Gazprom Lowers Production Numbers Yet Again

For the second time in a week, Russia’s state-owned energy company Gazprom has reduced its production forecast for 2015 due to weaker-than-expected demand resulting from warm weather.

Vsevolod Cherepanov, Gazprom’s director of gas, condensate and oil production, said at a Moscow news conference on May 19, “In total we expect [to produce] around 450 billion [cubic meters of gas] this year.”

On May 14 the company downgraded its expected yearly production to 471 billion cubic meters (bcm) instead of the 485 bcm it had originally expected, only to settle on an even lower estimate this week. All three forecasts, however, are higher than the 444.4 billion cubic meters of gas the energy giant had produced in 2014, the lowest annual output since Gazprom was founded in 1989.

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These production figures are important to Russia because Gazprom’s performance is crucial to the country’s budget and its economy as a whole. It accounts for fully 8 percent of its gross domestic product.

Vitaly Markelov, another senior Gazprom manager, attributed the lower production estimate to the milder weather, which depressed demand. Cherepanov added, “[w]e are pinning our hopes on a cold winter in Europe.”

But only so much can be attributed to winter weather. Other Russian oil and gas producers, including independent Novatek and state-run Rosneft, are offering Gazprom strong competition, even though Gazprom is the only Russian company to export gas abroad.

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In 2009, Gazprom’s rivals controlled about 18 percent of Russia’s gas market, but Sberbank CIB, an investment bank based in Moscow, reports that they nearly doubled their market share to 35 percent by 2014.

Gazprom could face even more pressure in the future as a result of EU efforts to reduce consumption of Russian natural gas. Gazprom now provides about 30 percent of the gas for European Union customers, and about half of that flows through pipelines that cross Ukraine. But because of political and pricing disputes between Moscow and Kiev, the flow has been halted three times in the past nine years.

Last year Russia sought to address that problem by proposing pipeline routes to Europe that bypass Ukraine. Already it supplies gas to EU customers through its Nord Stream pipeline, which runs under the Baltic Sea to Germany.

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Then Moscow began work on the South Stream pipeline, which was meant to move through Turkey, then the Balkans and on to Southern Europe. But that project was scrapped in late 2014 because of an EU rule that forbids one entity from owning both the pipeline and the gas it carries.

Now Moscow is pressing for an alternative called Turkish Stream, and is heavily lobbying cash-strapped Greece to become a lucrative transit point for the flow of gas to Europe. But the United States and other Western countries are countering Moscow’s efforts, pressing Greece to accept instead the Trans-Anatolian Pipeline, which would supply Europe with gas not from Russia, but from Azerbaijan.

How this particular competition turns out is bound to have a profound effect on Gazprom’s future.

By Andy Tully of Oilprice.com

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