The good news: Gazprom is under increasing pressure from weak demand in its primary market-Europe-and growing gas production. A couple of interesting data points.
First, in the first 9 months of 2012, Gazprom paid its European customers $4.4 billion in price adjustments as the result of contract renegotiations. (h/t @NoGazprom). Moreover, additional renegotiations are ongoing. The customers demanded Gazprom refund some money because the oil-linked price in the contracts was well out of line with gas values (as indicated by spot prices). Although Gazprom continues to cling to the oil linkage, the trend is clearly away from these traditional contracts due to burgeoning spot volumes. This renders increasingly hollow Gazprom’s claims that spot markets are insufficiently liquid to make spot prices reliable benchmarks in sales contracts.
This is not a trival sum. It represents about 7 percent of Gazprom’s 9M2012 revenues, and more than 15 percent of its 9M2012 profits.
Second, Norway is rapidly taking away market share from Gazprom. (Could this have anything to do with Norway’s movement toward spot pricing?)
Norway, Russia’s closest rival in the European gas market, seems to overtaking Russia’s Gazprom. Norway boasted record high exports in 2012, while Gazprom suffered the worst numbers in 10 years.
Norway increased its exports 16% in 2012 to reach 107.6bn cubic metres, according to Europe’s key statistics office Eurostat. This is “a record level, close to the Russian gas exports to Europe,” Michael Korchyomkin, head of East European Gas Analysis, told Kommersant daily.
During the same period, Russia’s gas giant Gazprom cut sales to Europe and Turkey by 8%, according to the company’s head Aleksey Miller. That’s the lowest export level for the last decade, Korchyomkin said.
At the moment Norway is breathing down Russia’s neck in its key European market – Germany. In 2011 Gazprom supplied 30bln cubic meters out of the total 80bn cubic meters of gas Germany consumes annually. Norway sold just a bit less – 28bn cubic meters. Norway’s Statoil accounts for about 70% of the country’s exports and in 2012 signed a 10 year contract to supply gas to Germany’s Wintershall.
These are present pressures. Future problems potentially loom even larger. Most notably, the likelihood that world gas supplies will grow dramatically. Initial hopes for rapid output increases in Poland and Ukraine appear to be overoptimistic, but eventually it is likely that these countries will start producing in commercial quantities. If political obstacles can be surmounted in the US, large and increasing volumes of LNG exports will be looking for markets-including Gazprom’s current European markets, and the Asian markets it hopes to serve in the future.
One of the potentially most dangerous threats, though, is the huge offshore gas resources in the eastern Mediterranean, off Cyprus, Syria, and Israel. Some analysts think that gas has the potential to turn Cyprus from financial basketcase into a prosperous and self-sufficient country.
The eastern Med gas is a particular threat to Gazprom because of its proximity to the company’s largest markets-Europe and Turkey.
Which is exactly why Gazprom and Russia have a tremendous incentive to make sure the underwater gas stays underwater. Russia’s tentacles reach deep into every aspect of Cyprus’s economy and government. Thus, not only does it have the motive, it has the means to impede Cypriot efforts to develop its gas resources. Not to mention that Russia has little incentive for Cyprus to escape basketcasedom. A financially secure Cyprus would not need to provide a haven for dirty Russian money (but I repeat myself), which is about all that keeps the island afloat right now. And oligarchs and corrupt bureaucrats desperately want such a haven.
Given the instability and geopolitical fissures in that region Russia has other levers it can pull to stymie development of gas in Syrian and Israeli waters. This article from the Economist gives just a few of the geopolitical obstacles in the way of commercializing the offshore gas. It should be child’s play for Russia to get Turkey, Lebanon, Syria (or even an Alawite rump state conveniently located on the coast), and Israel embroiled in all kinds of squabbles that will delay considerably the development of the gas resources-perhaps forever. There is plenty of animosity and mistrust to go around, which can easily be manipulated by an opportunistic Russia to ensure that not one molecule of Med methane makes it to mainland Europe.
Which means that the strains on Gazprom have more than economic relevance for Russia. They have geopolitical ramifications as well. And those ramifications are not good. Russia has a vital economic stake in keeping the Levant in turmoil-and in keeping a client in power there. It has shown no compunctions in the past about fomenting trouble, or interfering with attempts to solve it, when its economic interests are at stake. Given the huge dependence of Russia-and the Putin model in particular-on the Gazprom rent stream this is a matter of survival to the Putin regime. And that’s the bad news: Gazprom’s troubles give it and Russia a strong incentive to make trouble in the Levant.