Rus­sia’s Gazprom faces chal­lenges as out­put slumps

The China Post - - BUSI­NESS - BY GER­MAIN MOYON

Fac­ing a cold shoul­der from Europe and in­creased com­pe­ti­tion at home, Rus­sia’s Gazprom has strug­gled to as­sert dom­i­nance on the global en­ergy mar­ket, prompt­ing spec­u­la­tion the en­ergy gi­ant could have no choice but to splin­ter.

With the Rus­sian econ­omy slip­ping into re­ces­sion on the back of lower oil prices and West­ern sanc­tions over Ukraine, the econ­omy min­istry pre­dicted Gazprom would pro­duce 414 bil­lion cu­bic me­ters of gas this year, an all-time low for the pub­lic com­pany sit­ting atop some of the world’s largest nat­u­ral gas re­serves.

Gazprom’s mar­ket cap­i­tal­iza­tion has plum­meted in re­cent years. Prior to the 2008 fi­nan­cial cri­sis, the com­pany was worth more than US$300 bil­lion. Its value now hov­ers around US$50 bil­lion, trail­ing far be­hind the world’s other ma­jor en­ergy com­pa­nies.

“Gazprom is con­fronted with the great­est chal­lenge in its his­tory,” Chris Weafer, a part­ner at the Macro Ad­vi­sory con­sul­tancy firm, told AFP.

“What re­mains to be seen is whether Gazprom be­comes an ap­pendage of the for­eign min­istry or evolves into a global en­ergy com­pany.”

The de­cline in Gazprom’s value and gas pro­duc­tion co­in­cides with mount­ing ten­sions with the Eu­ro­pean Union, which has ac­cused it of cater­ing to Moscow’s geopo­lit­i­cal in­ter­ests in­stead of op­er­at­ing ac­cord­ing to busi­ness prin­ci­ples.

Gazprom is now grap­pling with a se­ries of is­sues, in­clud­ing its re­cent loss of the Ukrainian mar­ket, Europe’s en­ergy di­ver­si­fi­ca­tion ef­forts and in­creased com­pe­ti­tion on the do­mes­tic mar­ket, which jeop­ar­dize its sta­tus as a gas gi­ant.

Strug­gling with Asian Am­bi­tions

The gas gi­ant struck a US$400 bil­lion nat­u­ral-gas deal with China last year, an agree­ment that was her­alded as the sym­bol of Rus­sia’s pivot to Asia. Moscow and Bei­jing have since agreed on Rus­sia sup­ply­ing nat­u­ral gas to west­ern China.

But West­ern sanc­tions im­posed on Moscow over the Ukraine cri­sis have un­der­mined Gazprom’s at­tempts to turn away from Europe, its tra­di­tional mar­ket.

Wash­ing­ton’s ban on tech­nol­ogy trans­fers to Rus­sia for cer­tain en­ergy projects, in­clud­ing Gazprom’s Yuzh­noye Kirin­skoye field in the far eastern Okhotsk Sea, is sti­fling Moscow’s am­bi­tions on the Asian mar­ket.

Gazprom was set to use the field to de­velop its liq­ue­fied nat­u­ral gas (LNG) pro­duc­tion ca­pac­ity and, ac­cord­ing to some re­ports, ex­change as­sets with An­glo-Dutch com­pany Shell.

With­out U.S. tech­nol­ogy, ex­perts fear that Rus­sia will not be able to ex­ploit the field’s re­sources.

“This is bad news for Rus­sia be­cause the pro­duc­tion of LNG is a strate­gic ob­jec­tive in the re­gion,” said Valery Nes­terov, an an­a­lyst at Sber­bank In­vest­ment CIB.

The Ukraine con­flict, which has pro­pelled Rus­sia’s re­la­tions with the West to their post-Soviet nadir, has mean­while ex­ac­er­bated Europe’s de­sire to dis­so­ci­ate from Gazprom.

The com­pany, how­ever, has re­it­er­ated that Rus­sian en­ergy re­sources re­main the most ac­ces­si­ble to ful­fill Europe’s grow­ing de­mand for gas.

Gazprom’s ex­ports to Europe, which are ex­pected to rise this year, still pro­vide the com­pany with hefty rev­enues in spite of lower en­ergy prices.

TurkStream De­lays

After the EU blocked Rus­sia’s South Stream gas pipe­line project — which would have brought Rus­sian gas to west­ern Europe via the Black Sea — Rus­sian Pres­i­dent Vladimir Putin an­nounced the coun­try would work on a new pipe­line, the Turk- Stream, which would run through Tur­key.

Gazprom is ea­ger to com­plete the TurkStream pipe­line to by­pass Ukraine in its gas ship­ments, but its con­struc­tion, which was sched­uled to start in June, has been de­layed.

Ex­perts said it is un­likely that Ankara will make any de­ci­sions on the project un­til after up­com­ing gen­eral elec­tions.

Ac­cord­ing to Mikhail Korchemkin, the di­rec­tor of the East Eu­ro­pean Gas Anal­y­sis firm, there are “next to zero” chances that the pipe­line will be com­pleted.

Crit­ics have said Gazprom has been slow to re­act to the ever-chang­ing gas mar­ket, cling­ing to lengthy con­tracts pegged to fluc­tu­at­ing oil prices.

An­a­lysts have claimed that Gazprom could ben­e­fit from di­vid­ing its mam­moth struc­ture into smaller en­ti­ties that would be more ef­fi­cient and trans­par­ent.

Rus­sian me­dia has re­ported that Igor Sechin, the in­flu­en­tial head of Rus­sian oil gi­ant Ros­neft, has asked the govern­ment to open up gas ex­ports to com­pe­ti­tion and to split Gazprom in two, sep­a­rat­ing en­ergy pro­duc­tion and trans­porta­tion.

“I’m not sure Gazprom sur­vives this dif­fi­cult pe­riod,” said an­a­lyst Korchemkin.

“It would be eas­ier for its devel­op­ment if it split into pieces within a cou­ple of years.”

(Above) Two work­ers of Rus­sian gas and oil gi­ant Gazprom com­pany walk near Taimyr nu­clear ice breaker at Cape Ka­menny, north­ern Rus­sia on Feb. 19.

AFP

(Left) This pic­ture taken on Feb. 18, shows fa­cil­i­ties of the Novo­prtovskoye Oil and Gas Con­den­sates oil­field of Rus­sian gas and oil gi­ant Gazprom at Cape Ka­menny on the Gulf of Ob shore­line in the south­east of a penin­sula in the Ya­malo-Nenets Au­ton­o­mous Dis­trict, 250 kilo­me­ters north of the town of Nadym, north­ern Rus­sia.

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