Gazprom Plans Record Spending in 2022

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Russia’s Gazprom plans to increase 2022 spending to a new record level of 48%, thanks to a flood of revenues from high gas prices in its key export market of Europe.

The state giant's management board has recommended spending 1.758 trillion rubles ($23.6 billion) next year, up from 1.185 trillion rubles ($15.6 billion) to be spent in 2021 and from the previous record of 1.496 trillion rubles in 2018, or $21.5 billion at the exchange rate as of end-2018, Gazprom said in a statement Thursday.

The recommendation is pending approval from the board of directors. The planned investment program does not include spending for oil subsidiary Gazprom Neft, power generation arm Gazprom Energoholding and other non-gas subsidiaries.

Gazprom has already paid for some equipment required for its work program in 2022, meaning the actual financing of the 2022 investment program will be lower and total 1.5 trillion rubles, Gazprom said.

The investment program includes the overall amount of completed works and services that are scheduled in the reporting year, including works and services paid for in advance over previous years, Gazprom explained.

New Investment Peak

Gazprom said several years ago that its investments would peak in 2018-19, when it planned to complete three major gas export pipeline projects — Power of Siberia, Turk Stream and Nord Stream 2. The last project has not yet been launched due to sanctions-driven delays, although the 55 billion cubic meter per year pipeline is now fully built.

But the company now has other big projects, including construction of the 803.4 kilometer section of Power of Siberia to connect the second feeder field, Kovyktinskoye, scheduled to start production in 2023. Gazprom has now built 486 km, or 60%, of that section, it said Tuesday.

Other key projects to be financed over 2022 include upstream developments on the Yamal Peninsula and in the eastern part of Russia, as well as gas-processing projects such as the 45 Bcm/yr Ust-Luga scheduled for 2024 — a new strategic focus for Gazprom aimed at monetizing ethane-rich gas reserves which also requires spending on separate gas pipelines for ethane-rich gas.

Windfall Revenue

The higher investments are largely thanks to the windfall revenue from a sharp increase in European gas prices allowing the firm to fast-track key investment projects.

Many believe Gazprom has contributed to the price rally by restricting its own supply to Europe, although Gazprom denies it deliberately limited the gas flows.

Gazprom’s average export price remains lower than spot prices of around $1,000 per thousand cubic meters, but have also increased significantly this year thanks to a big share of hub-indexation in the company’s long-term contracts.

Gazprom expects its export price to average some $295/Mcm to $330/Mcm in 2021, up from $134/Mcm in 2020, but it might still review this forecast.

Serbia Secures Low Price

The sharp spike in gas prices has forced Gazprom’s buyers to ask for discounts or amendments to price formulas to avoid price hikes under their contracts, which Moscow is understood to be inclined to approve to gain political allies in Europe.

One such ally, non-EU Serbia, has secured a price freeze at the level of $270/Mcm for the next six months, which appears to be the lowest price in Europe for the upcoming winter, Serbian President Alexandar Vucic said after meeting with his Russian President Vladimir Putin in Sochi this week.

Serbia’s gas supply contract with Gazprom expires at the end of 2021 and Moscow had reportedly offered 70% hub-indexation in the price formula, which would raise the price to some $800/Mcm. Gazprom has likely agreed to keep the 100% oil indexation for six months in return for some political concessions from Serbia to Moscow, many observers believe.

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