The Russian state-owned natural gas giant Gazprom is in trouble as the company is unable to compensate for the loss of the European market after Moscow’s full-scale war in Ukraine, the Financial Times reports.
Late last year, when Gazprom reported record sales in China, Russian President Vladimir Putin was delighted, telling the company’s chief executive and longtime ally Alexei Miller: “That’s great, I congratulate you on your work results.”
But Putin’s praise, which Russian propaganda media were quick to report, is at odds with the company’s ongoing crisis caused by the loss of its biggest market.
Europe, by ending its dependence on Russian gas, has managed to dash Moscow’s hopes that the opposite will happen, and Gazprom, which was Putin’s trump card when he launched a renewed invasion of Ukraine, has become one of the biggest companies to fall victim to this war. writes “Financial Times”.
“Gazprom understands that it will never again have as big a source of income as Europe, and it simply has to accept it,” said Marcel Salihov, head of the Russian analytical fund Institute of Energy and Finance. “The only option now is to look for relatively smaller sources of revenue and gradually develop them by picking up the crumbs,” he added.
In an interview with the state television channel Rossiya 1 on Sunday, Putin admitted that Russia had previously made more profit from energy exports, but denied that the loss of the European market was causing problems.
Although Moscow decided to cut gas supplies to Europe shortly after the renewed offensive in Ukraine began, which initially raised prices to a level sufficient to compensate for the drop in exports, the impact on prices was short-lived.
Gazprom’s pre-tax profit reached a record high of 4.5 trillion rubles (46 billion euros) in the first six months of 2022, but fell by 40% a year later, while net profit shrank from one trillion rubles to 255 billion rubles.
Researchers of the Russian Academy of Sciences predict that the company’s financial results for 2023 will show that it is no longer working with profit, while losses could reach one trillion rubles by 2025.
The European Union (EU) has proved more adept at securing alternative gas supplies than many thought, with EU data showing that Russia’s share of the bloc’s gas imports has fallen from more than 40% in 2021 to 8% last year, while prices have fallen from at the beginning of the maximum level war. The goal of the EU is to completely end Russia’s fossil fuel imports by 2027.
On Sunday, Putin claimed that Russia was handling the situation well after Europe stopped buying its gas, “exploring alternative routes and focusing on its gasification efforts”. But in reality they cannot replace the lost EU market.
Since the main export market has been lost, “Gazprom” has been trying to find new buyers, but the deals it concluded in Central Asia and the small increases in supplies to China and Turkey will only compensate for 5-10% of the lost European market, says Salihov.
Significant investment in pipelines and other infrastructure to serve new markets, as well as involvement from external partners, will be needed to significantly change this situation, but they are in no rush to do so.
When Russia’s renewed invasion of Ukraine began, Gazprom was seemingly in a much better position than other Russian energy exporters, given that, unlike oil, Russian gas was not subject to any Western sanctions.
However, in September 2022, “Gazprom’s” prospects changed when underwater explosions damaged the “Nord Stream” gas pipeline, through which 40% of Russia’s gas exports were transported to Europe, drastically reducing Moscow’s opportunities to use it as a means of exerting pressure on Europe.
The Russian market, which has always received a much larger share of the company’s supplies than Europe, has helped tan stay afloat, but because gas is sold at a much lower price domestically, domestic sales cannot compensate for the loss of the EU market.
Although Russian gas exports to China have increased, the volume remains relatively small – Russia supplied about 22 billion cubic meters of gas to the country via pipelines last year, just a fraction of the 230 billion cubic meters of gas it exported to Europe on average annually before beginning of the Ukrainian war.
The company could improve its prospects if it reaches an agreement to build the 3,550-kilometer Sila Sibiri 2 pipeline, which would connect gas fields that once supplied Europe to China, and to build a second pipeline to China. However, Beijing and Moscow have not yet agreed on the “Sila Siberia 2” project, which will cross Mongolia.
Independent analysts and state-supported researchers agree that even in the most optimistic scenario, the construction of “Sila Sibiri 2” would take several years and would not be able to compensate for lost sales in Europe.
“Gazprom’s” oil business “Gazprom Neft” has become the company’s main support, which provided 36% of the company’s revenues and 92% of its net profit in the first half of 2023. The market value of the structural unit even exceeded the market value of its parent company last year.
The former head of strategy of Gazprom Neft, Sergey Vakulenko, states that Gazprom’s condition is neither great nor terrible, and the company is not on the verge of collapse. However, analysts agree that Gazprom must face the risk that its financial situation and prospects will never be the same again.
2024-02-19 20:20:48
#Financial #Times #Gazprom #fallen #victim #war
