Peak Oil is You
Donate Bitcoins ;-) or Paypal :-)
Page added on August 7, 2015
Russia’s Energy Giant Implodes
It was not too long ago that Gazprom, the state-controlled energy conglomerate, was one of the Kremlin’s most potent geopolitical weapons. But those days now seem like a distant memory: Gazprom is a financial shadow of its former self.
The speed of Gazprom’s decline is breathtaking. At its peak in May 2008, the company’s market capitalization reached $367.27 billion, making it one of world’s most valuable companies, according to a survey compiled by the Financial Times. Gazprom’s deputy chair, Alexander Medvedev, repeatedly predicted at the time that within a decade the Russian energy giant could be worth $1 trillion.
That prediction now seem foolhardy. Since 2008, Gazprom’s value has plummeted. As of August 3, it had a market capitalization of $51.12 billion. A little over four years ago, in April 2011, the figure stood at $194.5 billion. No company among the planet’s Top 5,000 has suffered a bigger collapse in market capitalization, according to Bloomberg Business News.
Indicators suggest Gazprom is nowhere near hitting bottom, and lingering uncertainty raises questions about its survivability. During the first two quarters of 2015, Gazprom’s natural gas production fell by 12.9%. In addition, Russia’s Ministry of Economic Development predicts that annual production will fall to 414 billion cubic meters (bcm), the lowest level in Gazprom’s history, and well below the company’s 2015 target of 485 bcm. Last year, production declined by 9% to 444 bcm, which, at the time, was the lowest on record. Industry experts forecast that production will remain low over the next few years.
Not only production is sagging, export revenues are also taking a big hit. During the first five months of 2015, export revenue shrank by 35.8% to $18.768 billion, according to Russia’s Federal Customs Service. Last year, the company’s net income plummeted by over seven times in ruble terms to 159 billion rubles from 1.139 trillion rubles in 2013, and by whopping 12.5 times in dollar terms to $2.8 billion from $34.8 billion in 2013.
So what happened? Why is the company with the largest proved oil and gas reserves among publicly traded energy giants, and operating in a country bordering on two of the world’s top energy consumers – the European Union and China – performing so badly?
The Kremlin, which holds a controlling stake in Gazprom, tends to blame the sharp drop in oil prices and “warm winters.” However, energy giants ExxonMobil and Petro China, Gazprom’s financial contemporaries back in mid-2008, have remained top performers. As for falling demand in “warm winters,” while Russian supplies to Western Europe shrank, Norway boosted its market share and, for the first time, significantly beat Russia – by more than 50% – in terms of supplies to this critical region in the last quarter of 2014 and first quarter of 2015, according to the latest data available.
Experts say that Gazprom’s main problem is that it continues to serve as the Kremlin’s favored geopolitical weapon, rather than be allowed to act as a purely commercial enterprise. President Vladimir Putin’s administration keeps forcing the company to serve its political interests. Examples include Gazprom’s purchase of major Russian media outlets that were then turned into Kremlin mouthpieces, bullying or buying the loyalty of neighboring states for Moscow’s geopolitical benefit, and sponsoring the egregiously expensive Olympic Games in Sochi.
Gazprom’s “plunge has become emblematic of the malaise that has overtaken President Vladimir Putin’s economy,” noted a commentary published by Bloomberg Business in 2014. Russia will finish 2015 as the second biggest loser in global economic growth, according to forecasts of economists surveyed by Bloomberg.
Most ominously for the company, the Putin administration still keeps pushing Gazprom to implement new projects that are “geopolitically important,” but risky from a financial viewpoint. Two prominent examples of such projects concern Ukraine and China.
The Kremlin’s sponsorship of separatists in eastern Ukraine has cost Gazprom dearly. Gazprom’s exports to Ukraine fell from 36.4 bcm in 2010 to 3.7 bcm during the first six months of 2015, before stopping altogether on July 1. Moscow’s efforts to effectively mount an energy blockade against Ukraine in 2014-2015 did not work, but ended up costing Gazprom close to $6 billion in lost revenue and fines, while pushing European customers to diversity their energy imports.
Moscow still wants to stop transit supplies of gas via Ukraine to Europe (or at least cut them from 60-62 bcm in 2014 to 10-30 bcm) by 2019. The alternative for Russia is to channel gas via Turkey and two new lines via the North Stream network. Analysts are not thrilled with these plans, seeing them as more about politics than economics.
The estimated construction costs for two new lines of North Stream stand at €9.9 billion ($10.9 billion), while the first of the total of four Turkish Stream lines could cost €3.3 billion ($3,6 billion). Thus, the total costs of the projects, without taking into account the likelihood of cost overruns, will reach about €23.1 billion ($25.4 billion).
