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CORPORATE STRATEGY

How Gazprom Is Using Europe's Energy Crisis to Its Advantage

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  • Gazprom will likely keep exports to Europe at low levels, which will bring it high price realizations and give Moscow political leverage amid the war in Ukraine.
  • The state-controlled company plans to pay out record dividends for the first half, as the Kremlin needs extra money for the sanctions-hit Russian economy. 
  • Gazprom is moving ahead with key investment projects, trying to fit them into its long-term eastern-looking export strategy. 

The Issue

Russian gas giant Gazprom is losing its European market and will be forced to revise its export strategy in the long term. But for now it is reaping financial benefits from the war in Ukraine and energy crisis in Europe — something that could facilitate the task of building more gas pipelines running east. Windfall revenues from record-high prices have helped the state-run gas producer please its masters in the Kremlin with generous dividends and higher tax payments, while allowing it to complete near-term upstream and pipeline projects.

Supply Cuts as Leverage

The short-term effect from the energy crisis is very positive for Gazprom and the Kremlin from a financial perspective. As long as Europe cannot fully stop importing Russian pipeline gas — which it hopes to do by 2027 — Gazprom’s export strategy in Europe will likely be to supply minimal volumes to the continent in a bid to keep prices as high as possible and to use supply cuts as leverage in a political standoff with the West.

The current shutdown of the Nord Stream pipeline to Germany fits well into this strategy. Ostensibly caused by an oil leak on a turbine, the closure sent spot gas prices higher after they had eased last week amid higher storage levels, and added to the uncertainty around Russian supplies to Europe ahead of winter. Although Gazprom denies having deliberately cut exports, it has apparently been restricting pipeline gas supplies to Europe since the first half of 2021, when it underutilized prepaid Ukrainian transit capacity and instead drained its European underground storage facilities.

It then failed to refill the storage in the summer, giving spot prices more momentum in the second half of the year. While the demand-destructive nature of high prices was a key factor behind a decrease in Gazprom’s export volumes last winter, deliberate and politically motivated supply cuts have come to the forefront during the war in Ukraine.

Records Tumble

High prices helped Gazprom post a record annual net profit of 2.1 trillion rubles ($34.7 billion) in 2021, up from 135 billion rubles in a coronavirus-affected 2020. It also beat the 1.46 billion rubles earned in 2018, when the company notched its best ever export volumes. In the first six months of 2022 alone, however, Gazprom’s net profit smashed the annual record, reaching 2.5 trillion rubles, although the value of the Russian currency had fallen.

The bumper profits and significant cash reserves allowed Gazprom’s board to recommend in late August distributing 1.2 trillion rubles, or 50% of adjusted net profit, in dividends for the first six months of this year, even though Gazprom has never paid interim dividends before. There is no guarantee, however, that the Russian government, which controls 50.23% of Gazprom directly and indirectly, won’t repeat its move of voting against the payout and taking the entire sum in taxes instead of sharing half of it with minority investors. Shareholders will vote on the dividend on Sep. 30.

Gazprom’s role as the Kremlin’s “cash cow” is becoming increasingly important while Russia’s economy is under the strain of Western sanctions. And Moscow may be realizing that Gazprom might not be able to bring in as much cash if European gas prices stabilize at lower levels in the medium to long term and the EU phases outs Russian imports. Some experts believe Gazprom may be sending some 35 billion cubic meters per year to 45 Bcm/yr to the West after 2030, versus around 175 billion cubic meters in 2021, since Turkey, some Balkan states, Hungary and possibly Austria and Germany could still need Russian gas then.

Rethinking Gas Flows

Gazprom is already exploring ways to diversify gas sales in the long run, looking for more opportunities on the domestic market and in Central Asia, advancing talks with China on increased exports, and even thinking of more exotic schemes, an insider tells Energy Intelligence.

The prospect of lower exports to Europe in the future, which can hardly be replaced with domestic sales, may force Gazprom to rethink its upstream projects in the Arctic. But for now the company is pressing ahead with fields already under development and thinking how to fit them into the new sales strategy. Gazprom is preparing for the launch of the 32 Bcm/yr Kharasaveiskoye field on the Yamal Peninsula, slated for 2023-24, and is starting predevelopment of the 20 Bcm/yr deeper deposits of the giant Bovanenkovskoye field nearby, from which first production is scheduled for 2025, CEO Alexei Miller told a company meeting last week.

The Arctic fields of the Yamal Peninsula had been earmarked to feed the Nord Stream and Nord Stream 2 export pipelines to Europe, and Gazprom may now have to delay some proposed upstream projects in the region, including offshore fields, while sending some Arctic gas to the Russian market and possibly to China. For that, Gazprom plans to connect Russia's united gas transmission system in West Siberia and the European part of the country with its eastern pipelines. That's "an objective that we are going to pursue in the nearest future,” Miller said.

Gazprom also plans this year to connect the Kovyktinskoye field in West Siberia with the Power of Siberia pipeline to China, in line with a planned ramp-up of supplies under the 38 Bcm/yr contract signed in Shanghai in 2014, Miller reiterated. Gazprom has always prioritized pipeline gas exports ahead of LNG and that doesn’t seem to have changed despite falling exports to Europe, especially as access to foreign liquefaction technology is closed off by sanctions.

Betting on forecasts that China will account for 40% of global incremental gas demand over the next 20 years, Gazprom wants to agree to more deals with Beijing, although the Chinese will hold the upper hand in price talks when Russia is losing its European market.

For more coverage of the Ukraine crisis, visit Ukraine Crisis: Energy Impact >

Topics:
Corporate Strategy , Earnings, Sanctions, Ukraine Crisis, Gas Supply
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