Tough Times Ahead for Gazprom

Roderick Kefferputz from the Centre for European Policy Studies has released a new short paper on Gazprom.  Below is the introduction.  Download the full study here.

Gazprom’s situation has become increasingly difficult since January’s notorious gas crisis. From being ranked as the world’s fourth most-valuable corporation in 2008 with a market capitalisation of nearly $300 billion, its position has now dropped into the low thirties, with its capitalisation shrinking to around $90 billion.

Even more worryingly for Gazprom is the fact that the natural gasmarket is changing in a number of ways. First, the pressures of theeconomic and financial crisis have led to a considerable depression innatural gas demand. Domestic consumption in Russia, the second largestgas market in size after the United States, has considerably fallen.The real problem, however, lies in a drop in exports that provideGazprom with the majority of its revenue. Western Europe alone hasreduced its Russian gas imports already by up to 50 billion cubicmeters (bcm), with Germany and Italy responsible for nearly half thatdrop, while Turkey has bought 25% less gas from Russia in the firsthalf of 2009 compared to last year. This is laying the ground forcommercial disputes between Gazprom and European companies such asE.ON, ENI and Botas, since they are buying less gas from the Russianenergy giant than stipulated in their long-term ‘take-or-pay’contracts. This undelivered gas is currently valued at roughly $2.5billion. While Gazprom insists its customers pay up, European energycompanies claim there should be more flexibility in their contracts,stressing that Gazprom itself is failing to fulfil its obligations tobuy its requisite amount of Turkmen gas and that Prime Minister Putinhas so far allowed cash-strapped Ukraine to buy much less gas than itis contractually obliged to. In addition, they point out that they didnot take the Russian energy major to court over its breach of contractduring the gas crisis when its failure to transit gas through Ukraineleft Europe in the cold.

Both sides will have to come to a suitable arrangement; this isparticularly necessary given the fact that noone can guarantee anincrease in future natural gas consumption. Quite to the contrary,according to the latest World Energy Outlook published by theInternational Energy Agency (IEA), natural gas consumption is expectedto fall by 5% by 2015 and 17% by 2030 compared to a business-as-usualscenario if environmental policies such as energy efficiency and theexpansion of renewable energy are put into place. Similarly, a recentreport by Cambridge Energy Research Associates (CERA) states that theEuropean Union is able to cut back its consumption by 125 bcm per annum- similar to consumption levels in the early 1990s – by 2030 usingexisting technologies to increase energy efficiency.