Courtesy of The New York Times, interesting analysis of the impact that shrinking energy markets (and long-term, higher cost contracts) are having upon Gazprom’s profits and influence.  As the article notes:

“…Throughout his eight years as president of Russia, Vladimir V. Putin pursued the strategic goal of dominating natural gas supplies to Europe and the pipelines that deliver them. His success was underscored in January, when for the second time in three years a pricing dispute with Ukraine disrupted the flow of natural gas, leaving hundreds of thousands in Eastern Europe shivering in the deep winter cold.

But in his zeal to monopolize gas supplies, Mr. Putin, who is now Russia’s prime minister, committed Gazprom to long-term contracts with Central Asian countries for gas at a cost far in excess of current world prices. Now that the world economic crisis has sharply curtailed demand for gas, Gazprom is saddled with a glut of expensive Central Asian supplies that it is forced to sell at a loss.

In a painful twist, the company also finds itself forced to close its own wells in Russia, which produce gas for a fraction of the cost of that from Central Asia, in order to balance its supplies with declining world demand. In effect, a strategy that made business and political sense in a time of high and seemingly ever rising prices is threatening to create years of losses and declining influence, if energy prices fail to rebound.

“It’s an extraordinary turnaround from what everybody was expecting,” said Jonathan P. Stern, the director of natural gas research at the Oxford Institute for Energy Studies.

Demand for Gazprom’s natural gas will plunge by about 60 billion cubic meters this year, according to Mr. Stern — about equal to the amount the company is contractually committed to import from the former Soviet states.

The turnaround for Gazprom has been as swift as it has been devastating to the company’s business model. As recently as last September, Mr. Putin, as prime minister, flew to Tashkent, Uzbekistan, to wrap up a deal that consolidated Russia’s strategic gains after the war in Georgia.

Under the deal, which Russia’s RIA state news agency has described as valid until 2028, Gazprom will pay, on average, $340 per 1,000 cubic meters of gas in 2009. The price is arrived at through a complex formula based on world oil prices with a six-month delay. But that same volume of gas sells in Ukraine for an average of about $230, while European prices have sagged to an expected average of $280 for all of 2009.

Gazprom, in a written statement, acknowledged that it had lost money on the Central Asian contracts this year but said they would be valuable when demand recovered.

“Gazprom’s contracts with its Central Asian partners are concluded for many years into the future,” the statement said. “The world economic crisis, without doubt, is negatively influencing demand for energy. In the long term, however, demand for gas in Russia and abroad will grow. “

The declining fortunes are creating unaccustomed stresses for Gazprom, which strutted onto the world scene during the energy boom and came to symbolize the new might and swagger of Russia under Mr. Putin’s leadership.

Investors, in fact, once viewed Gazprom’s close ties to the Kremlin as good for business. For example, when Gazprom raised gas prices in Ukraine after the street protests known as the Orange Revolution, the move supported the Russian foreign policy goal of pressing a pro-Western government on its southern rim.

It also made money for Gazprom. Now, the political goals of Gazprom’s business in the former Soviet Union will cost the company.

That trend is already visible. Last week, the European Union signed an agreement with Azerbaijan, Georgia, Turkey and Egypt that could revive the long delayed Nabucco pipeline, which is intended to break Russia’s monopoly on Caspian Basin energy supplies. That was quite a turnabout for Azerbaijan, which after the war in Georgia last summer had offered to sell Gazprom its entire future output of gas from an offshore development.

Another former Soviet supplier, meanwhile, has accused Russia of sabotaging a pipeline to shut down deliveries of expensive gas.

On the night of April 9, a portion of the pipeline carrying Central Asian gas to Russia exploded in Turkmenistan, temporarily cutting off shipments. Turkmenistan’s Foreign Ministry issued a statement blaming Gazprom for closing the valve leading to Russia, preventing gas from flowing north and creating overpressure in the pipe. News reports are sketchy, but as of May 1 the pipeline was still out of commission.

Gazprom has declined to comment, but a Russian energy expert, speaking on Russian state television, said the aging Turkmen pipelines were to blame.

Turkmenistan responded with an immediate overture to the West on energy issues, signing an exploration deal with the German company RWE for a bloc in Turkmenistan’s sector of the Caspian Sea shelf. RWE is a participant in the Nabucco pipeline consortium.

With the affairs of Gazprom and the Kremlin so intertwined, financial troubles at the company have immediate consequences for state finances.

Gazprom earned profits last year of $30.8 billion on revenues of $160.5 billion, according to annual results released this month. This year, Troika Dialog, a Moscow investment bank, has estimated that Gazprom’s profits will drop to $16.7 billion on revenues of $104 billion.

As the country’s largest taxpayer, Gazprom contributed $40 billion to the state’s coffers last year, including export tariffs, profit and mineral extraction taxes. This year, financial analysts who follow the company estimate, those payments will fall by nearly half, to around $22.5 billion.

Gazprom’s profits are expected to remain under pressure as long as energy prices stay at or near their current level and energy demand remains subdued. Even if the purchase price of Central Asian gas trends downward, following the decline in world oil prices, Gazprom will still have to accept delivery of that gas while keeping its own reserves — which can cost as little to produce as $4 per 1,000 cubic meters — in the ground.

The current problems also carry the potential to hamper the company’s future performance.

Gazprom has budgeted capital expenditures this year of $27.46 billion, according to the company, and is still planning to spend $44.8 billion in 2010, even as its revenues shrink.

If it maintains these spending plans, however, it will have a negative cash flow by 2010, said Alex Fak, an oil and gas analyst at Troika, and will be compelled to borrow.

“Either the oil price will have to surge, or it’s not going to happen,” Mr. Fak said of the development program.”