Analysis Gazprom, the Russian gas giant weakened at home by the economic crisis, is priming its international portfolio.
Gazprom to bolster weak domestic sales with world expansion
Gazprom, the Russian gas giant weakened at home by the economic crisis, is priming its international portfolio as it reaches for improved profits and greater international clout. The company pumps gas in only one country: Russia. But it is hoping to change that with exploration and production agreements in five central Asian states as well as three in Africa - Algeria, Libya and Nigeria; two more in Asia - India and Vietnam; and two in South America - Bolivia and Venezuela.
Last month, its oil subsidiary, Gazprom Neft, was among the bidders in Iraq's first post-war oil and gas licensing round, although it joined the majority of auction participants who left empty-handed. In the international gas sector, it is getting difficult to avoid rubbing shoulders with Gazprom, as the company moves to establish a globe-spanning presence in producing regions, to expand its reach as an exporter and to diversify its investments in infrastructure such as pipelines and storage facilities.
The company's recent flurry of deals, including a gas supply agreement in Azerbaijan, a gas development joint venture in Nigeria, gas transit accords with Bulgaria, Greece and Serbia, and asset purchases from Italy's Eni and Spain's Enel, has prompted one analyst to wonder whether Gazprom's global strategy might be to corner the world's entire gas supplies. While this is far beyond Gazprom's reach, many observers suggested it could be focused on squeezing Europe's gas sources to bolster prices in its most lucrative market. However, this view is not shared by some of the world's leading experts on the company.
Gazprom is a huge company with more than 460,000 shareholders. But the Russian government's controlling 51 per cent stake makes it difficult to distinguish between the Kremlin's influence and commercial motives when it comes to corporate strategy. For example, said Federico Bordonaro, a geopolitical analyst for the Italian group Equilibi.net, the company became involved in Russia's confrontation with Ukraine at the beginning of this year.
On its website, Gazprom says its strategic goal is "to become a leader among global energy companies by developing new markets, diversifying business activities and securing the reliability of supplies". But after cutting off 20 per cent of Europe's gas for two bitterly cold weeks in January over a contractual dispute with Ukraine, Gazprom's reputation as a reliable supplier has suffered, to say the least.
The company has also annoyed Turkmenistan, the biggest central Asian gas producer, from which it buys gas for re-export. In April, amid a worldwide slump in gas demand, Gazprom abruptly cut its imports of Turkmen gas, thereby possibly causing a pressure build-up and explosion on the country's main gas export line. In both cases, Gazprom's disruptive behaviour was triggered by a dispute over gas pricing and payment. And in both cases, it was willing to risk grave long-term consequences.
The EU was galvanised into presenting a united front on energy policy, something the 27-nation bloc never managed before, and is now deeply engaged in a search for energy supply alternatives that would lessen its dependence on Russian gas. This month, four EU countries and Turkey signed a transit agreement for the proposed Nabucco pipeline (named after Verdi's opera). Many analysts see the project to bring Caspian and Middle-Eastern gas to Europe through Turkey as rivalling Russia's proposed South Stream pipeline, which would supply south-eastern Europe with gas piped under the Black Sea. Turkmenistan is among the countries that have now said they want to supply gas to Nabucco.
However, Professor Jonathan Stern, the director of gas research at the Oxford Institute for Energy Studies in the UK, is sceptical that Gazprom's international strategy is explicitly aimed at monopolising gas supplies to Europe. He also questions whether the ?20 billion (Dh104.2bn) South Stream development competes directly with the ?8bn Nabucco project. South Stream, he says, is aimed at bringing existing Russian gas supplies to Europe by a different route, while Nabucco would pipe in gas from new supplier countries.
