Gazprom’s Woes = Less Influence for Russia

Via Stratfor (subscription required), a detailed look at Gazprom’s troubling declines in both production and export values in 2008 and even sharper falls predicted for 2009.  As the article notes, less revenue for Gazprom translates into less influence for Russia and could have long-term implications for Moscow’s relationship with Europe and the United States:

“…Figures from January 2009 show that Gazprom, Russia’s state-owned natural gas giant, saw significant drops in both production and exports as compared to January 2008. Production is reported to have fallen by 13.9 percent, while exports in the fourth quarter of 2008 dropped by 21 percent.

The forecasts for the rest of 2009 are even gloomier, as Gazprom (not usually pessimistic in its own statistical projections) has announced production and export numbers lower than the previous year’s. According to Gazprom Deputy Chairman Alexander Medvedev, Gazprom predicts that production levels will fall by 7 percent in 2009 to 512-523 billion cubic meters (bcm) and that income from exports will be $47 billion, a decline of at least 30 percent. Gazprom’s investment program is also expected to fall around 30 percent, meaning that upgrades to aging facilities and new ambitious energy projects will have to be triaged.

These numbers would be worrying for any energy company, but they are doubly so for Gazprom, which serves as Russia’s national champion. Russia has neither a dynamic nor diversified economy; rather, it relies on natural resource exports, especially energy, for the bulk of its economic activity. Russia is the world’s leading natural gas producer and exporter, and Gazprom is Russia’s biggest and most powerful company. Europe has long served as the primary market for Russian natural gas, relying on Gazprom for more than a quarter of its energy needs and thus allowing Russia to fill its coffers and yield extensive influence over individual European countries through its energy-driven foreign policy.

But Gazprom — and by extension Russia — faces numerous problems in relation to the Europeans, both in the short term and long term. An unusually mild winter in 2008 reduced domestic and European demand for natural gas (used for heating homes and buildings) and therefore diminished Russian exports and revenues. Also, a price dispute between Russia and Ukraine led to a natural gas cutoff at the start of 2009, causing Gazprom’s exports to Europe in January to fall by 42 percent. Though exports have begun to pick up since then, many European countries are still reeling from the damaging effects on industrial production — exacerbated by a sweeping recession — that took place as result of the shortage.

The Europeans are very aware of Russia’s intentions to spread its influence by exploiting differences among European countries and burying any concept of European unity. Russia would prefer to negotiate deals such as energy contracts with individual states, rather than the European Union as a whole. This would allow Russia to reward countries that cooperate with Moscow (such as Germany) with more favorable conditions and punish countries that do not (such as Ukraine). The various bilateral negotiations and deals Russia made during the natural gas cutoff served as a reminder of Russia’s divisive tactics.

These policies have not gone unnoticed by the Europeans, who are scrambling to diversify away from Russian energy supplies while pursuing long-term energy-efficiency projects. The European Union launched an initiative in 2007, known as 20-20-20, that calls for a 20 percent reduction of carbon emissions, a 20 percent increase in renewable fuels, and a 20 percent reduction of total energy demand by 2020. Europe is now putting its money where its mouth is, and Russia is at the top of the list of sources to cut. Norway is the only major energy producer in Europe, and it is nearing its capacity to fulfill the increasing demand of its neighbors. Norwegian natural gas exports rose by 26.9 percent year-on-year in January 2009, up by 4 percent from the previous month. Algeria has also been pegged as a viable alternative, as it provided more than 50 bcm to Europe in 2007 and hopes to expand its natural gas exports to 85 bcm per year by 2010 (though it is not guaranteed that all of this would go to Europe).

The Europeans have also extensively discussed liquefied natural gas (LNG) as a means to reduce dependence on Russia. Due to its liquid nature, LNG can be transported by tanker; therefore, supplies can be shipped from any LNG production/export plant to any LNG import facility. There were several LNG import facilities built in Europe in 2008 (and many more are under construction) that added 16 bcm in capacity and are being filled quickly due to high demand. LNG, which currently supplies about 10 percent of Europe’s natural gas demand, could expand to serve as much as 20 percent of Europe’s natural gas needs over the next decade as more import facilities come online. But diversification to LNG so far is only applicable to Western Europe, where all the new — and expensive — LNG import plants are concentrated, leaving Central and Southeastern Europe still heavily reliant on Gazprom.

In addition to the Europeans’ diversification efforts causing problems for Gazprom by decreasing demand, there are also domestic issues for the natural gas behemoth to deal with. In terms of investment projects, Russia has prioritized its efforts as a result of less cash flowing into its coffers. The project to revamp the Yamal peninsula (the primary source of Russia’s natural gas supply), for instance, will maintain investment and is scheduled to begin shipments in late 2009. But regardless, Russia’s natural gas fields are maturing and face a fairly steep long-term reduction in output. And any ambitious new projects designed to further integrate Europe into Russia’s energy infrastructure, like Nord Stream or South Stream, are unlikely to get off the ground.

Russia is not without options, however. Europe will remain dependent on Russian energy in the short term and will continue to provide Moscow with cash and fuel its energy-driven foreign policy. Also, Russia has accumulated large rainy day funds that, though significantly reduced by the financial crisis, still hold almost $400 billion. So while Russia will not have the exorbitant amount of cash it had previously to use for various power-projection purposes, the Kremlin will have to prioritize and choose its next moves regarding its relationship with Europe and its strategic competition with the United States wisely.”

This entry was posted on Thursday, February 19th, 2009 at 9:59 am and is filed under Gazprom, Russia.  You can follow any responses to this entry through the RSS 2.0 feed.  Both comments and pings are currently closed. 

Comments are closed.

Wildcats & Black Sheep is a personal interest blog dedicated to the identification and evaluation of maverick investment opportunities arising in frontier - and, what some may consider to be, “rogue” or “black sheep” - markets around the world.

Focusing primarily on The New Seven Sisters - the largely state owned petroleum companies from the emerging world that have become key players in the oil & gas industry as identified by Carola Hoyos, Chief Energy Correspondent for The Financial Times - but spanning other nascent opportunities around the globe that may hold potential in the years ahead, Wildcats & Black Sheep is a place for the adventurous to contemplate & evaluate the emerging markets of tomorrow.