Streetwise Professor

October 2, 2011

Music to My Ears

Filed under: Economics,Energy,Russia — The Professor @ 8:30 pm

Your favorite company and mine is under some stress.  Gazprom faced raids from EU officials pursuant to an antitrust investigation of the company against the background of Euro hemming and hawing (so what else is new?) over the creation of a unified energy market.  But perhaps more interestingly, Gazprom’s customers are rebelling against the anachronistic oil-based pricing, take-or-pay contracts under which the company has sold gas since the 1980s.  These contracts made economic sense then, when there was no liquid spot market.  They are not economically sensible now, given the development of such a market.  But given the divergence between oil prices and spot gas prices, they are quite lucrative for Gazprom, so the company is holding on to them with a death grip.

But cracks are appearing.  One long-standing contract (dating from 1986), with Turkey’s Botas, is about to expire.  Botas has terminated the contract citing a dispute over the pricing mechanism.  Perhaps this will give impetus to the efforts of other companies, such as Germany’s E.ON who are also pressing the Russian corruporation to move towards spot pricing.

The Turkey episode is actually quite entertaining, and should make anyone think N times before believing any Gazprom statement.  The initial threat to terminate the contract came from Turkey’s energy minister.  Gazprom then huffily said that the Energy inister was irrelevant, because it was negotiating with Botas not the Energy Ministry.  Uhm, 2 days later, Botas told Gazprom to hit the road, Jack.

I love it when that happens.  A twofer.  Gazprom loses a deal, and then looks foolish trying to deny it’s going to lose the deal.

The disputes over contracting are a short-to-medium term problem for the company.  Longer term, there is the threat from shale.  US shale is developing apace.  There was recently an announcement of a huge shale gas find in the UK (although there were soon naysaying reports–all of which is par for the course in this business).  Poland has also claimed that it has bright shale prospects (although a private correspondent who has investigated the issue closely argues these claims are overstated).

The company has ambitions to raise  its market share in Europe from about 25 percent to 30 percent.  It will not be able to achieve those ambitions and maintain its anachronistic pricing mechanism (which greatly overprices gas).  Moreover, it will face new competing suppliers.  Gazprom will no doubt continue to maintain its swagger, but as the Botas episode shows, cracks are appearing in its facade.  Look for those fissures to grow.

I look forward to hearing more music.

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  1. The raid on Gazprom, just like the raids on foreign oil companies in Russia, clearly shows that the EU has a selective approach to the rule of law.

    Comment by Sublime Oblivion — October 2, 2011 @ 11:06 pm

  2. Sublime Oblivion, you really are an idiot.

    Comment by Andrew — October 3, 2011 @ 3:01 am

  3. Andrew, with every S/O’s comment he proves that he is an idiot again and again. Baby’s tantrums.

    Comment by voroBey — October 3, 2011 @ 11:19 am

  4. Andrew and VoroBey-you are both wrong. Objective evaluation of idiocy is no longer allowed. The progressive political definition is all that is allowed by the intelligentsia and by definition we are idiots. This is very clealy set out in their manual, Progressive Rhetoric For Complete Dummies.

    Comment by pahoben — October 3, 2011 @ 6:56 pm

  5. The Russian stock market has lost 40% of its value since July, it is back in freefall.

    Comment by La Russophobe — October 4, 2011 @ 2:12 am

  6. “Россия – это зло. Россия – это зло в его чистом, беспримесном виде.”

    Comment by La Russophobe — October 4, 2011 @ 6:58 am

  7. Based on the latest data I can find Gazprom has 391,000 employees (not including vast numbers of contractors) and produces about 550 billion cubic meters gas per year. That is only 135 thousand cubic feet per day/employee (135 MCPD). At current Henry Hub prices that would be revenue of only $486/day per employee ($3.60/MCF). On the bright side for Gazprom total salary divided by total employees yields an average wage of only $30/calendar day. For comparison Chesapeake has production of about 330 MCFPD/employee-so much for economy of scale. Gazprom will do its all to maintain gas prices in part to continue its inefficiencies and serve as a super major employer of last resort in Russia.

    Comment by pahoben — October 4, 2011 @ 7:59 am

  8. EOG is close to 1150 MCFPD/employee

    Comment by pahoben — October 4, 2011 @ 9:36 am

  9. PAHOBEN: That is freakin’ awesome stuff!

    Comment by La Russophobe — October 4, 2011 @ 10:21 am

  10. Thanks

    Comment by pahoben — October 4, 2011 @ 7:17 pm

  11. “employer of last resort in Russia” – that’s a good one. As in when nobody wants to hire a starving Schroeder any more, Gazprom helps out.

    Comment by Ivan — October 4, 2011 @ 11:09 pm

  12. Very funny-I hadn’t thought about Schroeder. Maybe they will have a slot for Obama.

    Comment by pahoben — October 5, 2011 @ 7:07 pm

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