• 23 mins WTI At 7-Month High On Supply Optimism, Kurdistan Referendum
  • 7 hours Permian Still Holds 60-70 Billion Barrels Of Recoverable Oil
  • 12 hours Petrobras Creditors Agree To $6.22 Billion Debt Swap
  • 16 hours Cracks Emerge In OPEC-Russia Oil Output Cut Pact
  • 20 hours Iran Calls On OPEC To Sway Libya, Nigeria To Join Cut
  • 21 hours Chevron To Invest $4B In Permian Production
  • 23 hours U.S.-Backed Forces Retake Syrian Conoco Gas Plant From ISIS
  • 1 day Iraq Says Shell May Not Quit Majnoon Oilfield
  • 3 days Nigerian Oil Output Below 1.8 Million BPD Quota
  • 4 days Colorado Landfills Contain Radioactive Substances From Oil Sector
  • 4 days Phillips 66 Partners To Buy Phillips 66 Assets In $2.4B Deal
  • 4 days Japan Court Slams Tepco With Fukushima Damages Bill
  • 4 days Oil Spills From Pipeline After Syria Army Retakes Oil Field From ISIS
  • 4 days Total Joins Chevron In Gulf Of Mexico Development
  • 4 days Goldman Chief Urges Riyadh To Get Vision 2030 Going
  • 4 days OPEC Talks End Without Recommendation On Output Cut Extension
  • 4 days Jamaican Refinery Expansion Stalls Due To Venezuela’s Financial Woes
  • 4 days India In Talks to Acquire 20 Percent Of UAE Oilfield
  • 5 days The Real Cause Of Peak Gasoline Demand
  • 5 days Hundreds Of Vertical Oil Wells Damaged By Horizontal Fracking
  • 5 days Oil Exempt In Fresh Sanctions On North Korea
  • 5 days Sudan, South Sudan Sign Deal To Boost Oil Output
  • 5 days Peruvian Villagers Shut Down 50 Oil Wells In Protest
  • 5 days Bay Area Sues Big Oil For Billions
  • 5 days Lukoil Looks To Sell Italian Refinery As Crimea Sanctions Intensify
  • 5 days Kurdistan’s Biggest Source Of Oil Funds
  • 6 days Oil Prices On Track For Largest Q3 Gain Since 2004
  • 6 days Reliance Plans To Boost Capacity Of World’s Biggest Oil Refinery
  • 6 days Saudi Aramco May Unveil Financials In Early 2018
  • 6 days Has The EIA Been Overestimating Oil Production?
  • 6 days Taiwan Cuts Off Fossil Fuels To North Korea
  • 6 days Clash In Oil-Rich South Sudan Region Kills At Least 25
  • 6 days Lebanon Passes Oil Taxation Law Ahead Of First Licensing Auction
  • 7 days India’s Oil Majors To Lift Borrowing To Cover Dividends, Capex
  • 7 days Gulf Keystone Plans Further Oil Output Increase In Kurdistan
  • 7 days Venezuela’s Crisis Deepens As Hurricane Approaches
  • 7 days Tension Rises In Oil-Rich Kurdistan
  • 7 days Petrobras To Issue $2B New Bonds, Exchange Shorter-Term Debt
  • 7 days Kuwait Faces New Oil Leak Near Ras al-Zour
  • 8 days Sonatrach Aims To Reform Algiers Energy Laws
Colin Chilcoat

Colin Chilcoat

Colin Chilcoat is a specialist in Eurasian energy affairs and political institutions currently living and working in Chicago. A complete collection of his work can…

More Info

Defending Gazprom’s Market Share Will Cost $25 Billion

Defending Gazprom’s Market Share Will Cost $25 Billion

2015 actually wasn’t all that bad for Gazprom. The giant state gas company posted strong European delivery figures and it saw sizeable growth in both net sales and profit.

Of course, for Gazprom, ‘bad’ – as a subjective and cursory metric of appraisal – has an entirely different meaning than it did, say a decade ago, when the company’s market valuation was more than $320 billion higher than it is today. Between the lines, Gazprom’s reliance on Europe has probably never been greater and the broader state of Russia’s economy looms large. To be sure, Gazprom has market-moving capabilities, but its largely reactive strategy leaves little room for error in an increasingly competitive 2016.

