Streetwise Professor

November 13, 2008

As Conjectured Here

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:17 pm

Putin has threated to halt construction of Nord Stream unless the Europeans pony up more Euros:

Putin said ”we cannot do it alone, and we won’t,” the ITAR-Tass news agency reported.

In other words, more chutzpah.   “Pay for the gun we will hold to your head.”

This also has obvious implications for South Stream.   If there’s no money for Nord Stream, where is the money for its southern twin?

Oh, and by the way: Where is the gas that is supposed to fill Nord Stream (and South Stream, for that matter) going to come from?

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1 Comment »

  1. You raise a really good point as to where the money is going to come from to get the natural gas to fill the pipelines. If Russia can’t come up with a few billion dollars to pay for a pipeline, where will it come up with the $200 billion estimated cost of bringing new natural gas fields online to maintain production at current levels. Novaya Gazeta published a very thoughtful piece analyzing GAZPROM’s declining production and the challenges it will face delivering natural gas to the market. It relied on buying natural gas cheaply from Central Asia, but the Central Asian republics are now asking to be paid at fair market rates. This leaves GAZPROM with a declining production and the inability to exploit neighboring countries to maintain profits. An excerpt from Novaya Gazeta:

    Against the background of declining volumes of extraction at the old gas fields, put into operation as far back as 1980s, Russia is going to face a threatening problem of the gas deficit. The Yuzhno-Russkoe field is the last relatively large field remaining in the standing area of the extraction where the infrastructure is rather well developed and conditions of extraction are more favorable. The “new gas” will have to be taken from unexplored fields, one of the most complicated in the world, where exploration and making the necessary infrastructure will require vast investments. According to fresh estimation by Gazprom itself, the cost alone of the construction of the Bovanenkovo-Ukhta pipeline will be $80-90 Bn, while the entire project of exploration of the Yamal may take an amount of up to $200 Bn, which is more than all the Russian Stabilization Fund!

    Why all those investments haven’t been done so far, considering it was planned that the gas from Yamal gas fields was to be delivered to the continent at the late ‘90s?

    The problem is that over all these years Gazprom intentionally has spent only relatively minor means on investments into its profile business, i.e. gas extraction. The vast super profits, gained out of rapid growth of the export and domestic gas prices, Gazprom has spent on buying up the assets and on financing the rapidly growing costs.

    That way, within the period from 2001-2007 only slightly over $27 Bn have been spent by the Company on the capital investment of its main business, the gas extraction.

    Just compare: in 2003-2007 Gazprom has spent $44.6 Bn on buying the assets. Over $30 Bn in that amount were assets having no relation to the gas industry. That’s mainly oil companies (Sibneft, Tomskneft) and electric energy companies (RAO EES, Mosenergo, wholesale and territorial generating companies), also Rosukrenergo trader.

    If those means had been spent on exploration of the new gas fields, Russia would not be posed a threat of the gas supplies crisis.

    While the fields in Yamal are not getting explored yet, Gazprom has got into dependence on the gas import from the Central Asia. If in 2002 the share of the Central Asian gas was slightly over 4% in the Gazprom balance, now the figure is 8%. In the meantime, this gas is going up rapidly. In 2003 a thousand cubic meters of the Turkmen gas cost to Gazprom $30. Today the price is $150. And since 2009 on, the figure may become $250 or even higher.

    No wonder that the financial report of Gazprom for 2007, made in accordance with the international standards, has shown a paradoxical result: with the growth of proceeds of more than 8% out of the gas selling, the profits out of selling have reduced for 11%. And this figure appeared against the background of steady growth of gas sales in 2007, including 22.5% for the Russian consumers and the average 25.2% for the CIS countries.

    How can it have been shown reduction of profits out of sales with the rapid growth of prices? The Gazprom’s management makes no secret out of the fact that the reason is the growth of costs, where the main article is buying up the gas from the third persons (cost of such buying has increased for 36%). If in 2003 the expenses for bought oil and gas were less than a billion dollars, in 2007 the figure was $15 Bn or more than a quarter of all the operational costs by the Company!

    The biggest share of those costs is rapidly growing costs for buying the gas in the Central Asia: a bit over $ 1 Bn in 2006; $7.5 Bn in 2006; $11.7 Bn in 2007.


    Comment by Michel — November 13, 2008 @ 4:03 pm

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