Gazprom’s board of directors held its traditional start-of-year meeting on January 26 to set policies for 2010 (Interfax, January 26, 27). The decisions focus on marketing policy, rather than investment into 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 chosen focus reflects the company’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 Russian government’s statistical authority (RosStat) shows gas extraction in the country at 584 billion cubic meters (bcm) in 2009, down by 12 percent from 2008 (Interfax, January 25). Gazprom’s own report shows exports to “far abroad” countries (in Europe outside the former USSR) at 140 bcm, again down by 12 percent from 2008 (Gazprom press release, Interfax, January 26).
For its part the technical authority, Central Dispatcher Administration of the Fuel and Power Complex (TsDU TEK), reports gas extraction in Russia at 582 bcm in 2009, down by 12.4 from 2008. Total exports (including the “near abroad” countries of the former USSR) were 167 bcm in 2009, down by 10.3 percent from 2008. Use of natural gas within Russia itself amounted to 429 bcm in 2009, down by 6.6 percent from 2008 (Interfax, January 11).
According to Gazprom’s Vice-President and GazEksport head Aleksandr Medvedev, Gazprom’s revenues shrank from 111.5 billion Euros in 2008 to 72.5 billion Euros in 2010; and Gazprom’s profits, from 21.5 billion Euros in 2008 to 11.5 billion Euros in 2010 (interview in Southeastern European Times, January 12).
The decline in Gazprom’s exports and profits 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 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. Maintaining Gazprom’s existing share on European markets.
2. Entering “new markets” through pipeline construction and Russian LNG development.
3. Preparing to meet 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 (Interfax, January 26).
Moreover, Gazprom has announced a 25 percent increase on spending for its internal gasification program in 2010, “with an emphasis on gasification of the village (Interfax, January 19).
Those guidelines partly acknowledge, and 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 exorbitant 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 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.
One 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 vastly outpacing the anticipated production in Russia. That production will continue stagnating for as many years as are needed (possibly a decade) for developing 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 concealed the Russian gas shortfall 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 dilemma they 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.