Russia’s Gazprom Eyes Governmental Support

Publication: Eurasia Daily Monitor Volume: 5 Issue: 233

Russia’s Gazprom Eyes Governmental Support

Despite the current economic climate, the state-run gas monopoly Gazprom has pledged to move ahead with its ambitious development program, but it now appears that it will be forced to rely increasingly on government support.

Earlier this month, Gazprom started construction of the Bovanenkovo-Ukhta gas pipeline designed to support the development of new deposits on the Yamal Peninsula. On December 3 First Deputy Prime Minister Viktor Zubkov said at the ground-breaking ceremony in Ukhta that in terms of scale and complexity the development of the Yamal deposits was a unique energy project in recent Russian history.

Gazprom CEO Alexei Miller announced on December 3 that the gas giant aimed eventually to pump up to 360 billion cubic meters (bcm) of gas per year on the Yamal Peninsula. The Yamal project is set to become the cornerstone of Russia’s gas supply system, he said. This year Gazprom is spending 105 billion rubles ($3.75 billion) to develop the Yamal projects, according to the company (Interfax, December 3). The government officials and Gazprom executives refrained, however, from explaining why the gas giant had decided to start this unprecedented energy project against the background of global financial turmoil.

Gazprom plans to pump 15 bcm of gas a year at the Bovanenkovo deposit starting in 2011, eventually increasing production to 115 bcm per year. In order to develop the Yamal project, Gazprom also plans to build 1,500 miles (2,500 kilometers) of new pipelines, including the 660-mile (1,100-kilometer) Bovanenkovo-Ukhta pipeline. Yamal reserves are estimated at 16 trillion cubic meters, including 4.9 trillion at Bovanenkovo (Interfax, December 3).

Apart from Yamal, Gazprom indicated plans to spend 80 billion rubles ($2.86 billion) in 2009 to build the onshore Gryazovets-Vyborg section of the planned Nord Stream gas pipeline. On December 5 Gazprom also announced an agreement with the Abu Dhabi National Energy Company to build a major underground gas storage facility in Bergermeer in the Netherlands (Interfax, December 5).

The gas behemoth has also expressed interest in other foreign projects. It was said to have made an offer to let India’s ONGC take part in the Novo-Urengoi gas processing project (Interfax, December 3), presumably in exchange for expected access to projects in India. In 2005 Gazprom and ONGC signed a memorandum of understanding on joint projects in Russia, India, and third countries; but the agreement has been slow to materialize.

On December 3 Russian news agencies cited anonymous government sources as claiming that India had proposed joining the Trans-Afghan gas pipeline project designed to connect Turkmenistan and India via Afghanistan and Pakistan. India considered Russia to be one of the potential suppliers, along with Turkmenistan, Azerbaijan, Kazakhstan, and Uzbekistan. Sources also suggested that Gazprom and India could cooperate in supplying Iranian gas to India (Interfax, December 3).

During the visit by Russian President Dmitry Medvedev to India on December 4 and 5, however, no agreements were signed on cooperation in the area of gas. The joint Russo-Indian declaration only said that the authorities of both countries would support Russian and Indian oil and gas companies in reaching mutually acceptable agreements on the extraction and processing of energy resources (Interfax, December 3).

On the other hand, Gazprom conceded that it faced some economic problems. On December 5 Gazprom indicated that its natural gas production in 2008 could prove to be 3 percent, or 15 to 18 bcm, lower than previously expected, owing to reduced consumption caused by an unusually warm winter. The company’s actual gas output this year could be 0.7 percent to 1.2 percent lower than last year, said Gazprom deputy CEO Valery Golubev (Interfax, RIA Novosti, December 5).

Russian Energy Minister Sergei Shmatko announced on December 3 that as Gazprom cut its gas production, its revenue would decrease accordingly; and the government might decide to co-finance Gazprom’s investment program in 2009. Valery Yazev, deputy speaker of the State Duma, the lower house of parliament, further commented that the warm winter could "make a hole" of about $2 billion in Gazprom’s balance sheet (Interfax, December 3).

Earlier this month, Gazprom announced that it might seek up to 100 billion rubles ($3.57 billion) in governmental assistance. Gazprom also reported to be cutting about 10 percent of the staff at its head office in Moscow. Interestingly, Gazprom was said to have shut down its investor relations department and fired all the staff members there (Interfax, December 5).

The request for government assistance and the staff reductions come as a dramatic change in the company’s fortunes. As recently as last May, Gazprom prided itself on being the world’s third-largest company in terms of market capitalization; and it aimed at becoming the world’s “Number One” company. Since the start of the global financial crisis, however, Gazprom has no longer spelled out its market capitalization goals. Gazprom’s latest statements indicate that it intends to develop its key Yamal project, while anticipating increased state funding; but it remains to be seen whether government support can sustain the gas monopoly’s development program.