Gazprom’s Financial Information Shows Mixed Signals
Russia’s Gazprom registered a 19% sales increase to 1,461,441 Rubles in the first three months of the year in comparison to the same period last year. Despite the apparent good news, the financial information released on Tuesday is not univocal and the Russian giant has to find a way to maintain its clout. Gazprom’s prospects are two-sided.
On the one hand, sale of Russian gas is inevitable. The decreasing production in the UK, the Netherlands and Norway further cements the production leadership of the Russian company. Its sway is nothing new and it is likely to remain in place in the near future. Rising gas demand in Europe increases Gazprom’s business outlook. Coherently, the company sees another strong period in the second half of 2013.
The recent figures about export of gas to Europe came equally as no surprise. In the first eight months of the year, Gazprom exported 105.2 Billion cubic meters (Bcm), compared with 91.9 Bcm a year ago. The 14.5% increase is proof of Gazprom’s centrality. Equally, profit before tax grew from 461,371 to 489,919 Rubles. The 6% increase in the first three months of the year is good news for CEO Aleksey Miller and for the rest of the top management.
On the other hand, technological and commercial leadership of the Russian company is questionable for several reasons.
Gazprom’s announcement that West Europeans increased their demand for Russian Gas has been subject to debate. As said by Mikhail Krutikhin of the RusEnergy, the company itself publishes larger figures that include resale of non-Russian producers’ gas by international trading subsidiaries of Gazprom.
On top of that, Gazprom is called to face two other major hurdles. The first comes from Russia, with Rosneft rising strong and gaining power. Igor Sechin, CEO of Rosneft, could take advantage of his political clout and change some cards on the table.
The second hurdle comes from increased attention from European companies and governments on energy prices. The future of Gazprom depends on the evolution of energy markets in Europe, especially as European officials are working on a formal antitrust complaint against Gazprom, over allegation that the company abused its dominant position.
What’s going on in Europe
On Tuesday, Lithuania granted Chevron the right to explore for shale gas in order to decrease its reliance on Russian gas, while Estonia recently became self-sufficient on shale boom. Ukraine is also moving away from its historical reliance on Moscow.
European countries are also investing in LNG terminals, with recent projects in Italy, Cyprus, France, Poland and Spain. However, the increased efforts by European governments did not inherently have direct consequences. Some suppliers, like Qatar, are losing interest in European LNG markets, preferring the higher prices for gas in the Asian markets.
In this context, prices in United States and Asia will be important determinants for the future of European LNG. The deal between Centrica and Cherniere could be the first of many.
Finally, some additional pressure on Gazprom came from E.ON, Edison and RWE. The three companies have indeed taken Gazprom to arbitration and won concessions on price.
What’s next?
The main problem for Gazprom is a changing business environment. Years of easy money have made Gazprom fat, while political interests made it slow. The slow-response approach is not compatible with a changing energy market, especially when losses come from everywhere.
Inefficiency is the main issue. Think-tank Peterson Institute for International Economics claimed that Gazprom lost $40 billion to corruption and inefficiency.
Another problem could be derived from an increase in competition within Russia, but this depends mainly on the decisions of President Vladimir Putin. The power equilibrium could change, but there is not much Gazprom can do to change the course of events.
The battleground for Gazprom remains Europe – a market accounting for 40% of its revenue. The confrontation on the pricing system will be pivotal and the ability of European governments to forge ad-hoc strategies will tell the rest.
Europe needs diversification and a more efficient system, as does Gazprom. The Russian giant can maintain its clout only by increasing its knee-jerk reactions. Europe will change and Russia has to acknowledge the current events. Asia can be a way out, but it is not the only one.
Sergio Matalucci