Gazprom Gas Supplies May Fall Short of European Demand By 2015: IEA

The International Energy Agency has warned that Europe may face gas shortages by 2015, largely due to Gazprom’s inability to meet growing demand. While this presents short term problems for European supply, Russia also has much to worry about in terms of bringing new fields online as the EU attempts to diversify its supplies beyond its eastern borders.

The International Energy Agency’s (IEA) warnings about potential shortfalls in European gas supplies are not new. The growth of Gazprom’s production rate dropped to a mere 0.5% in 2005 and to almost zero in 2006, underlining the energy watchdog’s forecasts that, without major development of new reserves, Gazprom could be unable to fulfil European supply demands. Even the Russian Statistics State Committee has admitted that gas production in 2007 was down 0.8% on the previous year.
Although Gazprom has claimed that it will not only be able to fulfill contracts but markedly increase output, the task ahead is considerable. Russia’s main domestic reserves are believed to be over 50% exhausted, making it increasingly critical for Gazprom to develop new sites in technically challenging areas such as Eastern Siberia, the Yamal Penninsular and the Barents Sea. Should such reserves fail to come online, Russian gas production is expected to fall below 2006 levels by 2020. Even the most conservative estimates suggest that a $200 billion investment in the Russian gas sector will be required by 2020 if it is to meet international demand.

Ironically, reforming domestic prices so that they are closer to European rates would help to stabilize Gazprom’s balance sheet and make a number of sites more financially viable (some 65% of gas produced is still used on a domestic basis). Russian President Dmitry Medvedev has indicated that prices will be examined towards 2011, but this will remain a piecemeal process that still falls well below prevailing competitive European rates. This is a problem that the IEA has highlighted in numerous other markets where political, rather than market, pricing is failing to reduce hydrocarbon demand. The fact that Gazprom also ‘props up’ transmission and distribution networks across Russia serves as an additional drain on resources relative to upstream assets.

Red Orbit