the RUSSIA oil & gas competitive intelligence report - Report Buyer

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Russia Oil and Gas Competitive Intelligence Report 2010 however, a more fundamental threat in the making to Gazprom's position in the European gas market. Bolstered by the successful application of technological advances in hydraulic fracturing (fraccing) in the US and Canada, the oil majors are now eyeing European shale plays, moving into such unlikely gas producing destinations as Poland and Sweden. Should the European shale basins prove to be commercial, the competitiveness of Russian gas imports in the region will be seriously, and perhaps terminally, undermined. The Yamal peninsula is believed to contain around 2.14bn bbl of oil plus 10.4tcm of gas. Although no firm project timetable has been set, Gazprom is aiming to start producing the first 15bcm of gas in Yamal by Q312 (a year later than originally expected) and then gradually boost volumes to 250bcm per year. The economic downturn, however, has forced the company to postpone investment in expensive new projects. In a setback for its resource nationalism agenda, Gazprom’s debt burden has led the company to express its readiness to reduce its stake in major projects, including Nord Stream and Shtokman, in return for increased funding from foreign partners. In February 2009, Russian business daily Kommersant reported that in an attempt to cut costs, Gazprom may invest exclusively in projects that would be profitable at a Brent price below US$25/bbl, with an exchange rate of US$1/RUB36. Kommersant reported that planned investments had previously been based on US$50/bbl. The plan was swiftly denied by the company, which stressed that no concrete strategic decisions have been made. Despite denying the report, Gazprom’s high debt levels, which stood at some RUB1.7trn (US$56bn) in mid-2009, must be a concern for the company. The Russia-Ukraine gas dispute is also likely to have hit its bottom line by around US$1-1.5bn, as well as damaging EU confidence in Russian gas supplies. The firm’s reported interest in UK gas supplier Centrica indicates a determination to gain greater control over its Western European customers, despite the assured political opposition to such a deal. Regardless of the rhetoric, Gazprom is committed to future European energy supplies through pre-existing contracts and infrastructure. In fact, most of Gazprom’s current export capability is geared towards Western Europe, and the cost of this network should ensure full usage through the long term. True, the Eurasian giant is busy courting the Asian market, but this relationship is in the very early stages. Gazprom is intensifying its relations with Western Europe. The company confirmed in November 2007 that it is discussing long-term gas supply deals with several Italian utilities, including Enel and Edison. The news follows the 2006 agreement between Eni and Gazprom to extend supply contracts to 2035, which will allow the Russian company to sell gas directly to the Italian market. Gazprom has previously said that it plans to sell up to 3bcm of gas to Italy per annum from 2010. In March 2008, Gazprom announced that it may swap Russian upstream properties for some of Enel’s power assets. Meanwhile, January 2008 saw Gazprom announce plans to control 10% of the French gas market by 2012/13. In 2007 the company directly supplied France with only 500Mcm. The bilateral ties are certainly getting closer, © Business Monitor International Ltd Page 23
Russia Oil and Gas Competitive Intelligence Report 2010 with major French utilities EDF and GDF Suez close to getting a minority stake in the South Stream and North Stream pipelines respectively. In November 2007, Gazprom announced plans to operate a natural gas entity in the US by 2014. While realising that the company will have to overcome regulatory barriers to enter the US market, it has said that it will use its economic strength to acquire assets. Latest Developments Corporate Gazprom has boosted its 2010 capex despite a downward revenue target revision. In September 2010, the company's board approved an amended version of the 2010 budget, raising planned investment by 13% to RUB905bn (US$29bn). To some extent the injection of an extra RUB103bn of investment in 2010 reverses Gazprom's belt-tightening in 2009. In November 2009 Gazprom cut its 2009 capex by RUB216.5bn (US$x). Projects that were put on ice in the economic downturn are now gradually being defrosted. Extra investment in long-term projects such as South Stream and Algerian exploration also indicates Gazprom's broad strategic ambitions of defending its position in European gas markets. In 2010 Gazprom has been facing pressures to reduce its European prices. One of Gazprom's largest customers, E.ON Ruhrgas of Germany, has reportedly asked for a fresh price cut in August 2010, only six months after receiving its first discount. Should E.ON succeed in gaining a concession, other European utilities are set to follow suit. In February 2010 E.ON was among five major European utilities that obtained a price concession on a take-or-pay long-term supply contract with Gazprom. In E.ON's case, the German utility gained a right to buy 16% of its Russian gas imports through to 2012 at spot prices. In H110, Gazprom says it sold gas to Europe on long-term contracts for around US$300/mcm. Prices at UK's National Balancing Point (NBP), Europe's largest spot hub, averaged US$207/mcm in the same period, falling to as low as US$150/mcm in early 2010. Fresh demands for discounts are a highly unwelcome development for Gazprom, which has been hoping for a steady European economic recovery to revive its flagging fortunes in its main market. In Germany in particular, Gazprom has been losing market share to Norway, and to a lesser extent the Netherlands. Over 2009 European companies have been talking with Gazprom to reduce the volumes of gas that they are committed to buying under long-term 'take-or-pay' contracts. With imported gas volumes remaining below levels agreed with Russia, European buyers are seeking to avoid penalties set out in the contracts by agreeing a reduction in gas purchases, as has recently been arranged between Russia and Ukraine. Citing an unnamed Gazprom source, Russian daily Kommersant stated that the first company due to pay according to the 'take-or-pay' contracts is Eni on January 18 2010, followed by Turkey's state-owned © Business Monitor International Ltd Page 24
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