Taking a closer look at 2015, net sales to the Western European market (including Turkey) were up 17 percent through September 30 compared to the same period the year prior, driven by cheaper prices and ruble depreciation – revenue is down significantly in dollars. That offset declines of 4 percent and 2 percent in the former Soviet Union (FSU) and domestic markets respectively. Related: Despite Bold Predictions, T. Boone Pickens Sells All Oil Holdings

Measured by volume however, deliveries fell a combined 9 percent to Russia and FSU countries in the same period, and dropped nearly 5 percent overall, despite increased volumes to Western Europe. Westward growth remained strong in Q4, and by year’s end 2015 deliveries to the European Union and Turkey reached 159.4 billion cubic meters (bcm), up almost 9 percent from 2014.

One month into 2016 the trends are largely unchanged. Demand for Russian gas is growing in its most key market. Gas exports to non-CIS Europe increased by 36 percent in January year-on-year to over 8 bcm. Growth was particularly pronounced in Britain, Germany, and Poland, pushing Nord Stream utilization to greater than 70 percent. Notably, exports to the Turkish market rose 3.4 percent.

Glancing east briefly, market penetration remains a few years away. Gazprom has earmarked roughly $1.2 billion for construction of the Power of Siberia pipeline in 2016 – and is willing to proceed further without Chinese backing – but commodity prices remain well below Russia’s believed breakeven price for gas exports to China. Barring a quick market turnaround, Russian deliveries to the patient Chinese market are unlikely before 2021 at the earliest. Related: Obama Proposes $10 Tax On Each Barrel Of Oil

Looking ahead – and as the pivot returns west – Gazprom and Russia face a number of internal and external pressures. With its wait-and-see approach played out, and seemingly more self-aware than it has ever been, Gazprom may look to take a more proactive, albeit cautious, slant in 2016.

That starts with defending its European market share, which the company plans to keep at around 30 percent for the next two decades. Gazprom aims to ship a record 162.6 bcm to the EU and Turkey by the end of 2016, followed by a jump to 166.1 bcm in 2017 and 166.3 bcm in 2018. Toward that end, the company plans to boost production to approximately 480 bcm for the year, some 60 bcm greater than 2015’s historical low.

While Gazprom would like to avoid significant price competition, the company will not likely hesitate to undercut upstart U.S., and/or Australian LNG should it infringe upon its market pretensions. In fact, that strategy may be its only way to realize profits in the medium-term.

Gazprom estimates European prices for its fuel will fall to about $200 per thousand cubic meters ($5.45/mmbtu) in 2016, down more than 40 percent since 2014. Related: U.S. Rig Count In Free Fall: Plunges By 48 In One Week

However, it may need to go lower; the short-run marginal cost of U.S. LNG is still very much competitive at that price. Just how low is something that Gazprom would rather not find out, though, it has the low-cost supply to push prices into the $4-5/mmbtu range, at least briefly. In any case, it’s worth it. Defending the price, and not the market share, could cost Gazprom some $25 billion in revenue over the next five years.

Internally, Gazprom faces pressure to maximize revenues for a struggling Russian government. For the first time since the latest financial crisis began in late 2014, a majority of Russian citizens have a negative view of their country’s economy, and most think it will only worsen. In response to middling domestic figures, Gazprom and its subsidiary Gazprom Neft are exploring ways to market Gazprom Neft’s increasing supply of gas at free market rates, something Gazprom itself is precluded from.

Gazprom has struggled to save face following its high-profile political moves in 2006 and 2009, but it has done reasonably well (read: only marginally better) to avoid mixing business and politics since. The degree to which those two forces mix in 2016 – and they will mix – is a crucial variable as Gazprom toes the line between subjection and self-determination.

By Colin Chilcoat of Oilprice.com

More Top Reads From Oilprice.com:

Back to homepage

Leave a comment

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News