Monday, January 11, 2021

Gazprom: many fires to fight

As the future of sanction-impacted pipeline Nord Stream 2 lies in the dark, Gazpromy faces problems on china-bound pipelines and struggles with low gas prices and liabilities, writes german newspaper WELT:

Just a few years ago, nobody at the Russian gas giant Gazprom suspected that a ship laying pipelines could become a symbol of the risk and instability of entrepreneurial success. “Fortuna” - the term used by the ancient Romans for the changeable fate - is the name of the Russian barge that is supposed to complete the controversial Baltic Sea gas pipeline Nord Stream 2.

It remains to be seen whether he will ultimately be able to build the 100 or more kilometers of pipeline that are still missing. On December 28, the ship completed the 2.6-kilometer section in German waters. In the middle of January the plan is to continue in Danish waters.

But the US, which had been hindering the work with threatened sanctions for the whole of last year, has prepared further sanctions so that Gazprom's European allies can stop the project. Europe would become too dependent on Russian gas, they say in Washington. The US also wants to sell its own gas in Europe.


In Mecklenburg-Western Pomerania, where the tube is to hit the land, the state government no longer wants to accept the standstill. With a foundation trick, she wants to undermine the sanctions threats from the USA. If the project succeeds, the new pipe could bring more natural gas directly from Russia to the German Baltic coast this year. But what if it doesn't work?

In this case, it cannot be ruled out that Gazprom has put half its share of around five billion euros in the total costs of the almost finished project in the sand - just like the five European co-investors theirs. For Gazprom, 2020 would definitely be one of the darkest years in the company's history.

It is true that the new pipeline is not absolutely necessary to meet the demand in Gazprom's main market, Europe, where the troubled giant is nonetheless the largest supplier. But in addition to the damage to the image and the lost money, there would be a negative long-term effect, as Konstantin Simonow, Director General of the Moscow Research Foundation for National Energy Security, explains to WELT:

The gas from the new production facilities on the Yamal peninsula in the Arctic Ocean would have to travel 2000 kilometers longer and would be correspondingly more expensive if it did not flow through the Baltic Sea, but through the southern Ukraine to the west. "Apart from billions in transit fees."

In 2020, Nord Stream 2 will finally become the epitome of the complex and messed up relationship between the world's leading gas company and its most solvent customer Europe, with the USA behind it. But regardless of the pipeline, Russia's largest taxpayer suffered setbacks with its export to the West in 2020 as never before.

The lesser of all is that the semi-state colossus, which is regarded as the Kremlin's foreign policy leverage, had to repay $ 1.5 billion (1.2 billion euros) to the Polish buyer PGNiG because of excessive prices after the decision of an international arbitration tribunal. The collapse in demand and export prices made far more difficult.

Mind you, the problem didn't just begin with the corona pandemic. Even before that, demand had remained low because European customers had filled the underground storage facilities to the brim in the second half of 2019 for fear of a new transit dispute with Ukraine and the winter was quite mild.

Corona-related things got really dramatic in the second quarter of 2020. The average export price, which in 2019 was 210 dollars per 1,000 cubic meters and had already dropped to 162 dollars in January 2020, slumped to 94 dollars in May. That's below the breakeven point, which is set at around $ 100.

There is a similar problem with gas volumes: In the first half of the year, Gazprom's exports fell by 18 percent compared to the same period last year. The market share in Europe fell from 36 percent at the end of 2019 to just under 28 percent.

The disaster, further exacerbated by the drop in the ruble rate as a result of the drop in oil prices, continued in the third quarter. In the end, Gazprom was left with a loss of 218.4 billion rubles (€ 2.4 billion) in the first nine months of last year, while in the same period of 2019 it had a profit of 1.05 trillion rubles. Correspondingly, as with other Russian raw materials companies, the debt skyrocketed: at the end of September, at 4.46 trillion rubles, it was 41 percent higher than in the previous year.

Gazprom has weathered many crises. "So it would be premature to write off the group again," said Mikhail Krutichin, partner of the Moscow consulting firm RusEnergy and expert on the Russian gas sector, in an interview with WELT. The situation in Europe changed for Gazprom in the fourth quarter.

Not only that the gas price has risen to over $ 200 again. The previously extremely cheap liquefied petroleum gas from other parts of the world was in so much demand there due to the economic recovery in Asia that all providers are now sending their tankers to Asia. "That creates more space for Russian gas in Europe," said Krutichin.

However, the losses from the first three quarters cannot be made up for. It has since become known that Gazprom exported 179.3 billion cubic meters to Europe in 2020 as a whole - a decrease of ten percent compared to 2019. Turkey, which - traditionally Gazprom's second most important customer after Germany - is switching to other suppliers, is also largely responsible for this.

As problematic and competitive as the European market has become for Gazprom since the illegal occupation of the Ukrainian Crimean peninsula by Russia in 2014 and the sanctions imposed as a result, Gazprom could soon face the much bigger problem with its new major customer China.

For years, Russia has threatened the Europeans to divert its gas flows to China without any problems. And the $ 400 billion contract signed in 2014 for the delivery of 38 billion cubic meters of gas annually over 30 years to the Middle Kingdom at least suggests that this was not an empty threat.

But it is not certain whether the Russians will be able to fulfill the treaty. The problem: The large Chayanda deposit in the Yakutia region of eastern Siberia, from which the “Kraft Siberia” pipeline to China, which was completed a year ago, was to be filled, was technically flawed and therefore produces far less gas than the group originally assumed.

Similar problems also exist at the Kowykta deposit near Lake Baikal, which should help fill the $ 55 billion pipeline to full capacity from 2025 as soon as the strand to it is completed. At least that was the result of research by Krutichin and the online medium "lenta.ru" in spring 2020, which in the case of Chayanda alone spoke of possible losses in the double-digit billion dollar range. In Russia, nobody takes up the topic because it is covered by an unwritten ban on thematizing, explains Krutichin.

Was it sloppy with serious consequences in the hurry ordered from above to conquer the Chinese market? Comments on this were not available from Gazprom or the Russian government. The true extent of the internal scandal remains controversial. The fact is that Gazprom has too little experience with East Siberian deposits, which in contrast to the West Siberian, pure gas deposits also contain a lot of oil, as gas expert Simonov explains.

It is also a fact that, on the orders of Kremlin chief Vladimir Putin, Gazprom is now examining the feasibility of a second pipeline called "Kraft Siberia 2", which begins in north-west Siberian Urengoy - the traditional source for gas supplies to Europe - and contrary to an earlier plan, not to western China, but should lead to east China; the current “power of Siberia” is already leading to this.

And it is also a fact that, according to CEO Alexej Miller, the feasibility study also includes a possible connection of the new pipeline to the deposits on the Arctic peninsula of Yamal, which were developed over the past decade to supply Europe. The results of the entire audit should be available in the first quarter of 2021, according to Miller, who is clearly also targeting additional export volumes for China.

Should it be implemented, because otherwise China threatens severe penalties for non-fulfillment of the previous supply contracts, experts agree on at least one point: In terms of costs alone, Nord Stream 2 was only a test run for the pipeline from the Arctic regions to China.


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