Monday, 4 March 2013

Gazprom is fast running out of steam

Time is running out for Russian energy giant Gazprom, which is seriously underperforming. American shale gas and coal have completely have completely transformed the world energy markets. "Putinprom" remains stuck in its massive and costly pipeline network. 

Andrew McKillop's analysis is worth reading:

Russia's problem, since at latest 2010 is that the gas world has been transformed far beyond anything that Russia, and other gas exporters could have imagined. The South Stream pipeline is as noted above, very likely to be underutilized and under worst case scenarios might have to be abandoned. The second Nord Stream line, completed with pomp and fanfare in late June and commissioned in October 2012, to supply Germany and western EU27 countries, was almost certainly not needed given forward trends for gas demand in Europe. Gazprom's very high cost "Eastern strategy', featuring the Shtokman and Sakhalin gas-and-oil development projects has been cut back to near zero since 2011, but spending so far has left a $100 billion gap between the Gazprom market price and its underlying asset valuation based on its "performing assets", mainly west Siberian gas fields.

For the moment, with apparently surprising but real "objective allies" such as major European oil, gas, energy and power producers, and national governments Gazprom is forced to argue for a "slow and ordered" abandonment of  longterm oil indexed gas supply contracts, that is linking or indexing gas rent to oil rent. The base of this was simple: For as long as oil prices remained high, so would gas prices. Since midyear 2012, Gazprom has increasingly "conceded" that oil-indexed pricing will have no role and place in global gas pricing by as early as 2015. --

Time is very likely running out for Gazprom to dither and hope. For the Kremlin and its energy revenue maximizing strategy, sometimes nicknamed "Putinprom", it is clear that Gazprom is underperforming. Russia's oil revenues running as high as $900 bn in 2012 vastly outrun Gazprom's gas-plus-oil revenue offering, probably well below the net figure of around $210 bn a year for 2012 claimed in Gazprom's deliberately complex accounts.--

At one time a master card, Gazprom's ownership or leasehold on gas pipepline routes into Europe is no longer what it used to be. Pipeline transit fees charged to third party suppliers are tending to fall. Upkeep and infratructure costs and charges on Gazprom-owned lines, in a massive and sprawling network of more than 150 000 kilometres total length, described by some as "madman's macrame", are relentlessly rising. And while Gazprom strives to string existing and new pipelines together and reduce its massive gas losses in transit, estimated to be as high as 16-20 bn cubic metres per year, Moscow has to look over its shoulder at the US shale gas revolution. Here, apart from the near-vertical growth of production the mismatch between existing gas pipeline routes at the start of the shale boom, and needed routes linking new supply regions to existing demand centers has created its own boom-and-bust in new US gas line projects. Gazprom's huge pipeline asset is becoming a liability.

Read the entire article here

No comments: