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Gazprom's commitments strain the budget

The revival of a project to ship gas to Turkey puts more pressure on a company already struggling

An astonishing political rapprochement between Russia and Turkey nine months after Moscow imposed sanctions on Ankara may force Gazprom to cut some of its vast investment programme.

TurkStream, a major gas pipeline that could open a new route for Russian gas in Europe, is now back on the table as relations between Moscow and Ankara thaw. Plans for the pipeline were shelved late last year after Turkish forces shot down a Russian warplane near the Syrian border.

While an apology for the incident by Turkish President Recep Tayyip Erdogan boosted President Vladimir Putin's international standing-at least in Russian eyes-the revival of TurkStream puts more pressure on Gazprom's already-strained capex programme.

Turkish authorities told Gazprom chief executive Alexei Miller in late August that they would shortly grant the company all the necessary permits to build the pipeline. It would run 660km along the old route of South Stream, an earlier proposal, and cover 250km of a new route towards European Turkey. The first part of the pipeline would be used exclusively for gas supplies to the Turkish market.

While most of the investments have already been made, Sberbank CIB analysts put the remaining cost of building the pipeline at about $4bn.

But Gazprom's earnings are deteriorating, export prices are dropping and a significant tax hike is looming, so the firm's management is considering a trim of its investment programme. Gazprom has already committed to build Nord Stream 2, a second pipeline connecting Russia to Europe via the Baltic Sea, and the Power of Siberia export line to China.

"Depending on which part of capex it cuts, that could negate some of the effects of a tax hike," says Alex Fak, head of oil and gas research at Sberbank CIB. "Cutting maintenance would be dangerous but cutting the Power of Siberia, Turk-Stream and Nord Stream 2 programmes would be positive."

Alexander Novak, Russia's energy minister, said that the TurkStream pipeline is becoming more attractive for Turkey and Russia because of the rising cost of gas transit through Ukraine. He added that the project provides for the construction of at least one line of the pipeline with the delivery of 15.75bn cubic metres a year.

Paying the bills

With the exit of other partners from the $11bn Nord Stream 2 project, it looks like Gazprom may be stuck with that entire bill too. Daunted by Polish regulations, E.ON's Uniper, Wintershall, Shell , OMV and Engie announced on 16 August that they had abandoned plans to take part in the project.

The pullout leaves Gazprom having to move forward on its own with the 55bn-cm/y project-another pipeline designed to avoid shipping gas through Ukraine.

In Europe, the company is facing increasing competition from liquefied natural gas shipped from the US and elsewhere. Gazprom has responded by increasing its European exports by 10%-a record high-this year as gas prices drop. The extra volume has helped offset a 35% fall in the price of its exported gas. Meanwhile, sales to former Soviet states dropped by 16% this year, mostly caused by Ukraine's drive to wean itself off Russian gas since the annexation of Crimea in 2014.

Analysts have identified "the currently very low level" of gas inventories in Ukrainian underground storage facilities as a key risk factor for Gazprom's export volumes this year, suggesting there could be disruptions in gas transit to Europe in the winter.

Despite Gazprom's struggles in recent years-including a 34% fall in the share price since 2014-Putin says he remains optimistic about the company's future and will keep faith in its management.

"Despite the development of alternative energy, when you still look at the economic element and environmental standard demand, then there is no other source of primary energy in the world other than natural gas," he told Bloomberg News in a televised interview recently. "There is a country that is, obviously, the world leader in gas reserves. That's our country, the Russian Federation."

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