№10 October 2012Table of contents Issue Archive
№10 October 2012Table of contents Issue Archive
№ 10 (October 2012)
The Export Strategy of Russia's gas monopoly is short-sighted: sales in Europe are falling while pipelines multiply
By Irina Rogovaya
The overall volume of Russian gas exports in 2011 reached 221 billion cubic meters, which was the absolute sales record ever for the gas monopolist. Based on the figures for 2012, it is expected that the volume of exports will reach 222 billion cubic meters, with no less than 160 billion exported to “far abroad” regions (which for Gazprom is the entire EU, including the Baltic states).
Expected profit is also at a record high – approaching $84.5 billion, of which 61 billion was expected to have been received from exports to the EU. Gazprom’s Vice President and Gazprom Export’s General Director Aleksander Medvedev recently pointed out, that these figures are based on “a very conservative estimate of export volumes to the ‘far abroad’ regions.” Medvedev did not resist the temptation to taunt on this occasion the media stating: “It is very amusing to read that Gazprom has apparently encountered problems related to shrinking export levels. That is absolutely not the case.”
It is worth noting that Gazprom’s record breaking export are in stark contrast to the Eurozone’s economic downturn. It seemed that Gazprom’s anticipated gas revenues were too optimistic in light of the grim economic outlook and expected decline in energy demand in Europe. As early as the beggining of this year, industry analysis everywhere (expect at Gazprom) warned of a long-term trend towards gas supply surplus. In particular, analysis warned that Russia’s position as the primary exporter and invester in supply capacities to the EU (with the newly-commissioned “Nord Stream” and the planned “South Stream” pipelines) was under serious threat by European LNG imports from Qatar and the U.S. (see Fig. 1).
Breaking a Wave of Euphoria
In late August, Russia's Ministry of Economic Development published statistics for the current (January-July 2012) period, as well as projected figures, for Russian export markets. The total volume of gas exports for the period of January-July 2012 was 104.7 billion cubic meters, with the total volume extracted for export having dropped to 27.4 percent (down by 2.2 percent when compared to the same time in the year prior). Long-distance exports (Eurozone, including the Baltic states) dropped to 67.3 billion cubic meters (down by 3 percent). The volume of gas physically delivered for the given period also dropped, by 19.2 percent (see Fig. 2).
These figures closely match experts’ predictions. The sharp drop in long-distance delivery volumes particularly stands out conspicuous. Maria Egikyan, an oil and gas analyst at Alfabank, told OGE that “the issue is that Gazprom’s European clients are drawing on steved gas reserver as the financial crisis continues, which is why export sales have fallen by a lower marg in than physical deliveries.”
Projections published by the Ministry of Economic Development also predict a drop in gas markets. Gazprom’s export levels are expected to reach 193 billion cubic meters – substantially less than figures the state-owned monopolist announced earlier.
A continuous decline in demand for Russian gas in export markets, as underlined in the ministry’s report, stems from the rise in competition from other gas-exporting countries, as well as the drop in European energy consamption. As such, the price of natural gas is currently one of the most sensitive issues for the Russian goverment, since it would be particulary difficult to experience a decline in Gazprom’s record-breaking revenues.
To Dump Natural Gas or to Step Aside?
According to the International Monetary Fund (IMF), in the first seven months of this year the average price for Russian gas on the European market rose to $443 per 1,000 cubic meters, which is 25.4 percent higher than the price during the same period last year.
The contract July 2012 price for Russian gas on the German border was $409.7 per 1,000 cubic meters, which is 1.6 percent higher than it was in July 2011.
The terms of European supply agreaments, however, are traditionally subject to variation, reflecting the current political climate and the level of loyalty between byer and seller. For example, European observers note that the price of gas at the Polish border fluctuates between $420 and $500 per 1,000 cubic meters. Meanwhile, Germany pays, on average, around $380, Slovakia – $330, Italy – $320. In the near future, the RF Ministry of Economic Development predicts that the average price of gas beyond the borders of the CIS with drop to $393 instead of $439, a figure that was projected at the beginning of the second quarter of 2012. This will constitute a sizable loss for Gazprom, but such a price drop will be barely noticeable to European clients, in comparison to the price of gas in the U.S. – $80 per 1,000 cubic meters.
Non-competitive prices and in particular the unjustifiable growth in price of Russian gas, as compared to the level of real demand in Europe, will likely increase problems associated with maintaining Gazprom’s transportation infrastructure, which even today is under threat – the threat of losing the gas export market.
Poor Supply Conditions
The second line of the “Nord Stream” pipeline is currently being tested in the Baltic Sea. On August 29, the undersea section was connected to the overland section of the pipeline, in the Portovaya Bay, near the city of Vyborg. The pipeline is being filled with buffering product, which is the last stage prior to commissioning, an event that is planned to occur on November 1, 2012. The total capacity of this pipeline will reach 55 billion cubic meters per year.