Beyond the construction expenses, transit costs for North Stream appear to be significantly more expensive than shipping energy via Ukraine. Experts estimate that in 2014 Gazprom’s transit costs per bcm via North Stream amounted to $43 compared to $33 via a Ukrainian route.
When it comes to Gazprom’s commitments to Chinese exports, the news for the company may not be much better. Initially, when the $400-billion, 30-year deal was announced in May 2014, it was widely seen as a major geopolitical victory for Putin and Russia. But details of the agreement remain a secret, suggesting that there is little good news for Gazprom in it. The limited information that has emerged supports this assumption.
The project is expensive, with cost estimates ranging from $55 billion, as mentioned by the Kremlin, to $100 billion or more cited by Gazprom’s specialists. In addition, Gazprom is reportedly obligated to cover the costs of building infrastructure to extract, process, store and deliver gas to China on its own. China was initially supposed to help out with a $25-billion payment, but it never happened. Meanwhile, Gazprom moved ahead with the project on borrowed money, increasing the price tag and risk. Adding to the risk is the fact that the project poses significant technological challenges, including difficult terrain along the planned route.
While it was initially announced that the deal could be worth upwards of $400 billion for Gazprom, Russian officials now estimate the deal could reap significantly less due to low oil prices. A benchmark barrel of oil cost roughly $100 at the time the deal was announced; these days the oil price is hovering in the $50-per-barrel range.
Analysts at Merrill Lynch estimate that Gazprom needs to sell gas to China at a price of $340-380 bcm to turn a small profit. Currently, however, Gazprom is receiving about $200 per bcm for its gas exports. For the third quarter, for example, Gazprom is charging Moldova a price of $210 per bcm. With revenue potentially falling to about $200 billion, and construction costs of $100 billion or more, the China deal could potentially turn toxic for Gazprom.
Overall, the price tag of the new geopolitically driven pipelines could exceed $125 billion, or about 2.5 times Gazprom’s current market capitalization. Given the company’s financial situation, Gazprom executives have a lot to worry about in the immediate future. By EurasiaNet.org via OilPrice.com
17 Comments on "Russia’s Energy Giant Implodes"
Makati1 on Fri, 7th Aug 2015 9:31 am
I’ll wait for some real facts from Russia and other sources. Not a corporation pushing petrocarbon industry stock.
Nony on Fri, 7th Aug 2015 10:18 am
USA! USA!
https://www.youtube.com/watch?v=8gfD134ED54
Kenz300 on Fri, 7th Aug 2015 10:28 am
Russia had never been a RELAIBLE supplier……..
The sooner Europe transitions to safer, cleaner and cheaper alternative energy sources the better.
Wind and solar are the future….. it is time to embrace the future.
Davy on Fri, 7th Aug 2015 10:48 am
Poor Makster everywhere he looks his superheroes are stumbling and falling. He must be so embarrassed. He tries to pump them up like his favorite beach floaty with a slow leak. Everyday there is more bad news for the Makster to struggle against.
Folks that is the problem when you have an agenda of “my heroes good yours bad”. Maksters attitude is juvenile and petty. Folks, if you are wondering why I savory these moments it is because for the two years the Makster and I have been at odds. Two years of a constant stream of negative western news with positive Asian news by the Makster.
Yes, I am also petty and juvenile but battles are fought in the trenches so I must drop to the Makster’s level unfortunately. I have offered multiple truces but I am ignored. The truth cannot be suppressed Makster as much as your sci-fi mind would like it to be.
I have said all along neither region has anything good to brag about. Makster message will continue to deflate until eventually it is silent because he will sound completely ridiculous. I am all for bashing the west and the US but in a balanced and fair way.
Nony on Fri, 7th Aug 2015 10:58 am
I don’t like how you ride Maki. And I am actually closer to your POV than his. But you try to stir things up when you get bored. (I know the pattern. ;))
Davy on Fri, 7th Aug 2015 11:12 am
Guilty as charged NOo. Lets hope Makster and I can come to an agreement. I am all for diplomacy. You want to help NO?
Davy on Fri, 7th Aug 2015 11:19 am
Folks, Zero Hedge is having a field day with this energy implosion. I wish I could say enjoy but the reality is different. If this continues it will spell dangerous trends in other areas by the fall.
Deja Deja Deja Vu For Energy Stocks
http://www.zerohedge.com/news/2015-08-07/deja-deja-deja-vu-energy-stocks
Fool me once, shame on you. Fool me twice, shame on me. Fool me thrice, Happy Jack. Fool me a fourth time… dude, seriously!!
Nony on Fri, 7th Aug 2015 11:37 am
$45 oil is going to do some damage to the US EPs. As a consumer though, I love it.
