Gazprom acknowledges pessimistic outlook in part

by Vladimir Socor

Gazprom's board of directors held its traditional start-of-year meeting on January 26 to set policies for 2010. The decisions focus on marketing policy and pipelines, rather than investment into new field development. This focus increases the probability of a gas shortfall in Russia in the short-to-medium term and can only bring that situation nearer.
The Russian government's statistical authority, RosStat, shows gas extraction in the country at 584 bn cm in 2009, down by 12 % from 2008. Gazprom's own report shows exports to "far abroad" countries at 140 bn cm, again down by 12 % from 2008.

For its part the technical authority, Central Dispatcher Administration of the Fuel and Power Complex (TsDU TEK), reports gas extraction in Russia at 582 bn cm in 2009, down by 12.4 % from 2008. Total exports (including the "near abroad" countries of the former USSR) were 167 bn cm in 2009, down by 10.3 % from 2008. Use of natural gas within Russia itself amounted to 429 bn cm in 2009, down by 6.6 % from 2008.
According to Gazprom's Vice-President and GazEksport head Aleksandr Medvedev, Gazprom's revenues shrank from EUR 111.5 bn in 2008 to EUR 72.5 bn in 2010; and Gazprom's profits, from EUR 21.5 bn in 2008 to EUR 11.5 bn in 2009.

The international economic recession precipitated the decline in Gazprom's exports and profits. The decline would have been even steeper, but it was cushioned thanks to the "take or pay" obligations in Gazprom's long-term contracts with European buyers.
German and other European companies can now buy gas on the fast-growing LNG and spot markets at lower prices than Gazprom's prices. However, long-term contracts with Gazprom on a take-or-pay basis constrain those companies' freedom of choice. Some of them, notably E.ON Ruhrgas, are now seeking ways out of those constraining arrangements, into which they had earlier allowed themselves to be lured.

Gazprom's board meeting announced a set of policy goals and decisions for 2010:
1. "MaintainingRussia's existing share" on European gas markets.
2. Entering "new markets" through pipeline construction and Russian LNG development.
3. Preparing to meet an anticipated growing demand for gas in Russia itself.
4. Improving payment collection from consumers ("payment discipline").
5. Switching to market principles of gas price formation with all users, "without exception."
6. Developing alternative routes of gas delivery [from Russia] "for an effective management of gas flows," and diversifying the directions of export pipelines.

Moreover, Gazprom has announced a 25 % increase on spending for its internal gasification program in 2010, "with an emphasis on gasification of the village".
Those guidelines partly acknowledge, partly conceal Gazprom's pessimistic outlook. Under the first point, Gazprom retrenches from the goal of expanding on European markets to that of maintaining its share. Points two (alluding mainly to China) and six, however, presuppose vast pipeline construction projects, which Russia would be unable to finance without external support.

Meanwhile, Moscow can only expect German-mobilized credits for Nord Stream, which is only one of Russia's pipeline projects. Points five and six reflect a sense of urgency about remedying Gazprom's financial situation.
However, payment discipline remains unrealistic, given Russia's precarious social discipline. And the implied goal to raise prices for consumers "without exception" would conflict with the Russian government's political and social agenda, which mandates deeply discounted gas prices for Russian household consumers, at Gazprom's expense.

The guidelines' focus on marketing policy reflects Gazprom's financial constraints and limited capacity for investment. The board's decisions are an inevitable result of Gazprom's shrinking production, exports, and profits during 2009, when the stagnant trends of the preceding years turned into outright decline.
The most striking omission from the list is investment in new field development. Gazprom and, apparently, the Russian government lack the necessary financial resources for such development. Their declared spending priority is pipelines, rather than production to fill those pipelines.

While gas production stagnates in the short and medium term, pipeline planning continually expands, with theoretical export pipeline capacities massively exceeding Russia's export potential from its stagnant production. That production will continue stagnating for as many years (possibly a decade henceforth) as will be needed for developing new gas fields, beyond those past-their-peak from the Soviet era.
The economic recession in Europe and in Russia itself since the second half of 2008 has temporarily reduced demand for Russian gas. Falling demand has hidden the Russian gas shortfall from view and postponed its consequences until the post-recession period.

Once external and internal demand recovers, however, Gazprom and the Kremlin will no longer be able to side-step the dilemmathey were already facing on the eve of the recession.
They will face that dilemma in an even more acute form, having to decide which consumers among Gazprom's multiple consumers (internal and external) to prioritize over others.

Vladimir Socor is political analyst of East European affairs for the Jamestown Foundation.