Add to favorite
September was a negative month for Russia’s gas giant Gazprom, with a series of critical publications about its future. The key words were: the European Commission, shale gas, Novatek.
It started with the European Commission launching an official inquiry into what is says could possibly be violations of competition rules by Europe’s key gas partner. It follows years of negotiations on Nabucco, a pipeline that would be a game changer for Europe’s energy supplies ensuring independence from Gazprom and sporadic if bitter price disputes.
Shale gas
One of the ways to “break the Russian stranglehold”, according to the Canadian Christian Science Monitor, lies in “developing shale gas reserves”.
Unless the EU rules to ban fracking, a key method of extracting shale gas, it could seriously undermine Gazprom’s position and slash its profits. It’s happening already. Last year the profit was $44 billion while in 2012 it was down more than 23 percent.
The tuturesmag.com says that “today the gas price on the spot market is $320 per 1,000 c m, while the gas sold by Gazprom under its long-term contracts costs as much as $400-450 per 1,000 c m. As a result, the share of Gazprom on the European market is shrinking, which may lead to reduced exports in the long-term future”.
2016 can actually be the turning point, or point of no return, when the U.S. launches its terminals for its own exports. American shale gas production is growing steadily, worth just $110 per 1,000 c m, says the futuresmag.com.
According to the Turkish Weekly, in 2000 shale gas provided only 1% of total American natural gas output, by 2010 the figure jumped to 20%.
It also says that the U.S. concluded its first long-term contract with British Gas, one of the key players on the European gas market.
“Under the agreement, the price is linked to Henry Hub spot prices, which dipped below $2 per million British thermal units or Btu (a measure of heating power) earlier this year. Just for comparison, currently the average price of gas imported to the UK is $8-10 per million Btu, while Russian gas at the German border costs no less than $11-12 per million Btu”.
“Shale gas production in the U.S. is already having a negative impact on gas prices in Europe and on Gazprom, Even though there is as yet no actual U.S. gas imports to Europe, the high domestic (U.S.) gas production has displaced coal as a major fuel source and that coal is finding its way into Europe and other world markets. The greater availability of cheap coal has already very significantly undermined the gas market and Gazprom’s ability to price gas”, Chris Weafer, Chief Strategist at Troika Dialog, told Oil&Gas Eurasia.
“That is why Gazprom is under pressure to negotiate existing contracts and also why it is in a hurry to build Nord Stream and South Stream. It wants to at least lock in the customer base before European and/or U.S. shale gas arrives; at least then it will be an issue of price bartering rather than market share,” he added.
The Voice of Russia balances out the story with an opinion from independent analyst Dmitry Adamidov.
"There were many “shale revolutions”, and all of them ended in nothing. A shale revolution” is more of a media event than anything else. They are aimed at attracting investors’ money to such projects. The initiators of such projects usually profit from capital investments. That is why Gazprom is not worried at all," he said.
More problems
The pressure is coming not only from the outside. Domestically, the share of private gas suppliers on the Russian market has already reached 25 per cent and continues to grow, according to the Voice of Russia.
One of the leading competitors is Novatek, “which recently snapped up a Gazprom subsidiary known as Sibur for way under market value. Novatek may, reportedly, get permission to start exporting gas, as well, breaking Gazprom’s monopoly,” reports the Washington Post. For the time being, Gazprom accounts for 12 percent of all Russian exports.
Gazprom’s plans to explore the Arctic have been dealt three blows recently, including mothballing the promising Shtokhman project, a delay in the oil production at Prirazlomnaya til the end of 2013, and the recent comments made by Total chief executive Christophe de Margerie. He became “the first industry executive to endorse arguments made by environmentalists that the extreme conditions of the Arctic shelf and the sensitivity of the local eco-system mean that drilling there should be banned”, despite the tempting fact that, according to the U.S. Geological Survey, “the Arctic may hold a fifth of the world’s undiscovered oil and gas reserves.”
Long-term impact
The Financial Times provides the most convincing case against Gazprom.
“Curiously, in 2011 Gazprom was formally the most profitable company in the world with purported net profits of $46bn, but these profits were hardly real. Investment analysts opined that no less than $40bn disappeared through inefficiency or corruption. Gazprom’s cash flow was barely positive.”
All these factors combined mean, according to the FT, that “Gazprom’s demise looks likely.”
But the disaster won’t stop there. The FT takes its prediction a step further and looks at the possible ramifications for the whole country. Like the Washington Post, which believes the company become a “component of the political system” and that “They subsidize essentially the way politics is run in the country,” the FT issues a stark warning to the authorities.
“With its demise, Russia’s revenues would dwindle. Mr Putin‘s model of state capitalism would suffer a devastating blow from Gazprom’s fall. If not even Gazprom is viable, which Russian state company is? Such an insight could give market economic reforms new impetus. After all, Russia just privatised $5.2bn of shares in Sberbank, the state savings bank.”
Sources: http://www.themoscowtimes.com http://www.turkishweekly.net http://www.oilandgaseurasia.com http://english.ruvr.ru http://www.csmonitor.com http://www.futuresmag.com http://www.ft.com http://www.washingtonpost.com
Author: Mikhail Vesely