Additionally, on November 15, the final investment agreement for the “South Stream” pipeline under the Black Sea is due to be signed. It is worth noting, that the partnership agreement for the construction of its offshore section had been signed by Gazprom, Eni – Italy, EDF – France and Wintershall – Germany, exactly one year ago – on September 16, 2011. According to the agreement, each side is pledging to invest of 10 billion euros in the Black Sea section of the pipeline. “South Stream” will consist of four lines along the bottom of the Black Sea with a maximum planned capacity of 63 billion cubic meters per year.
Early this year, then – Prime Minister Vladimir Putin directed the head of Gazprom to speed up the planning stage of the project in order to begin construction of its undersea section no later than December 2012, ahead of schedule.
If the project meets its three-year timeline, South Stream will be connected to the European gas distribution network as early as 2015, at which point, based on the scope of existing Gazprom Export delivery contracts, the total volume of Russian gas exported to Europe may reach 180 billion cubic meters. By the Russian government’s logic, this will require additional and reliable (meaning “lacking a third party”) export channels. The total delivery volume of existing pipelines – the “Nord Stream” (55 billion cubic meters) and Yamal-Europe (33 billion cubic meters) – is insufficient for guaranteeing uninterrupted supply to meet contractual supply obligations to the EU.
Thus, the pressure brought to bear on Gazprom to speed up construction of South Stream is the result of none other than a last ditch attempt by Russia to stake a claim in the southern transportation corridor. The Nabucco pipeline project (currently scheduled for commissioning no earlier than 2017), as well as many other projects, offer non-Russian alternatives of gas delivery from South and Central Asian regions to Europe.
At a meeting in Zug, Switzerland, on June 27, representatives of the four sides agreed to speed up the project schedule in order to begin construction of the undersea section of the pipeline no later than December 2012.
Gazprom still faces many challenges with the “South Stream” project, particulary relating to the construction of the overland section of the pipeline, which is to run across at least seven countries in Central and Southen Europe. Transit agreements have been signed with most of these countries, providing for the possible construction of additional outlets for each country’s domestic natural gas consumption. “Possible” is the key word here, since none of Gazprom’s international partners have committed to purchasing any quality of gas transiting “South Stream” in the future. Demand for natural gas in South and Central Europe, with the expection of Italy, has traditionally been low. Furthermove, few Europian consumers are willing to comuit to long-term “South Stream” supply contracts in light of the emergence of new prospects and partners on the market.
The Depths and Football Clubs – to Each Their Own
On August 27, Gazprom and the Bulgarian energy holding EAD finally signed an agreement on construction of the South Stream pipeline on Bulgarian territory (this document clarifies many points, among them, the South Stream’s point of entry into the Bulgarian distribution network as well as other matters that have been under intense negotiation between Russian and Bulgaria for many years). But only a day later, on August 29, the Bulgarian government signed an agreement with the French company Total and its partners for exploratory drilling in the deep water Khan Asparukh field, which potentially holds 500 billion cubic meters of gas. Total and its partners are prepared to invest 1 billion levs (approximately 500 million euros) in exploratory drilling in Bulgarian waters. This is planned to span a 14,000-square meter area and last for five years.
Currently, Bulgaria consumes a little over 3 billion cubic meters of natural gas per year, for which it is completely dependent on Gazprom. The Bulgarian Prime Minister Boyko Borisov, has commented on the deal as “a giant leap towards a real measure of energy resource diversification as far as the supply of gas and oil is concerned.”
In related development, one of Bulgaria’s news agencier quoted an interview with Mr. Borisov in early August, in which the national football club, as well as Bulgaria’s negotiations with Gazprom, were discussed. The Novinite Agency quoted the prime minister’s interview to Radio Darik, “I told Aleksei Miller, the head of Gazprom, that if we agreed to the ‘South Stream’ in October, it would be good to get them as sponsors for the Bulgarian football league.” A little later, Russian news agencies stated that Gazprom might become the sponsor of “CSKA Sofia” FC before the end of this year. However, not the fact that it happens in reality.
It’s no time to play
Successful record - in the previous year - the state of the Russian state monopoly can also "record" falter. First of all, on the possible (and probably inevitable) sanctions the European Commission. Recall, September 4, Brussels launched an investigation into the conditions of Russian gas supplies to eight countries in Central and Eastern Europe. If evidence of the facts of abuse of dominant position on the markets with "Gazprom" will be charged a penalty of 10% of revenues, which, according to various estimates, could reach at least 10 billion euros. Also recall that the company has already suffered considerable damage from a sharp fall in exports. Only during the first trimester of this year, according to observers, "Gazprom" has lost about 25% of revenues.