Gazprom in 2013; a rough start?

Paolo Sorbello wonders whether the times are changing for Russia’s biggest state gas company.

Gazprom's CEO, Alexey Miller - increasingly outside the circle? Photo from

Gazprom’s CEO, Alexey Miller – increasingly outside the circle?
Photo from

In mid-February, a historic figure in Gazprom’s short life passed away. Rem Vyakhirev, 78, held the post of CEO from 1992 to 2001, when he was removed by incoming president, Vladimir Putin. Ironically, his death came just a few days before the twentieth anniversary of the establishment of the most important Russian Joint Stock Company. Celebrations in Moscow were lavish, with a US $2 million gala evening at the Kremlin.

Production forecasts are optimistic at the company’s Nametkina Ulitsa headquarters, where Gazprom officials rest their hopes on new fields to offset the rapid decline of the older Siberian reserves. James Henderson of the Oxford Institute for Energy Studies begs to disagree. Henderson uses data from Novatek to predict Gazprom’s stable production at 500-550 billion cubic meters per year. In fact, Gazprom has recently cut its production by 3.7%, in contrast to the tendency of its competitors in the gas sector and of the resurgent oil industry.

Non-Gazprom Producers (NGPs, as they are known in the sector) are predicted to increase their share in domestic production, and now Vladimir Putin has signalled his willingness to open gas exports to NGPs. Indeed, Gazprom’s monopoly on exports is showing its first cracks in a case over Liquified Natural Gas (LNG) exports, while Rosneft is demanding more flexibility for its growing production of natural gas.

On the domestic market, Gazprom has traditionally sold gas at subsidised prices, which used to be below those set by NGPs. This led to Gazprom devoting a larger share of its output to satisfying internal demand – potential losses slowed by increasing prices and fixed government volumes. However, the NGPs are now able to sell their gas at a price even lower than Gazprom’s and can erode the company’s share of the Russian pie. Tougher competition is a novelty for Gazprom, and not a pleasant one.

Furthermore, demand in Europe is shrinking, due to the American “shale gas revolution” and the economic crisis, which hit Gazprom’s most reliable customers. Long term contracts are not only expiring, but are also under the threat of renegotiation, as demonstrated by a recent court case involving the Czech RWE Transgas.

Between 2012 and 2013, Gazprom is expected to pay back around US $9 billion to its European customers in retroactive payments – a tacit reimbursement of the overpriced gas of past years. In fact, Gazprom did not use hub-based spot market prices for its gas because trade was carried via pipeline; now spot prices are shrinking and the competition with LNG in Europe is becoming tougher. Together with the decline in exports, this has lowered the company’s net profit by 10%.

According to government and company officials, the EU Third Energy Package regulations are not a problem. The export of Russian gas to Europe will continue to satisfy the needs of Moscow’s Western European partners. Yet questions remain over the extent to which “Russian gas” will remain synonymous with “Gazprom” and whether firm’s the 20th anniversary will mark a turning point in its so-far meteoric rise.


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