Below is an interesting comment from the analysts at Breakingviews, who ask if Gazprom is really capable of handling the operational and financial challenges of their ill-gotten new energy assets. In related news, Gazprom’s board just approved an 11% cut in capital expenditure, right at a moment in which money is so badly needed for reinvestment in gas production. This news does little to inspire confidence in the “reliable supplier” campaign, and must make steam blow out of Claude Mandil‘s ears. Why would Gazprom cut the capex on the brink of a supply crisis? Perhaps the siloviki on the board are looking to pocket the maximum before any possible instability comes with the next elections – then again, state-run industries filled with rent-seekers are not exactly known as bastions of efficiency and long-term planning. From Breakingviews:
Russia Energy Egotism Pushes Gazprom to a New Power Grab Russia’s Vladimir Putin recently said energy egotism was “a road to nowhere.” If so, it looks like state-owned Gazprom is well on its way. The $210 billion Russian gas monopoly has pretty much gained control over Russia’s vast gas resources, with the exception of BP’s Kovykta, a gas field with reserves twice the size of Norway’s. Most expect Gazprom to take that over too. Can Gazprom really handle it all? There are two risks: operational and financial. Take Shtokman, a field in a storm-tossed sea dotted with icebergs, 550 kilometers off the coast of Russia. Gazprom plans to develop this project alone, snubbing the foreigners that were lining up to join. Its other flagship project is in the Yamal Peninsula, which means “end of the world” in the native population’s tongue. There is a high risk that budget or timetable could slip on either of these projects or on both. Meanwhile, Gazprom’s current production is flat. Then there is the question of whether it can pay for the growth. The gas giant increased its capital-expenditure plan to $60 billion between 2007 and 2009, some 70% more than analysts were expecting. Analysts expect Gazprom to make only about $10 billion in free cash flow this year, before taking into account acquisitions. But Gazprom has already spent $10 billion on a 50% stake in Sakhalin and a stake in a Belarus pipeline. It is also spending billions on building new pipelines. Worse, Gazprom is regularly accused of being wasteful and inefficient in its spending. But the gas monopoly’s profligacy is, to some extent, self-serving. For years, it has been negotiating for the Russian government to push cheaper domestic prices closer to the export price. Any savings would strengthen the case against raising prices. The plan seems to be working. Once parity is achieved, Gazprom should have a greater incentive to be more efficient. New projects should also begin to fill its coffers. And so what if Russia’s egotism means these projects take a few more years to develop? Mr. Putin is playing a long-term game of controlling Russia’s energy resources. A delay in the Kovykta field must bother China, the intended market, much more than Russia. If the oil price stays high, there’s no reason for Russia’s energy ego to deflate anytime soon.