The former gas empire is going through a period of stagnation, but it will not collapse completely, and there are a number of reasons for this.
Russian gas exports to the European market decreased from 40 % to 9%, and the two Nord Stream gas pipelines worth more than 20 billion euros are simply lying at the bottom of the Baltic Sea. Meanwhile Gazprom's share price fellby 88% after the invasion of Ukraine, and in August it burned a large amount of unsold gas. This is according to a Politico article.
“He is essentially suffering from an existential crisis,” said Adnan Vatansever, a senior lecturer and expert on Russian energy at King's College London. “Gazprom's prospects for further growth are somewhat limited, and at some point it will have to significantly reduce production.”
This is a new situation for the company, which is more used to being the cash cow of the Kremlin. Transformed from the Soviet Ministry of Gas into the USSR's first state-owned corporate enterprise in 1989, Gazprom was fully privatized under former Russian President Boris Yeltsin. But Putin returned it to state control in 2005.
So far, the company is still making a lot of money. Although exports to the EU fell by 48% in the first eight months of this year compared to 2021, its profits more than doubled in the first half of 2022 thanks to a sharp rise in gas prices – and it continued to earn €100 million a day. according to some estimates. It also paid 20 billion euros in dividends, which is the largest payment in the history of the Russian stock market.
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But the long-term outlook is bleak. While gas prices will remain high for “at least the next two years,” according to James Henderson, director of energy transition research at the Oxford Institute for Energy Research, it is unclear whether they will remain high beyond that.
” By the second half of this decade… there will certainly be a question mark as to whether Gazprom will be able to continue operating at the same level as it is now, he said. – This will be a case of the potential need to reduce production, potentially having to reduce the company a little.”
The company could start feeling the financial hit in 2025 or “earlier,” Vatansever said, depending on how quickly Europe cuts out Russian supplies and how high prices are. But Putin won't let it go bankrupt, Henderson said, not only because of its symbolic value, but also because he controls the entire pipeline system in Russia and supplies half the country with energy.
“He can't let it fall apart, because it is an integral part of the Russian economy, he said. – The energy system is based on this. This is what keeps people warm.”
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Putin insists that the old export relations can be restored. Speaking at an energy conference in Moscow this week, he said Russia was a reliable and non-political energy supplier and suggested restoring gas supplies via Nord Stream 2.
“Nice try,” said German government spokeswoman Christiana Hoffman on Putin's proposal. – Regardless of the possible sabotage of the two pipelines, we have seen that Russia is no longer a reliable supplier of energy.”
This leaves Gazprom with a European-sized financial hole, which before the war accounted for about 70 percent of its gas revenues.
Alternatives for gas sales
According to Vatansever, given that European sales are gone, the company will rely more on the other four main markets.
First, these are the former Soviet republics, such as Belarus and Central Asian countries, where Gazprom sells gas at discounted prices, tying to Moscow's political goals of maintaining influence in its former empire. But Gazprom earns less than 5 billion euros on this market.
Another option would be to turn to Asia, especially China. Moscow supplies Beijing with about 16 billion cubic meters of gas a year through the Power of Siberia pipeline, and China intends to receive up to 10 billion cubic meters of gas through another new pipeline in the Russian Far East. Construction of the Power of Siberia II pipeline with a capacity of 50 billion cubic meters is also planned, although it will not begin until 2024. But all this together is still only half less than the 150 billion cubic meters that Gazprom has historically supplied to Europe. Pricing will also be a key issue.
“Currently, the gas sold to China costs much less than what Gazprom used to get in Europe,” said Jonathan Stern, a researcher at the Oxford Institute for Energy Research. – So even if they manage to export a lot more gas to China, the question is whether they can ever hope to make the same amount of money.
Also read: Putin has already lost, but what will he do further? Politico on possible scenarios
An increase in LNG (liquefied natural gas) exports is another possibility, although, according to Vatansever, this is one of the areas where “Gazprom” has lagged far behind. Due to poor management, it was overtaken by independent Russian competitors such as Novatek. But LNG sales will still not be enough to make up for lost volumes in Europe.
Russia can produce at most 42 billion cubic meters of LNG equivalent at its current terminals, according to independent analyst Oliver Alexander. “It will take them decades to even come close to producing gas from pipelines,” he said.
The most promising area for expansion may be Russia itself. In a speech this week, Putin called for “social gasification” — connecting homes, schools and hospitals to the gas grid and providing Russia's economy with cheap electricity.
But there's another reason why Gazprom won't collapse, according to Oleksandr Gabuev, a senior researcher at the Carnegie Foundation, he is a mechanism for obtaining income for Putin and his entourage. The investigation of the anti-corruption organization of the Russian opposition leader Oleksiy Navalny accused Gazprom chairman Oleksiy Miller of buying real estate worth 700 million euros with money withdrawn from Gazprom.
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“Money is stolen there,” Gabuyev said.
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