Gazprom is, without doubt, the most important and influential company in Russia. The energy giant controls one of the world's largest and most impressive hydrocarbon reserves including an elaborate transportation system in both Russia and abroad. The company is majority owned by the Russian state giving it unprecedented control as a domestic and foreign policy tool of the Kremlin. The year 2019 promises to be a pivotal moment for Gazprom due to the completion of several strategic projects: Power of Siberia, Nord Stream 2, and Turk Stream.
Several years ago, CEO Alexei Miller was predicting Gazprom’s value to surpass the $1 trillion market capitalization boundary from a ‘mere’ $367 billion in May 2008. However, the company’s value has spectacularly decreased to approximately $47 billion. Part of this collapse is due to the collapse of the Russian Ruble, but no company among the world’s top 5,000 has suffered a bigger collapse. This would have been very bad news for a normal company and a sign of even worse performance, but Gazprom is not an ordinary company. The Russian giant's primary goal isn't to make a profit for its shareholders which explains the low valuation of its shares.
One of the world’s eminent energy companies
Gazprom’s market capitalization of $47 billion stands in stark contrast to the company’s hydrocarbon reserves, infrastructure, and overall investment. Gazprom controls some of the world's most impressive resources which can deliver energy for another 100 years based on its current production level. The energy giant’s reserves far outstrip those of its peers. Related: New Data Confirms That China’s Energy Revolution Is Well Under Way
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Also, the company owns the world’s biggest transmission system which is capable of conveying energy from Russia’s most remote regions to its customers in Europe and Asia. The overall length of the infrastructure is 172,100 kilometres or 50 percent of the distance between the Earth and the moon. The entire infrastructure is worth billions. Furthermore, investments in internationally prolific projects are also significant: Power of Siberia ($55 billion), Nord Stream 2 ($11 billion), and Turk Stream ($7 billion). Despite these facts, investors are less optimistic about Gazprom's ability to pay out a dividend.
No ordinary company
Although the energy giant is the largest gas producer in the world, it is a disappointing investment for its shareholders including the Russian state. Energy is sold for a discount domestically while international customers pay a much higher price. Still, this doesn’t lead to big dividends.
Historically the state has had a big role in Russian society. With the demise of communism, the state’s authority has decreased but the Kremlin hasn’t entirely reined in control. Influence over the vital energy industry is the most important economic tool for the state to provide legitimacy for the political establishment. Thousands of Russians are employed in day-to-day activities and Gazprom makes significant investments domestically for the benefit of the collective. Related: Oil Rallies As Saudis Cut Exports To The U.S.
Furthermore, Gazprom's construction projects tend to favor companies owned by billionaires close to President Putin. The companies Stroytranzgas and Straygazmontazh owned by Gennady Timchenko and Arkady Rotenberg respectively, have strongly profited from relations with President Putin by receiving construction assignment concerning Nord Stream 2, Turk Stream, and Power of Siberia pipelines.
The Power of Siberia project is a good example of Gazprom’s decision making that sets it apart from its peers. The project wouldn’t have gone through under normal commercial circumstances with a price tag of $55 billion. The infrastructure could have cost $45 billion less by taking another route from active gas production areas with already existing infrastructure. The higher price tag, however, has benefited Russian workers and the economy in the short term, including Putin’s inner circle.
An uncertain future
Despite 2019 being an important year for Gazprom due to the construction of three major pipelines, it is unrealistic that the valuation of its shares will rise to the previous height of May 2008. The primary reason is not the company’s inability to create a positive cash flow, but the political decision making within the Kremlin that has earmarked the gas giant as a political, economic, and strategic tool. This is evident in Moscow’s refusal to lift the Gazprom’s export monopoly via pipeline to Europe and from 2019 also to China.
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It is, however, likely that the Russian energy giant will increase overall production resulting in higher revenue. Demand is rising in both Europe and Asia where Gazprom can make use of Russia’s relative closeness to these markets. However, it remains to be seen whether political motives will change in order for the Kremlin to loosen control.
By Vanand Meliksetian for Oilprice.com
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