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John Daly

John Daly

Dr. John C.K. Daly is the chief analyst for Oilprice.com, Dr. Daly received his Ph.D. in 1986 from the School of Slavonic and East European…

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Gazprom's Mixed Outlook for 2012

For the Russian Federation’s state-owned natural gas monopoly Gazprom, an entity that everyone loves to hate, 2012 is already shaping up as a decidedly mixed year.
The good news is that Ukraine, traditionally Gazprom’s most troublesome customer, has paid its December bill in full, all $1 billion.
Ukraine's national oil and gas company Naftogaz Ukrainy issued a statement noting, "Every month, in a timely manner and in full volume, Naftogaz Ukrainy fulfills its obligations before OJSC Gazprom on payments for imported natural gas."
Not that Naftogaz Ukrainy was happy about it, noting that the price Ukraine paid for Gazprom gas in the fourth quarter of 2011 was roughly $400 per thousand cubic meters (tcm), up from $264 per tcm at the beginning of the year.
But 2011 was not a bad year for the energy giant, as Gazprom CEO Aleksei Miller told journalists that Gazprom's total supply of gas increased by 7.5 billion cubic meters (bcm) to over 513 bcm, while its exports to Europe, its most lucrative market, rose by 13 bcm to over 150 bcm.
So, why isn’t this man smiling?
Well, for starters, Miller stated that Ukraine last year agreed to purchase 52 bcm of natural gas per year but, judging by the latest statements from Kiev, it intends to reduce this figure to 27 bcm, whining, "Gazprom is concerned by the statements made today that Ukraine is getting ready to purchase significantly less gas than stipulated by contracts. So far, our Ukrainian friends are only talking, but no specific proposals have been made. We hope that some sort of specific proposals will be made in the near future."
Naftohaz Ukrayiny public relations office however said that the firm had in fact notified Gazprom in advance that it would buy less gas in 2012, adding that its 19 January 2009 contract with Gazprom on the sale and purchase of gas in 2009-19 “provides for a change in the annual amount of natural gas supplies.” In a thinly veiled swipe at Gazprom’s pricing policies Naftohaz Ukrayiny added, "Considering the high price of imported natural gas (in the fourth quarter of 2011 in particular it was around $400, including the discount stipulated by the Kharkiv agreements (extending the lease for the Sevastopol base of the Russian Black Sea Fleet in exchange for cheaper gas)), the Ukrainian economy will need considerably less gas in 2012. In view of this and under the provisions in the terms prescribed by the contract, Naftohaz Ukrayiny sent to Gazprom around 10 letters with a request that gas supplies to Ukraine be agreed for 2012 in the amount of 27 bcm, which the company undertakes to buy and pay for under the contract in force."
And where might Ukraine purchase alternatives?
And, further north in the former Evil Empire, another former Soviet state is seeking to loosen Gazprom’s suffocating energy embrace.
Estonia’s government has approved legal measures to separate the ownership of natural gas sales and transmission by 2015 to lessen the nation’s dependence on Gazprom. According to Estonia’s Economy Ministry the new regulations will bar Eesti Gaas owners from both producing natural gas and sales.

Eesti Gaas management board member Raul Kotov countered, "The government is wrong in saying Eesti Gaas's ownership of transmission pipes is an obstacle to developing the market. The Competition Board has never made any complaints about restrictions to use of our grid or that someone can't join it."
Why does this concern Gazprom?
Simple – Gazprom owns 37 percent of Eesti Gaas.
Nor is Estonia the only Baltic renegade chafing at Gazprom’s monopoly, as it along with Latvia and Lithuania are seeking EU support to build a regional liquefied natural gas terminal in the region, arguing that they're being charged more for Russian natural gas imports than western European countries.
While the revenue continues to roll in, the future looks bleak enough to cause Miller to reach for the Stolichnaya.

By. John C.K. Daly of Oilprice.com

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Leave a comment
  • Fred Banks on January 13 2012 said:
    I wish that I had Gazprom's worries. They have plenty of gas and plenty of potential customers. They also have the technology and the intelligence to make the most of this situation. Having said that let me say that this is a useful article for a certain guy who has informed certain people that is going to give a brilliant lecture on the gas market soon.
  • D. Bumstead on January 13 2012 said:
    In the longer term, Gazprom will lose more sales. Poland is developing its shale gas deposits, ditto for the Ukraine. Plus, the Ukraine will buy gas from Azerbaijan in LNG form- 5 billion cu metres- and will build an LNG terminal to handle Azeri LNG shipments. This terminal can also be used for LNG from other sources.And with the Ukraine also set to exploit the gas deposits in the Ukrainian part of the Black Sea, Russia's grip on the Ukraine will loosen, not tighten.
  • Fred Banks on January 14 2012 said:
    Thank you Mr Bumstead. but what you say is completely irrelevant. Gazprom isn't going to lose anything. Their gas is worth gold, and they know it.
  • D. Bumstead on January 14 2012 said:
    Gazprom's gas is only worth something if they have customers. Increasingly, countries don't want to be dependent on Russia. So, they will look at alternatives- and develop them.The Ukraine will make more use of its massive coal deposits- this alone will reduce dependence on Russian gas. Add LNG imports from Azerbaijan and development of the Ukraine's shale gas and continental shelf gas deposits. Oh, and Shell will build at least three coal gasification plants in the Ukraine. This all means less sales of Russian gas to the Ukraine, not more. Add Poland developing its huge shale gas deposits, plus an LNG terminal Poland is building near Stettin- this too means less gas sales for Gazprom, not more.This, plus Estonia and Lithuania looking elsewhere, is VERY relevant to the Kremlin. Russia's economy is highly dependent on energy sales- if they go down, the Kremlin will have to start making budget cuts. Use gas as a political weapon as Russia does and you pay the price.

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