Streetwise Professor

January 17, 2013

Gazprom’s Troubles: A Good News-Bad News Story

Filed under: Economics,Energy,Politics,Russia — The Professor @ 5:16 pm

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.

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  1. Are the Zeta Reticulans siding with Gazprom?

    Comment by pahoben — January 17, 2013 @ 7:00 pm

  2. No! The Zetas need fuel for their spacecraft!

    The ProfessorComment by The Professor — January 17, 2013 @ 8:10 pm

  3. It came as a complete surprise that Yoko Ono has become an authroity on hydraulic fracturing.

    It looks like Putin’s sickness of the spirit is permeating ever deeper into Russian society and now even perverting the Bolshoi. The Kremlin basically has issued a de facto guide as to how acid attacks, poisonings, savage beatings, murder, and threats against vulnerable family memebers can help you achieve your goals. Wealth is not associated with value creation but with utilizing these Kremlin proven techniques to advance your career. Why be a sap and work hard when torture and murder are proven to be more effective.

    Comment by pahoben — January 18, 2013 @ 7:41 am

  4. The new plot of the Nutcracker.

    The Mouse King Vladimir plants drugs in the Stahlbaum house and thus extorts control of the Nutcracker from Clara and Fritz. The Nutcracker is then forced to conduct eponymous torture on the Prince until he takes the mice army to the Land of Sweets. The Mouse King throws acid on the Sugar Plum Fairy and they lay waste to the Land of Sweets. The next morning Clara wakes up in the hospital with serious internal trauma.

    Comment by pahoben — January 18, 2013 @ 9:53 am

  5. Good Doctor:

    A good safe haven for corrupt Russian rubles might be Washington DC instead of Cyprus. Wasn’t that part of the ‘flexibility’ that was mentioned some months back?


    PS I do not appreciate the Nutcracker Acid jokes.

    Comment by Vlad — January 18, 2013 @ 2:12 pm

  6. Okay it can be rewritten-

    The Mouse King orders inspections by State Health, State Workplace Safety, State Tax Authority, and Security Services. They find ongoing criminal violations by the Sugar Plum Fairy and she is imprisoned and THEN they lay waste to the Land of Sweets which is later sold at state auction to a judo colleague of Vlad The Mouse King.

    Comment by pahoben — January 18, 2013 @ 2:48 pm

  7. @Vlad-if you do not like this you will not like my “freshening” of the Brother’s Karamzov to reflect Putin 2.0 (3.0 depending on how you count it). You can be certain that the narratives for Dmitry and Alyosha will differ considerably from the original. I haven’t yet decided if I will flesh out Grushenka as an Olympic rythmic gymnast become politician or a renowned photographer of kittens.

    Comment by pahoben — January 18, 2013 @ 3:52 pm

  8. Thank you pahoben

    godfather Vlad ’s Davinci Code [Hat-tip Fascist-Russia dot com] Grushenka has been a member of the Russian parliament, the State Duma, representing the pro-Kremlin United Russia party. Since February 2008 she has been Chairman of the National Media Group’s Public Council

    Comment by Peter — January 19, 2013 @ 9:48 pm

  9. pahoben, do they use mysterious power outages, in addition to “inspections,” in Rasha?

    In Ukraine, they use power and water outages as an added “treat.”

    Also, one of the female candidates for Parliament was doused severely with green paint.

    And they also use a green dye. Use of the green dye was recently used against an opposition figure in Kharkiv. The police simply stood by. It was also used against Yulia Tymoshenko’s lawyer.

    For the Nutcracker – don’t you figure that Putler’s lavish exorbitant mansion in Sochi would figure into it? Or maybe the expensive mansions in Londongrad? Like Luzhkov’s mansion, maybe?

    Also – SWP, as you well know, oil linkage is not the only linkage. Rasha/Gazprom are still going after Ukraine with “political” linkage – “we will give you cheap gas prices if you become Rasha’s slave, and also give us your gas pipeline transport system.”

    Comment by elmer — January 20, 2013 @ 8:20 am

  10. @Peter-thanks for the update. I still wonder if she provides some behind the scenes political advantage. Even his daughter doubts his capacity for normal human emotion.

    @elmer-Ukrainian politics are like the X-Games of national politics. It looks like Yulia will be in prison until election results that are favorable to her.

    Comment by pahoben — January 21, 2013 @ 8:25 am

  11. @elmer-Maybe mixed martial arts (MMA) would be a better analogy for Ukrainian politics except groin shots and blows to the back of the head are allowed.

    Comment by pahoben — January 21, 2013 @ 9:55 am

  12. @pahoben

    yep – good point.

    plus a “judge” (Ukraine’s legal system is, ummm, severely deficient), his wife and their adult son and daughter living with them were just recently severely beheaded.

    If a “judge” in Ukraine doesn’t rule the “right way,” they come after you in several different ways.

    But Gazprom and the sovok mafia go on.

    Comment by elmer — January 23, 2013 @ 8:23 am

  13. Professor, there are indications that some measures scheduled to take place in Russia might restrict the ability of Cyprus to continuly host Russian capital. Froma semi-priviate communication I learn today that “…According to RBCdaily, in spring 2013 Russia Academy of Science working group will present new suggestions how to decrease Russian economy connection to offshore jurisdictions.
    The group will present it results directly to Mr. Putin, who started the discussion on re-evaluation of offshore connections in autumn 2012.
    Among suggested measures are obligations to keep shares of offshore firms with Russian shareholders with Russian custodians; agreements with offshore jurisdictions on tax information exchange and a prohibition assets transfer to jurisdictions without such treaty with Russia; blacklisting of foreign banks, which don´t co-operate with Russian Tax authorities and a special permission issue for Russian state companies for offshore operations. It might also be suggested to review several existing Double Tax Treaties between Russia and some very popular jurisdictions.”

    Comment by MJ — January 27, 2013 @ 9:29 am

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