Gazprom’s business will take at least a decade to recover from the impact of the Ukraine war

Gazprom’s business will take at least a decade to recover from the impact of the Ukraine war
Russia's natural gas champion's business will not recover for at least a decade and even if gas export volumes return to pre-war levels, the revenue the company earns from those exports will not. / bne IntelliNews
By bne IntelliNews June 6, 2024

The business of Russian gas giant Gazprom will take at least a decade to recover losses incurred from Moscow's full-scale invasion of Ukraine, according to a report commissioned by the company released on June 5.

Western sanctions have increasingly targeted the Russian oil and gas industry, whose profits fuel the Kremlin's war machine in Ukraine. The European Union pledged to reduce its dependence on Russian fossil fuels in the wake of the 2022 invasion, leading to a 71% drop in Russian gas imports between 2021 and 2024.

"The main consequences of sanctions for Gazprom and the energy industry are the contraction of export volumes, which will be restored to their 2020 level no earlier than in 2035," the report said.

According to the report, which was submitted to Gazprom executives in November 2023, exports to Europe are expected to average 50-75bn cubic metres annually by 2035, only a third of the gas monopoly's pre-war exports. Prior to the war Gazprom used to export some 150 bcm of gas to Europe a year, but that fell to a mere 50 bcm last year, of which about 25 bcm transited Ukraine, despite the war.

Ukraine has said that it will not renew the gas transit deal that is due to expire at the end of December, but remains open to transiting gas for other countries should they request it. Countries like Austria, Hungary and Slovakia continue to import Russian gas despite the EU’s efforts to end the trade completely.

The forecast is "grim," Elina Ribakova, a senior fellow at the Peterson Institute for International Economics, told the Financial Times. "Gazprom is at a dead end, and they're very much aware of it," Ribakova said after reading the report.

With the western direction largely closed to Gazprom, the company is seeking to find new buyers in the east and southeast, but as most of the gas pipeline export infrastructure runs westward it will take years and cost billions of dollars to build new pipelines to customers in Asia.

The Power of Siberia 2 (POS2) that runs from Russia’s Arctic regions to central China is the flagship proposal, but Beijing is dragging its heels, as it is holding out for a commitment by Russia to offer long-term cheap gas prices. The FT recently reported that Beijing is insisting that Russia sell its gas to China at the same deeply discounted prices charged on the domestic market that are half what Europe used to pay.

In the meantime, Gazprom is making use of the Soviet-era gas pipelines out of Central Asia, reversing the flows, and has recently signed off on a deal to export 12 bcm to the power-hungry Uzbekistan. A similar deal to export 32 bcm to China via Kazakhstan is also in the works.

While the Chinese and Central Asian export routes may eventually see gas export volumes recover to the pre-war levels, the amount of money Gazprom earns from these exports is likely to remain well below the pre-war levels as the company is being forced to offer extremely deep discounts to secure this business, according to Chris Weafer, the founder and CEO of Macro Advisory.

Gazprom reports gas production drop of 25%

Gazprom's share of Russia's energy market will continue to fall as liquefied natural gas (LNG) surpasses pipeline gas, the report predicts.

"Because Gazprom, which doesn't have its own proven technology for producing LNG at large capacity, is the only company exporting gas via pipeline and those volumes are decreasing, Gazprom's role in the gas industry is accordingly expected to decrease," the report said.

The US targeted LNG technology in a round of smart sanctions in December, a technology provided by only a handful of largely US firms. As a result, Novatek, Russia’s privately owned LNG champion, has been unable to finish work on the Arctic LNG-2 project that was supposed to significantly expand its LNG production this year.

Nevertheless, as bne IntelliNews reported, Europe remains hooked on Russian gas exports, which continues to buy half its production, delivered via the remaining functioning pipelines and rising LNG exports.

Gazprom's revenue crashed by 30% last year and it reported its first loss in 25 years of $6.9bn.