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Shale Revolution Scuppered Gazprom’s $1 Trillion Dream

In 2007 Alexei Miller, close friend of President Vladimir Putin, was CEO of the world’s third largest company by market value, Gazprom, worth around $360 billion, and he had vowed to grow it into a $1 trillion company.

In 2013 he is still the head of the natural gas giant, controlling 15% of global reserves and producing more natural gas than any other company, but Gazprom’s market value has not grown, but fallen, to $77 billion.

The US shale gas revolution dealt the heftiest blow as US gas prices crashed and Gazprom effectively lost the entire continent as a market. The fact that the US was no longer importing as much LNG meant that there was a surplus of cheap LNG on the international market that then made its way to Europe, stealing more of Gazprom’s precious clients.

Europe has always been Gazprom’s most prominent market, where natural gas is supplied by a huge network of pipelines, and contracts work off a natural gas price linked to expensive oil.

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Major gas pipelines of the former Soviet Union.
Major gas pipelines of the former Soviet Union.

In order to compete with LNG imports, Gazprom has been forced to reconsider its contract setup, and last year issued billions of dollars in rebates to European buyers who had complained of the uncompetitive prices that Gazprom’s pricing system created. Another round of rebates is expected soon, and 2013 earnings are expected to fall by 10%, for the second year running.

Having struggled to grow in the natural gas market as planned, Miller has now declared a new goal that may appease irate shareholders, “to control around 15 percent of the global market for liquefied natural gas (LNG).”

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But this idea has recently suffered a setback after Putin announced an end to Gazprom’s monopoly of LNG exports from Russia, allowing the likes of Novatek and Rosneft, hardly minnows themselves, to compete for the giant markets developing in Asia.

Gazprom is still the world’s third largest company behind ExxonMobil and Apple, but its market value is only two times 2012 earnings, making it the cheapest large-cap stock out there.

By. Charles Kennedy of Oilprice.com




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