Kremlin-owned energy giant Gazprom, once Russia’s most profitable company, could face a long period of poor performance as it fails to fill the gap of lost gas sales to Europe despite its domestic market and Chinese exports.
The company recently announced an annual net loss of 7 billion dollarsthe first since 1999, following the sharp decline in trade with Europe.
Gazprom’s problems reflect the profound impact European sanctions have had on the Russian gas industry, as well as the limits of Moscow’s growing partnership with China.
The impact of international sanctions on oil exports has been easier for Moscow to absorb, because Russia has been able to redirect seaborne oil exports to other buyers.
Gazprom relied on Europe as its main sales market until 2022, when Russia’s conflict with Ukraine prompted the EU to cut Gazprom’s gas imports.
According to Gazprom data and expert calculations, in 2022 Russia provided Europe with a total of approximately 63.8 billion cubic meters (bcm) of gas through various routes. Volume decreased further, by 55.6%, to 28.3 billion cubic meters last year.
This compared to the peak of 200.8 billion cubic meters that Gazprom pumped in 2018 towards the EU and other countries, such as Turkey.
The mysterious explosions at the Nord Stream undersea gas pipelines from Russia to Germany in September 2022 also significantly affected Russian gas trade with Europe.
Russia has turned to China, seeking to increase pipeline gas sales to 100 bcm per year by 2030. In late 2019 Gazprom began supplying pipeline gas to China through the Power of Siberia.
By the end of this year it expects to reach Power of Siberia’s annual capacity of 38 billion cubic meters, while Moscow and Beijing have agreed in 2022 to export 10 billion cubic meters from the Pacific island of Sakhalin.
Russia’s biggest hope is the Power of Siberia 2 pipeline through Mongolia, which is expected to export 50 billion cubic meters per year. But this project has run into some pitfalls due to the lack of agreement on prices and other issues.
“Even if Gazprom will gain additional export revenue when all pipelines are operational, it will never be able to fully compensate for the business it has lost to Europe,” he said Kateryna Filippenkodirector of gas and LNG research at Wood Mackenzie.
CHINESE DREAM?
Russia has also struggled so far to establish a gas trading hub in Turkey, an idea first floated by the president Vladimir Putin in October 2022. There has been no significant development since then.
Even if Gazprom managed to operationalize its supply of gas pipelines to China, sales revenues would be much lower than in Europe.
According to Moscow-based brokerage BCS, Gazprom’s revenue from gas sales to Europe in the period 2015-2019 averaged $3.3 billion per month, thanks to monthly supplies of $15.5 billion cubic meters.
Considering a price of $286.9 per 1,000 cubic meters, as reported by the Russian Ministry of Economy, and Gazprom’s gas exports of 22.7 billion cubic meters last year, the total value of gas sold by company to China could reach $6.5 billion through 2023.
Gazprom did not separately disclose revenue from sales to Europe or China for 2023.
Doctor Michal Meidanhead of China Energy Research at the Oxford Institute for Energy Studies, said China was unlikely to displace Europe from Russia as a highly profitable gas export market.
“China offers Russia an outlet, but at much lower prices and revenues than Europe,” he said.
In 2023, Russian gas was sold to China at $6.60 per million British thermal units (mmBtu) and at a slightly lower price in the first quarter of 2024, at $6.4/mmBtu.
This compares to an average price of Russian gas in Europe of $12.9/mmBtu last year.
According to an internal document leaked last month, Russia predicts that the price of gas for China will continue to decline gradually over the next four years, while the worst-case scenario does not exclude a 45% drop to $156.7 per 1,000 cubic meters (approximately $4.40 per mmBtu) in 2027 compared to 2023.
It was not said what might drive prices down, but Russia is facing rivalry from other suppliers of pipelines to China, such as Turkmenistan, as well as liquefied natural gas transported by sea.
Financial data from Gazprom, which also includes its oil and energy units, showed that natural gas sector revenues more than halved last year to just over 3.1 trillion rubles, while Sales of oil and gas condensates amounted to 4.1 trillion rubles, an increase of 4.3%, according to brokerage BCS.
Alexei Belogoriyev, of the Moscow Institute of Energy and Finance, said it would be impossible for Gazprom to restore profitability based solely on its gas activities.
According to Belogoriyev, the strategic shift to the production and export of ammonia, methanol and other gas transformation products is possible, but will not give a quick return.
“At the same time, the prospects for Power of Siberia 2 remain vague: China will most likely not need as many additional imports in 2030 due to the likely slowdown in demand growth and high rates of domestic gas production,” he concluded Belogoriyev.
