Procurement of Power Generation Assets in the EU May Make Sense for Gazprom

On April 23, 2013, the board of directors of Gazprom is going to discuss the issues of investment in power generation sector in the Russian Federation and abroad.

Actually, buying power plants in the EU now may make sense. Gazprom is one of the least taxed companies in the Russian oil & gas sector, so only a small portion of high profits from gas exports may be needed to cover losses from power generation in Europe. At the current price of gas, the overall corporate profit from additional sales of gas to Gazprom-owned power plants may exceed $3/MMBtu, after deducting anticipated loss at the power generation side.

However, profitability of Russian gas exports will continue to decline because of the large-scale construction of extremely expensive pipelines. In 2007-2012, the value of pipeline assets of Gazprom has more than tripled while the volume of total gas sales dropped 10%. By 2020, the value is likely to double (from the current level), but there are no new contracts signed. Notably, Gazprom diverts its export flows to the new routes and keeps the existing transit expenses in accordance with the ship-or-pay contracts.

To make profit from the sales of additional gas volumes to its power plants in Europe in the long run, Gazprom would need to abandon the South Stream project with its extremely expensive feeding pipelines linking the Yamal peninsula with the Black Sea. Otherwise, the profit margin is likely to disappear before 2020.

This post by Mikhail Korchemkin was republished with the kind permission of  East European Gas Analysis.

East European Gas Analysis (EEGA) is a Pennsylvania-based consulting firm founded in January 1995 and one of the leading experts in cost-benefit and financial analysis of production and pipeline projects in natural gas sector of Russia and the former Soviet Union (FSU).  Mikhail Korchemkin is the founder and executive director of EEGA.