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Gazprom In Dire Straits As Profits Plunge 86 Percent

Gazprom, Russia’s state-controlled gas company, suffered an 86 percent dive in net profits during 2014, due primarily to the decline in the value of the ruble, its feud with Ukraine over gas prices and debt from previous gas deliveries, and the continued low price of oil.

In its annual Management Report, issued April 29, the world’s largest gas producer said net income last year plunged to 159 billion rubles, or $3.1 billion, compared with about 1.1 trillion rubles in 2013. This is a crucial revenue decline for a company that provides the Moscow government with about one-fifth of its budget revenues.

Much of the decline mirrors the drop in the ruble’s value, which has affected companies across Russia that do business with foreign companies accustomed to trading in euros or US dollars. The report said Gazprom’s own foreign exchange losses rose in 2014 over 2013 by 926 billion rubles.

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The company’s operating profits also fell to 1.3 billion rubles, a 17 percent decline, because of the reduced value of its electricity and oil assets, as well as lower payments from Naftogaz, Ukraine’s state-controlled gas company.

Gazprom cut off gas supplies to neighboring Ukraine in June as Kiev complained that the Russian company was charging it above market price and Moscow said Ukraine still owed Gazprom billions of dollars for past gas deliveries. At the same time, relations between Russia and the West declined over Russia’s involvement in the unrest in eastern Ukraine.

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The cutoff of gas deliveries to Ukraine pushed down Gazprom’s output to 444 billion cubic meters in 2014, its lowest ever, as Ukraine was once Gazprom’s largest customer. Now, though, it has reduced gas imports from Russia to 14.5 billion cubic meters in 2014, down from 59 billion cubic meters in 2006.

And this year Naftogaz is expected to buy no more than 8 billion cubic meters of gas from Gazprom.

Although there is still bad blood between Kiev and Moscow, there is also a semblance of stability in their trade relations, thanks to a deal brokered by the European Union. Under that agreement, Naftogaz now pays Gazprom $247 per 1,000 cubic meters of gas, a discount of about $100 from Gazprom’s previous demand.

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This is only one element that shrinks Gazprom’s bottom line. The company, once considered the world’s most profitable, was operating in an “adverse economic environment” that could lead to a “slowdown of growth in energy demand with an appreciation of debt capital.”

“Lower oil prices make gas prices lower too,” the report said. “(A) Further drop in oil prices or their maintenance at the current level for a long time period would reduce the group’s income.”

The price of oil has plummeted by nearly half since June 2014. This also affects gas, though any related drop in gas prices doesn't follow until about six to nine months later. But Gazprom was hit immediately by the drop in oil prices because one of its subsidiaries is the oil company Gazprom Neft.

By Andy Tully of Oilprice.com

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