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Release Date: January 2006;
Price: 2340 Euro
Russia is the world's largest holder, producer and exporter of natural gas. Gazprom - in which the government has recently regained control over majority stake - is the only exporter of Russian natural gas to international markets. Traditionally, Gazprom's business has covered Euroope and the FSU. Today, Gazprom is setting ambitious goals to grow and globalize increase gas exports by starting LNG deliveries to the USA, as well as piped gas and LNG to the Asia-Pacific region.
The issue is: What is the extent of Gazprom's capability to play a global role? The new research study Russian Natural Gas on Global Markets: Capabilities and Limits delivers a comprehensive analysis of the gas supply chain and balance of Gazprom, and provides an outlook for the company's impact on international markets with three scenarios for the development of Gazprom's capability of a global gas player.
About the study
Russia is the world's largest holder, producer and exporter of natural gas. Gazprom in which the government has recently regained control over majority stake is the only exporter of Russian natural gas to international markets. Traditionally, Gazprom's business has covered Europe and the FSU. Today, Gazprom is setting ambitious goals to grow and globalize increase gas exports by starting LNG deliveries to the USA, as well as piped gas and LNG to the Asia- Pacific region. The issue is: What is the extent of Gazprom's capability to play a global role?
The new research study Russian Natural Gas on Global Markets: Capabilities and Limits delivers a comprehensive analysis of the gas supply chain and balance of Gazprom, and provides an outlook for the company's impact on international markets with three scenarios for the development of Gazprom's capability of a global gas player.
The study addresses the following key questions:
Russian Natural Gas on Global Markets: Capabilities and Limits goes beyond the façade of official statements by government officials and corporate executives, and provides valuable insight into the strategic choices faced and made by Gazprom.
The study analyses the main blocks of issues:
Based on the above, he study develops three scenarios for the development of Gazprom's exports allowing to assess the company's impact on global gas markets.
The study is an essential analytical support tool for:
Executive summary
Gazprom continues to be the world's biggest gas company, characterized above all by giant proven gas reserves, control over all gas exports from Russia and extremely strong dependence of market capitalization on global energy prices. Gazprom's ambitious goal to develop itself into a world-class energy company, as well as the declared upcoming liberalization of trading company shares, are making it the focus of attention of strategic and equity investors worldwide. At the same time, Gazprom remains a largely enigmatic company, with little consensus on its future development among interested parties, as apparent from numerous analytical reports available to the market.
The extent to which Gazprom will be able to successfully manage opportunities on the global scale is of extreme importance to the gas market players, including political figures. The Russian government elite treats Gazprom not just as a corporation, but also as the vehicle for promoting Russia's political interests, similar to the approach towards most national or quasi- national energy companies worldwide. 2005 in this respect became a landmark year for Gazprom when the government finally consolidated in its hands 50% plus of its shares.
On the international stage, Gazprom is a major source of gas supply to Europe. In the last five years, Gazprom's long-term contracts satisfy between 25% and 30% of European gas demand, which makes the stability of Gazprom's gas deliveries to Europe critical for the company's key business partners in Europe, as their market position strongly depends on retailing Gazprom's gas to final consumers. In this context Gazprom's intent to further globalize its operations and to get more involved down the supply chain is forebodes substantial change on many markets. However, Gazprom is also highly dependent on the international gas markets. The policy by which Gazprom has to supply the less attractive domestic gas market in priority order, as well as the way Gazprom is made to finance selected projects of `national importance', makes the European market critically important for the company. In 2004, over 73% of Gazprom's total income came from gas sales outside Russia, mainly (but not completely) through Gazexport.
The current study aims to examine the key strengths and weaknesses affecting and shaping Gazprom's development. It looks at the company's gas reserves, production and transportation, as well as its current and anticipated marketing operations in Europe, Asia-Pacific and the United States. Based on an analysis of the main factors influencing Gazprom's future exports and on the company's strategic decision-making practices, and study develops three scenarios for the development of Gazprom's future exports that show expected impact on global gas markets in the next ten years.
Whether and how Gazprom would be able to achieve sustainable growth in the future depends on how successfully it handles the six major sets of priorities:
Throughout the 1990s, Gazprom's management had to face serious challenges related to all of the above priorities. The economic reforms in Russia, government regulation of gas prices and weak international gas prices resulted in a severe under-investment for Gazprom. On top of this, the largest Russian gas fields entered into their depletion stage, while the transportation system the largest owned by any single company in the world required sizable capital expenditures to operate stably. It was the period when gradual liberalization of the gas market had started in Europe, and diversification of gas supplies had become an important issue for the EU. This brought Gazprom under the impression that it was in real danger of losing part of its export income and of facing worsened economics of remaining contracts. The period of low prices was over by the late 1990s, which coincided in time with Vladimir Putin becoming Russia's President in the elections of year 2000. The new Russian leader started strengthening control over Gazprom by appointing new management that initiated a program of 'emergency' measures, including in respect to export markets. Fortunately for Gazprom, both gas demand and prices in Europe were growing, despite the liberalization process, which helped Gazprom raise capital for further development. Gazprom's total gas sales grew consistently over the period 2000-2004 and reached $32.4 billion in 2004, which allowed to stabilize gas production and to expand the capacity of the gas transportation infrastructure. Gazprom's gas supplies to Europe reached 140.5 bcm in 2004, with 52.5 bcm more exported to the former Soviet Union countries an outstanding level for Gazprom. The company signed agreements with the Central Asian countries and started selling their gas to Europe through Gazexport's contracts. However, even with all these impressive successes, certain fundamental problems in Gazprom's operations remained unresolved.
