2024-05-14 12:14:32
Russian gas giant Gazprom could struggle with poor economic results for a long time. Once the most profitable Russian company owned by the Kremlin, it is struggling with the loss of the European market, which it is trying to compensate with the domestic market and exports to China. The company recently announced an annual net loss of seven billion dollars (161 billion CZK). It posted red numbers for the first time since 1999.
Gazprom’s problems reflect the significant impact of European sanctions on Russia’s gas industry, as well as restrictions resulting from Moscow’s growing partnership with China, Reuters writes.
The impact of international sanctions on oil exports was more easily absorbed by Moscow because Russia was able to divert oil exports by sea to other customers. Gazprom relied on Europe as its biggest market until 2022, when Russia’s conflict with Ukraine prompted the European Union to limit gas imports from the Russian company.
According to Gazprom data and Reuters calculations, Russia delivered roughly 63.8 billion cubic meters of gas to Europe in 2022 via various routes. Last year, this volume decreased by 55.6 percent to 28.3 billion cubic meters.
Gazprom pumped the maximum amount of gas to the European Union and other countries such as Turkey in 2018, when it was 200.8 billion cubic meters. Trade with Europe was also significantly weakened by the mysterious explosions on the submarine Nord Stream gas pipelines leading from Russia to Germany in September 2022.
The hope for Gazprom is called Power of Siberia 2
Russia has turned to China and is trying to increase gas sales there through pipelines to 100 billion cubic meters per year by 2030. In late 2019, Gazprom began supplying gas to China through the Power of Siberia pipeline.
By the end of this year, he plans that the annual capacity of the Power of Siberia will reach 38 billion cubic meters. Moscow and Beijing also agreed to export ten billion cubic meters from the Pacific island of Sakhalin in 2022.
Russia’s biggest hope is the Power of Siberia 2 gas pipeline through Mongolia, which is supposed to flow 50 billion cubic meters per year. However, he ran into some difficulties because it was not possible to agree on prices and other issues.
It will not completely replace the loss of trade with Europe
“While Gazprom will have some additional export revenue when all these pipelines are operational, it will never be able to fully compensate for the business it has lost in Europe,” said Kateryna Filippenkova, director of gas and LNG research at Wood Mackenzie.
Russia is also seeking to establish a gas trading hub in Turkey, an idea first mooted by President Vladimir Putin in October 2022. But the project has seen no significant progress since then.
Even if Gazprom succeeds in operating the gas pipeline deliveries to China, the revenue from sales will be much lower than from Europe. According to the Moscow brokerage company BCS, Gazprom’s income from gas sales to Europe between 2015 and 2019, thanks to monthly deliveries of 15.5 billion cubic meters, averaged $3.3 billion (roughly CZK 76 billion) per month. Taking into account the price of $286.9 per 1,000 cubic meters reported by the Russian Economy Ministry and Gazprom’s gas exports of 22.7 billion cubic meters last year, the total value of gas the company sold to China for the entire year could 2023, to reach 6.5 billion dollars, writes Reuters.
To China for much lower prices
Gazprom did not separately disclose its revenues from sales to Europe and China for 2023. According to analyst Michal Meidan of the Oxford Institute for Energy Studies, China is unlikely to replace Russia with Europe as a highly profitable market for gas exports. “China provides an outlet for Russia, but at much lower prices and revenues than Europe,” Meidan told the agency.
In 2023, Russian pipeline gas was sold to China at $6.6 per million British thermal units (mmBtu). In the first quarter of this year, the price decreased to 6.4 USD/mmBtu. In Europe, Russian gas was sold at a price of 12.9 USD/mmBtu last year.
According to a document seen by Reuters last month, Russia expects the price of gas for China to continue to decline gradually over the next four years. The worst-case scenario does not rule out a drop of 45 percent to $156.7 per 1,000 cubic meters (about $4.4/mmBtu) in 2027 from 2023. The document does not say what could lead to the price drop. But Russia faces competition from other pipeline gas suppliers to China, such as Turkmenistan, as well as seaborne liquefied natural gas supplies.
Gazprom’s financial results, which include its oil and energy units, showed that revenues from the natural gas trade fell by more than half last year to just over 3.1 trillion rubles (CZK 770 billion). Revenue from the sale of oil and gas condensate reached 4.1 trillion rubles, which is an increase of 4.3 percent, according to brokerage BCS.
Alexei Belogoryev of the Moscow Institute of Energy and Finance said it would be impossible for Gazprom to restore profitability if it relied only on the gas business. The company could reorient itself to the production and export of ammonia, methanol and other products from gas processing, but such a move will not bring a quick return, according to him.
“At the same time, the prospects of the Power of Siberia 2 project remain unclear: China will most likely not need as many additional imports in 2030 due to a likely slowdown in demand growth and a high level of domestic gas production,” Belogoryev said.