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Gazprom feels the heat

New US sanctions on Russia may create problems for the country's gas export giant

Donald Trump's America was supposed to be a friend to Russia. But new US sanctions—engineered by Congress, not the White House—are revising opinions. The new measures have some bite, and may even endanger the completion of Gazprom pipelines to Europe as well as jeopardise the gas-export monopoly's alliances with other Western partners.

Gazprom certainly thinks so. It made the admission in that the new sanctions could threaten construction of Nord Stream 2 and Turkish Stream in a Eurobond prospectus issued in mid-July, before Trump grudgingly signed off Congress's bill on 2 August.

US lawmakers said the new sanctions are a response to Russian aggression in Ukraine and efforts to influence the 2016 US presidential elections. The law implies that the US administration has the right to impose sanctions on companies that invest more than $1m annually in Russian export pipelines. Companies are also restricted from providing technology, equipment and services to Gazprom. Worried that Trump might soften the law, Congress included a provision blocking any unilateral decision by the president to lift the penalties against Russia.

It all prompted some angry tweets from Russian prime minister Dmitry Medvedev, who said the "US establishment" had "outwitted Trump" and his White House had shown its "weakness by handing over executive power to Congress in the most humiliating way". The measure "ends hopes for improving our relations".

Analysts say Gazprom will have to take on the additional costs itself, depend on Russian state lenders or seek money at higher rates from Asian banks.

"The measures could mean disruptions to Gazprom projects, including Nord Stream 2 and the Turkish Stream gas pipelines, and potentially cancellation," says Natalia Orlova, chief economist at Alfa Bank in Moscow.

Gazprom has responded by speeding up the construction of Turkish Stream under the Black Sea, using pipe-laying ships belonging to Swiss group Allseas Group—even though there is no final deal on where the pipeline will resurface in Turkey. Meanwhile, 13 EU member states have protested against the Nord Stream 2 pipeline, arguing it will increase European dependence on Russian gas for decades. A $5bn financing deal for Nord Stream 2 was closed in April with Anglo-Dutch giant Shell, France's Engie, Germany's Uniper and Wintershall, and OMV of Austria each providing about $1bn.

An ally of Chancellor Angela Merkel says that Nord Stream 2 "is currently not necessary" while other politicians in Germany maintain that US sanctions are a means of promoting the supply of US-produced liquefied natural gas.

Export surge

Gazprom increased gas exports to Europe and Turkey during the first six months by 12.3% year-on-year to 102.9bn cubic metres—a rise helped by cool weather and the low amount of gas in European storage facilities. Domestic sales have not changed substantially, while exports to former Soviet state countries are up 9%.

Chief executive Alexei Miller says construction of Gazprom's 3,000km Power of Siberia pipeline to China and the development of the Chayandinsky field are ahead of schedule. Miller named 20 December 2019 as the start date for deliveries. The pipeline is supposed to transport up to 38bn cm of gas per year to China.

The sanctions might, though, do Gazprom a favour. It is trading at just 10% above lows not seen since the 2008 crisis, partly due to disappointment over its dividend policy as well as what analysts describe as its "value destructive" capex programme. Analysts estimate that construction of the various pipelines will cost Gazprom $24bn per year over the next few years.

Given that the size and sources of financing of Gazprom's massive investment programme are the main uncertainties in the company's development, killing off the pipeline plans might please shareholders.

Others in the Russian energy sector shrugged off the sanctions. Rosneft boss Igor Sechin said they would damage US firms more than Russian ones—and his firm continues to plough ahead. Output from its Yuganskneftegaz unit recently hit a 31-year high of 1.35m b/d.

Earlier this year, Rosneft overtook Novatek to become the second-largest gas producer in Russia behind Gazprom. The company is sticking to its ambitious plan to achieve a production target of 100bn cm/y of gas by 2020, with its Rospan subsidiary being one of the key contributors to output growth. Rospan plans to quadruple its gas and liquids production to 23bn cm/y and 6m tonnes a year (about 120,000 b/d) by 2023.

Rosneft is also still considering the possibility of accessing the export gas market and is lobbying hard in the Kremlin to break Gazprom's monopoly. Meanwhile, Chief financial officer Vsevolod Rozanov is formulating the company's new five-year strategy, which he hopes will add $15bn to the company's market cap.

This article is part of an in-depth series on NOCs. Next article: Latin America's hobbled oil giants

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