The Russian economy has been crippled by the falling price of natural gas.
The global gas glut and low prices themselves are expanding the natural gas market by making use more attractive vs oil.
Gazprom has long been the dominant supplier of natural gas to Europe. Last year, it supplied 31% of the Continent’s gas needs.
But that could be disrupted later this year when the United States begins shipping liquefied natural gas (LNG) to Europe from its abundant shale gas fields.
That has put a frown on the face of Vladimir Putin and Gazprom executives. Russia is already getting squeezed by the fall in oil prices. Now, the U.S. is threatening to take its lucrative European gas revenues away – and Europe accounts for the vast bulk of Gazprom’s profits.
Gazprom might consider a strategy to flood Europe with cheap gas in 2016 to kill off U.S. LNG.
Such a scenario would be possible because Gazprom has 100 billion cubic meters of annual gas production capacity sitting on the sidelines in West Siberia, which can effectively be used as spare capacity, not unlike the way Saudi Arabia can ramp up and down oil production to affect prices. Gazprom’s latent capacity is equivalent to 3 percent of global production. This large volume of capacity is the result of investments that were made in a major project on the Yamal Peninsula back when gas markets looked much more bullish.
The approach would mirror Saudi Arabia’s strategy of keeping oil production elevated in order to protect market share, forcing the painful supply-side adjustment onto higher-cost producers. Crucially, Gazprom can produce and export gas to Europe at a much lower cost than LNG from across the Atlantic.
Gazprom will report negative free cash flow this year as its operating profit will not be enough to cover spending.
The company’s market capitalisation has fallen 86 per cent in dollar terms since a peak in 2008.
Gazprom’s own budget, drawn up at the start of the year, envisages that its export prices will fall this year to the lowest level in a decade, and this is forcing the company to pay more attention to its spending.
The company may be forced to delay or cancel some of its projects. The largest of them is the $55bn proposal to develop two new fields in eastern Siberia and build a new pipeline to ship gas to China.
People close to Gazprom say that due to a clause in the contract, first deliveries of gas, which were originally anticipated in 2019, could be as late as 2021.
The company has halved its plans for construction of the pipeline this year, from 800km to 400km.
Russian government has Gazprom as its largest taxpayers. These issues are a further drain on its resources. The government had hoped to force Gazprom to pay 50 per cent of its profit in dividends this year, but last week the company announced a much lower payout.
In America, five new LNG export terminals are under construction. When finished, they will be capable of exporting roughly 10 billion cubic feet per day, according to Perry, making America one of the world’s largest exporters of natural gas.
China has upped its LNG imports by 20 percent during the first three-quarters of 2016, compared to the same period last year. The jump has been caused by low gas prices, which has led the government to seek out new contracts for the procurement of the carbon emission-conservative fossil fuel.
During the United Nations-led Climate Change talks in Marrakesh earlier this month, China confirmed its commitment to abandoning coal – a potent polluter – and increasing its utilization of natural gas to power its developing economy.
The net result is Russia GDP is zero with prospects low for 2017. In 2015, tax from oil and gas amounted to 52% of Russian receipts – a stabilisation of the oil price will be a significant fiscal boost next year. Russia has been far from profligate since 2008, it runs a trade and current account surplus and, although the government is in deficit to the tune of 2.6% of GDP this year, the government debt to GDP ratio is a very manageable 17.17%.
With a growing federal fiscal deficit (3.7% of GDP by end 2016), one proactive step the government has taken is to reintroduce a three-year, medium-term fiscal framework, which proposes to cut the deficit by about 1% each year, ultimately leading to a balanced budget by 2020. The budget is conservatively based on a $40 per barrel oil price, and cuts are driven mostly by a reduction in expenditures in mostly defence/military and social policy.
They need the sanctions lifted and expect political movements toward that end.