-owned (Gazprom owns 20 percent of the company), but the Kremlin has been undergoing a massive consolidation of power and private companies like Novatek are far from immune. Ultimately, Moscow dictates how much natural gas Novatek can produce, and Moscow’s plans are already evident in Novatek’s first-quarter statistics. Novatek’s profits for the first quarter of 2009 dropped by 72 percent year-on-year, and Novatek’s planned production of 32 bcm in 2009 has been revised downward to an estimated 26 bcm.

These numbers are particularly revealing in the context of the price structure of natural gas in Russia, where the domestic market has thin to negligible margins compared to the substantial profits that are earned from exports. The fact that Novatek — which exists in large part because of Gazprom’s previous negligence of the domestic market — has had to slice output is a sign of Gazprom’s desperation.

Gazprom in the Long Run

In the short term, these moves can help Gazprom by squeezing out Turkmenistan, Novatek and any of its other competitors in a difficult economic climate. But in the long term, this strategy is unlikely to succeed. Even assuming that the global economic situation will improve sooner than expected, and that there will be colder winters than the one experienced this year, Europe will continue to actively diversify its energy supplies away from Moscow, and the demand for Russian natural gas will suffer.

That said, Gazprom will still be one of the world’s leading natural gas producers and exporters for the near future. But the glory days of the last five years that Gazprom witnessed leading up to the global economic recession are unlikely to be seen again, and this will affect Moscow’s behavior on both the economic and political fronts.