Gazprom's Management Needs to Look at Post-Crisis Market

July 27, 2009

Gazprom’s operating costs have been increasing at such a pace that they have almost tripled since 2003, according to a former deputy Minister of Energy and current head of the Institute of Energy Policy Vladimir Milov.


In a recent interview with Upstream, Milov indicated that production costs had slipped from USD 4.90 per boe in 2003 to USD 15 in 2008. Milov also believes that Gazprom’s production has remained level 550 bcm of gas per annum, and despite the recent price hikes, Gazprom is setting itself up for a fiscal day of reckoning as its growth in Europe has stagnated and domestic demand was met my increasing imports.


Gazprom, which is 51 percent government held, has drawn accusations that its management and board of directors hold Kremlin priorities higher than those of drilling, transporting, and marketing gas. Milov offers the following statistic to prove that revenues aren’t going to increase shareholder value or fund new projects: in 2003, Gazprom had a payroll consisting of 391,000 employees earning a total of USD 3.7 billion. By 2008, although production was plateaued and efficiency gains in drilling and transport should mean fewer workers, ranks had grown to 445,000 employees earning a total of USD 10 billion. The difference in compensation per employee means that in 2003 the average was USD 9,463 per worker, and in 2008 it had reached USD 22,472. Whether the increased pay went to executives with government connections or technical specialists needed to keep Gazprom's old Siberian fields producing, neither scenario bodes well for Gazprom’s bottom line.


While Gazprom has elected to shelve development of its Yamal Peninsula blocks until 2011, and may postpone plans to develop the Shtokman Field in the Barents Sea with Total and StatoilHydro.


Mr. Milov, who resigned as deputy Minister of Energy in 2002, is running for a seat in the Moscow City Duma from the Southwest Administrative District. He claims that Gazprom’s poor balance sheet and lack of fiscal discipline have lead the company to ignore major projects due to cost, leaving them exposed to lost market share when high demand returns.