Gas prices could flirt with $2. (They’re driven by Brent not wTI, which is holding things up…Brent has not fallen as much and the export rstrictions keep the differential. Also, summer demand for the refined product affecting price.)
Already a couple reports of stations with sub $2.
dissident on Fri, 7th Aug 2015 7:46 pm
Who the f*ck cares about stock prices. They are for idiots. Fictional wealth that disappears as soon as you try to sell the stocks (try to unload $300 billion in stocks and see what the price is after a few hours).
Gazprom hasn’t lost any of its reserves and any of its markets. EU-tard posturing makes zilch since they cannot replace Gazprom’s gas supply in any time frame that matters. US LNG is wishful thinking given that the US is finding ways to consume all the cheap domestic gas it can (e.g. conversion from coal to gas power plants).
Davy on Fri, 7th Aug 2015 8:47 pm
Dissy, the global system cares about stock. Reserves aren’t shit without the economics to get them out and market them. Equity and debt are part of that equation just as markets and currency. Your contempt for fictional wealth is foolish because that is the game and it is reality. When it is not the game then there will likely be very little reserves to draw from because there will not be an oil economy.
Do I have a disgust for fictional wealth and where it has gone in our modern global system? Yes. You can bitch all you want about real and fictional but the reality is the fictional makes the real possible when we are dealing at these levels of production. Fictional is real because real is made real by the abstracts of liquidity, confidence in markets and productive industry.
Nony on Fri, 7th Aug 2015 10:28 pm
Doing some more damage to the Doomers
http://tinyurl.com/pym3cpp
Nony on Sat, 8th Aug 2015 2:07 am
didn’t post it
Makati1 on Sat, 8th Aug 2015 7:40 am
dissident, I think of all of those who bought huge houses as an ‘investment’ for their old age when they planned to sell them for a big profit and play golf for the next 20 years. And/or the fools who own 401ks and other mutual fund clones whose value is paper promises that will soon be worthless or at least barely able to pay out anything 3rd world to their ‘clients’. They are in for a killer shock soon. My sister was smart. She cleaned out her 401k and bought a small farm.
And, yes, I get S.S. but I know it is not for much longer so I prepare for that day. I also know that it will be one of the last ‘entitlements’ to go. Too many people involved. Look out! Cliff dead ahead! ^_^
Makati1 on Sat, 8th Aug 2015 7:54 am
Nony, what Davy hasn’t grasped yet, is that I skip ALL of his comments. I only read those, like you, who see his motives for what they are and comment on them. We are all entitled to our opinion, and it would be a boring world if we all thought the same.
I have lived a different life than you or anyone else on here. My 70 years could not match anyone else’ nor would my view of the world be the same. We all see things according to our intelligence, experience, education, and willingness to open our eyes to the real world and not what someone else wants us to see and believe.
For those who are still raising a family and have a career and debts, it is more difficult to see the negatives of their situation because they make their future more difficult and maybe impossible. All of my kids are over 40, independent and intelligent. They live their own lives. I live mine. They don’t expect help from me. I am free. Perhaps that colors the view I have of the world? So be it! Have a great day!
Davy on Sat, 8th Aug 2015 8:23 am
Mak, if you think I care one way or another if you read my comments then sorry you. I throw cold water on almost all your distorted and inflammatory posts. You may notice that I do not reply to your post otherwise. If they are legitimate and not inflammatory I do not say anything. Almost all your post are anti-American but some are legitimate and respectful of others. IMA I do not have a problem with fair and balance criticism of the US. I do have a problem with a propaganda machine preaching a distorted message at the same time as that message is promoting another region for clearly personal reasons. That is clear bias and does not represent the truth. You have an agenda because of a failed American life. You are grandiose saying you lived a different life than anyone else. Your different life is a poor old man stuck in the P’s living on a s.s check. Nothing unique about that and that points to your resentment. A life of failure wants to think it is special to hide the pain and resentment. Mak, I am going to fight you to the bitter end. It is my mission.
bug on Sat, 8th Aug 2015 8:28 am
Mak, I probably agree with you on many fronts, and like your sister have cashed out and have no debts and a farm/wooded homestead. But I have the feeling that you take great joy in the fact that when/if things go sour, people will be hurt and ruined, I find that a pretty sad way to live. We can explain to them our thoughts, and leave it at that.
Kenz300 on Sun, 9th Aug 2015 4:44 am
Electric cars, bicycles and mass transit….. a future we can all live with.
Listen Up: Utilities Agree That Fossil Fuels Can’t Compete Against Renewables – Renewable Energy World
http://www.renewableenergyworld.com/articles/2015/08/utilities-agree-that-fossil-fuels-can-t-compete-against-renewables.html