Challenges For Gazprom’s Future

Gazprom is facing a number of important challenges to its gas business. Historically, the Russian state controlled company has been able to be an aggressive player in the European gas market, due to its immense gas reserves, its control over supply from Russia and the CIS and its ability to exert political influence over the former Russian Republics. It has also been faced by little or no competition. This might be about to change for a number of reasons. Firstly, the economic downturn has hit Gazprom hard; they find themselves unable to develop multi-billion-dollar upstream projects. Secondly, some of their long-term and high price gas export contracts to Europe are coming up for renewal and Europe has been trying hard to gain leverage for negotiations. For example, a number of countries have commenced work on their own shale gas reserves and the TAP pipeline has been given the go ahead. TAP will provide Europe with gas from the Caspian region via Greece and Albania into Italy – a new, fourth gas route into Europe. These factors are likely to impact Gazprom’s ability to continue to charge high prices, which may hit their bottom line.

Gazprom has been attempting to mitigate this potential issue by joining the burgeoning global LNG export market, but it hasn’t been going very well recently. In recent months it has had to shelve the development of Shtokman LNG as the costs are too high and Rosneft has announced their intention to build another LNG export facility at Sakhalin, the location of Gazprom’s only operational facility to date.

Shtokman is located in the Barents Sea. It is a vast field with 3.9 trillion cubic metres of gas and 56 million tonnes of condensate reserves and was a flagship project for Gazprom and its partners Total and Statoil. When the development plan for Shtokman was conceived it was predicted that the project would supply the U.S. market with 10% of its gas needs. The explosion of the shale gas market in the U.S. has meant that the U.S. no longer requires any of this gas. The disappearance of this market and the subsequent rising costs of developing Shtokman have been the final nails in the coffin for this project. Development of any asset in the Arctic region is expensive and, so far, this expense is stopping these projects from getting off the ground.

Rosneft and ExxonMobil ruffled Gazprom’s feathers with their announcement that they are to develop another LNG export facility at Sakhalin, where Gazprom operates Russia’s only on-stream LNG export facility. Gazprom have publicly stated that Rosneft’s facility is not required as there has been enough development with their present terminal. This second terminal is in the design stage and Rosneft and ExxonMobil expect to announce a development plan at the end of 2014 despite Gazprom’s opposition.

Positives on the horizon for Gazprom are that they are still heavily involved in the Japanese-run Vladivostok LNG export project, which is expected to come on-stream at the end of 2018, and have floated the idea of their own LNG terminal to export from Yamal, where Novatek and Total have an existing plan for a LNG facility; Gazprom have a number of the fields on the Yamal Peninsular. It is yet to be seen if these remaining projects will provide Gazprom with the required boost they need after the loss of Shtokman, but the one thing that is clear is that Gazprom will have to work in a world where they will not be the monopolising powerhouse they used to be.

Russia’s LNG Export Terminals

Source: Evaluate Energy

This report was created using Evaluate Energy’s LNG Database, which provides clients with full and comprehensive data for every planned and operational LNG import and export terminal worldwide. Evaluate Energy provides efficient data solutions for oil & gas company analysis. Services include annual and quarterly financial data, M&A, worldwide E&P assets and Refinery databases and an emerging US/Canadian Shale Gas & Liquids offering.

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