Gazprom: A Matter of Trust
by Mihkail Krutikhin
Here is a simple question: which of the following three statements was true?
‘It should be kept in mind that in 2004 we generated profit from sales within Russia.’ (Elena Karpel, Board member of Gazprom, June 1, 2006).
‘In 2009 Gazprom is planning for the first time to generate profit from domestic gas sales.’ (A press release of the Board of Directors of Gazprom, July 21, 2009).
‘Gazprom expects in 2010 to get, for the first time, net profit from gas supply to the domestic market.’ (Gazprom Chairman Alexei Miller, October 11, 2010).
The answer is impossible to get as the Russian gas monopoly is not exactly a transparent commercial company but rather a Soviet-style government-run industrial ‘ministry’. It is anyone’s guess how much politicking there is in every statement its managers emit. Experience shows that public declarations of Mr. Miller and his key subordinates seldom, if ever, reflect the true state of things at his company. Their foresight is even weaker.
For a gas industry observer, it would be safe perhaps to use the Gazprom managers’ predictions as a solid base for making good forecasts by replacing pluses with minuses and vice versa.
July 2008: ‘By the end of the year the Europeans will by gas from Gazprom at $1,000 per 1,000 cubic meters.’ No such luck. The prices nose-dived almost immediately after this statement. The prospect for 2010 is $308—but only if the Russian monopoly resists the pressure of indignant buyers who are utterly unhappy with the prices in their long-term contracts with Gazprom.
March 2009: “We’ll be a company with one-trillion-dollar capitalization.’ As a fact, the value of Gazprom has fallen since that moment from around $300 bln to less than $140 bln and seems to be ready to duck even lower if the current downward tendency of gas prices persists under the pressure of cheaper LNG and other factors.
September 2009: ‘We are determined to conquer 10 percent of the U.S. gas market.’ Well, well, well… Russian LNG with its estimate of the break-even price slightly under $300 will fund it hard to impress American buyers who are accustomed to the prices in the vicinity of $4 per 1 million BTU, which roughly equals $110 per 1,000 cubic meters.
October 2009: ‘We have an agreement with China to supply annually 68 billion cubic meters of Russian gas.’ Forget it. The Chinese have no plans of buying Russian gas until 2025 and beyond unless they get it at a great discount against production costs.
October 2010: ‘Gas production will grow to one trillion cubic meters a year…’.
They can go on forever. Believe it or not.
Mihkail Krutikhin can be contacted at RusEnergy, a consultancy in oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.