"South Stream has gas and markets, but a very high price tag. Nabucco has no committed gas and markets, but a low price tag. They couldn't be more different," Prof Stern says. But that does not mean both projects will go ahead, as south-east and central Europe might not be able to absorb all the gas they would supply, and gas users will resist paying for excess pipeline capacity. Nonetheless, according to Prof Stern, who has written a book on Gazprom, South Stream is critical to the Russian company. That is because its biggest problem in supplying Europe is having to depend on unreliable transit countries. Gazprom is therefore championing South Stream, and North Stream, a pipeline that would run beneath the Baltic Sea to deliver gas directly to north-west Europe, to avoid having to route most exports through its neighbours Ukraine and Belarus.
The company's other big problem is the low domestic gas price set by Russia's government. "Most people don't realise that the domestic market is Gazprom's major market. A small increase in prices in the domestic market would make a lot of difference," Prof Stern says. He doubts that Gazprom will succeed in negotiating a higher domestic price for its gas while Moscow is preoccupied with mollifying millions of Russian voters who have been hurt by the economic downturn. Russia's economy has suffered more than most because of its reliance on commodity exports.
Russia is the world's biggest gas producer and by far the biggest exporter, and Gazprom is responsible for most of that. The country's gas output of 601.7 billion cubic metres last year dwarfed that of any other nation save the US, which pumped 582.2 billion cu metres. But the US is a net gas importer. Canada, the world's second biggest gas exporter, pumped 175.2 billion cu metres last year, with almost half flowing to the US. Iran, which has the world's second biggest gas reserves after Russia, produced 116.3 billion cu metres, mostly consumed within its borders.
Gazprom's output last year was 549.7 billion cu metres, the company disclosed in its 2004-2008 fact book, accounting for 91 per cent of total Russian gas production. But that was already 1 per cent below the company's peak gas production of 556 billion cu metres reached in 2006, marking the start of a more severe decline. Booming European demand, until the second half of last year, masked a big problem emerging in the Russian market, where Gazprom's sales volumes fell 9 per cent between 2006 and last year to 287 billion cu metres from 316.3 billion.
A big drop in both total and domestic sales volumes is expected this year, as gas demand in Europe has fallen sharply, following the slide in Russia. On the financial front, Gazprom's earnings had already started a steep decline last year, tumbling 52 per cent to 173.02bn roubles (Dh20.42bn) from 360.45bn roubles. Gas prices and demand projections point to export revenues falling as much as 40 per cent this year, and an even more precipitous drop in profits.
To some observers, therefore, the company's foreign investment spree and its plans to sink tens of billions of euros into expensive undersea pipeline projects make no financial sense. Indeed, the company's share price is nearly 60 per cent off its 52-week high. Prof Stern is among those who suggest Gazprom's recent international investments have been dictated more by Russian foreign policy than corporate interests. After all, two of its former top executives, Dmitry Medvedev and Vladimir Putin, are now respectively Russia's president and prime minister.
"No one expects Gazprom to make vast sums of money in Nigeria and Venezuela," Prof Stern says. However, he does think the company's recent foray into the production and export of liquefied natural gas from a new facility on Sakhalin Island, off Russia's Pacific coast, is a good strategic move: it gives Gazprom access to export markets other than Europe. Another problem looming for Gazprom is the high cost of developing new Russian gasfields. Its best prospects are in the Arctic, in western Siberia's Yamal peninsula and the Barents Sea. But the company's dismal profit outlook has led it to delay some long-anticipated projects, including the development of the huge offshore Shtokman gasfield, as it seeks to cut capital investment this year by up to 20 per cent. That could be reason enough to lay relatively low-cost groundwork for future gas production from countries such as Algeria and Libya.
Although it may face an uphill battle to repair its damaged credibility with EU gas importers, Gazprom is also making an effort to assist European countries resolve energy security issues by investing in and operating gas storage facilities. It is a partner in OMV's gas centre at Baumgarten, Austria, the proposed end point for the Nabucco pipeline, and in a number of other European gas storage projects in Latvia, Germany, the UK and France. Last December, it teamed up with Abu Dhabi National Energy Company (Taqa) to build a gas storage centre in the Netherlands.