The period from 2006 to 2010 is going to be a time of important decisions for Gazprom's management and the country's government, and will shape the role of the gas giant on the global gas market for at least the next two decades.
Gas production has stabilized, but with unclear prospects, since Gazprom has been limiting upstream activity in its main giant gas fields of the Nadym-Pur-Taz region (NPTR). The company needs to develop new gas provinces in order to meet the goals inside and outside Russia. Development of these new provinces Yamal, Eastern Siberia and Far East requires billions of dollars of capital expenditures. At the same time, Gazprom is planning to attract foreign partners to develop the Shtokmanovskoye field, complete with an export-oriented LNG plant. However, pursuing development of all the priority projects simultaneously is likely to be overly expensive and risky, despite several declarations of Gazprom's management to the contrary. The company will thus need to make choices, which will largely depend on the position of the Russian government in respect to reform of the domestic gas market, which in turn may allow Gazprom to secure the financial resources required for its major investment programs. Profitability of gas sales to the domestic market would also mean lower Gazprom's dependence on the European market. In medium and long term, Gazprom has no real alternative but to develop Yamal as its new core gas production region. The Shtokmanovskoye project in order to go ahead will have to find solutions to the serious challenges of investment, market opportunities and implementation schedule.
In order to sustain gas deliveries to international markets major investment has been planned for maintaining and developing the gas transportation system. Construction of the Yamal-Europe and North European gas pipelines signal that the focus of European-bound exports is shifting to North-Western Europe and the Baltic Sea region. The new direct transportation leg from Yamal to Central Russia is another priority for Gazprom, since it would allow the company to make profit on gas supplied to major domestic industrial consumers, in particular to power generation plants (note that this is true for gas used to generate electric power consequently supplied to industrial end-users; prices for residential consumers will continue to be government regulated). The reconstruction of the Central-Asia-Center gas pipeline system will expand opportunities for Gazprom to include larger Central Asian gas volumes in its supply balance, under long-term inter-governmental agreements with these countries. Further expansion of the transportation system in Ukraine with the Bogorodchany-Uzhgorod pipeline would ensure strengthening of Gazprom's market position in countries of Central Europe.
The expansion of Russian gas exports on a global scale is the key external objective of the company's management. The reason for this new approach rests with the fundamentally new market opportunities and the importance of taking advantage of them. However, today only the first steps toward creating an international corporate strategy are visible. The core premise of the new strategy is to countries is secure and grow market share on foreign markets through integration of Russian and Central Asian gas flows under Gazprom's control, followed by Gazexport marketing the gas in Europe and the FSU. Another key element is deeper integration into international downstream markets. The liberalization of the gas market in Europe is opening to Gazprom real opportunities to penetrate new market niches. The company has already taken steps to reach end-users in its traditional markets. Germany and the United Kingdom are prominent examples of markets where Gazprom has started to supply gas to end-users through marketing joint ventures or affiliated companies. Gazprom has started with short term contracts and spot deals, yet long term contracts will continue to be a basis of export operations. Consequently, Gazprom is getting ready to face stronger competition in Europe, while also trying to open new gas markets, particularly Asia-Pacific and North America, where LNG is expected to play a major role. At the same time, Gazprom is strengthening its control over the gas markets of the FSU countries and is gradually increasing efficiency of exports by eliminating earlier practices of low gas prices.
In this manner, "diversification" is the key concept explaining Gazprom's current export efforts which are underpinned by the base premise of 'single export channel', promoted by Gazprom as the way to avoid competition between different Russian gas suppliers on export markets.
The current study presents three scenarios for Gazprom's future role on international gas markets. All three scenarios see Russian gas exports grow by 2010, but differ in the pace of growth during this period, and especially in their outlook to 2015. Central Asian gas consistently plays a significant role in all three scenarios, with the divergence largely depending on Gazprom ability to develop its own gas reserves.
The pessimistic scenario dubbed the `train wreck in process' envisions Gazprom's gas exports start slowly declining between 2010 and 2015, due to the effect of a number of unfavorable internal and external factors. This scenario foresees the crash of Gazprom's ambitious plans during this period as result of wrong or delayed decisions by the Russian government and Gazprom's management itself. It would seem that following this period, Gazprom's loss of market position and customer loyalty will accelerate, while its market capitalization will be under pressure from lack of investors' confidence.
The optimistic or, `global star' scenario proposes successful development of export capability with most strategic tasks set by Gazprom's management attained. A combination of favorable environment around Gazprom (involving management and political figures), evolution of the Russian gas market, strong reserves replacement and production growth, and higher returns from foreign gas markets would result in a situation when Gazprom asserts itself as a truly global energy super-major. Exports will vigorously grow to all key international gas markets Europe, US, Asia-Pacific while the Russian domestic market will be a solid profit generator for Gazprom. Under this scenario, Gazprom would be a preferred choice for international investors.
According to the moderate scenario, Gazprom's management would be able to realize only part of its plans to expand presence on the global gas market. The US market would be unattractive for direct gas supplies across the Atlantic Ocean, yet exports to Europe and the FSU countries would increase, though not on a large scale. Delays with reform of the domestic market, as well as with measures to increase Gazprom's own gas production would mean that the growth of exports to traditional foreign markets would hinge upon Gazprom's agreements with the Central Asian countries and the performance of the joint ventures established between Gazprom and international companies. The single export channel principle would be the key factor underlying Gazprom's export strategy. The moderate scenario concludes that Gazprom will miss certain opportunities to penetrate new markets and segments because of a possible deficit in its own gas balance. Consequently, Gazprom and its projects would not be favorites among investors.
Table of Contents
List of Figures, Maps and Tables
The country profiles have the following figures and tables:
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