Cheap oil, sanctions take toll on Russian energy
Cracks are widening in Russia鈥檚 flagship natural gas producer Gazprom.
The state-owned gas company has suffered mightily under the weight of western sanctions and the fall in energy prices. And the results are beginning to show. Gazprom听听that its net income plummeted by 70 percent in 2014, which will result in a cut in its dividend.
Those numbers represent the cumulative blow from a bad year for Gazprom in 2014. The company鈥檚 troubles went beyond low oil prices and sanctions. Due in part to the conflict in Ukraine, Europe has shown renewed resolve to break Russia鈥檚 energy grip, with a few recent successes. Lithuania has brought a new听听online in 2014, providing a major alternative to Russian gas.听听()
Nevertheless, the seeds of legal action that is currently bearing fruit (from the European Union鈥檚 perspective) were planted in 2011 with the passage of the EU鈥檚 Third Energy Package. According to Judy Dempsey at the Carnegie Endowment for International Peace, EU听听丑补惫别听听to take a hardline with Gazprom over market access, with the intention of breaking up Gazprom鈥檚 monopoly.
The antitrust regulators, Dempsey says, can be credited with forcing Russia to backtrack on the proposed South Stream pipeline, a project that Russia had hoped would allow it to bypass Ukraine and send natural gas beneath the Black Sea to Bulgaria. Once the EU threatened Bulgaria with penalties if it followed through on the project, Gazprom backed off. The project is now suspended and Russia has shifted its sites to Turkey.
Regulators are also responsible for scaring Gazprom away from expanding connections to the Nord Stream pipeline, a project that runs from Russia to Germany via the Baltic Sea. ()
The EU can claim those unofficial victories, but a much larger antitrust case is mounting in Brussels. The EU may charge Gazprom with violating antitrust laws and manipulating prices, which could result in billions of dollars in fines and pressure Gazprom into giving up its practice of linking natural gas prices to the price of oil in long-term contracts. That has been the听听for years. Now that oil prices have collapsed (and natural gas prices along with them), Gazprom is ironically hurting from the approach that it has fought so hard to defend.
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Taken all together 鈥� the collapse in oil and gas prices, western sanctions cutting off credit, improved access to energy for the EU, and a looming antitrust battle 鈥� Gazprom is ailing. The 70 percent fall in profits attests to that fact.
In early March, Gazprom even had to go running to the Russian government for aid, to which it听听Without access to western finance, Gazprom has struggled to raise cash. ()
All is not lost. Gazprom is seeking customers outside of Europe, where it has historically sold most of its gas. On March 17 Gazprom听听that it had听听with Egypt to send it 35 cargoes of LNG, which will take place over five years. That agreement added to the momentum between Russian and Egyptian relations. Russian President Vladimir Putin is pushing to听听between the two countries, and crucially, use local currencies rather than dollars to do it. Goldman Sachs听听its credit rating for Gazprom on March 29.
But the megadeals that Russia has signed with China will go a long way to determining Gazprom鈥檚 growth prospects. Russia plans on exporting gas to western China. It also听听through a future pipeline to China鈥檚 east, although the certainty over the timeline of that project is听听as Russia focuses on the more feasible western project.
And it is not as if Gazprom has given up on Europe just yet. The Russian gas giant says that despite efforts on behalf of the United States to send LNG to Europe in order to undermine Russian influence, it听听than American LNG. But even if that is the case, it will likely have to give up oil-indexed pricing and make large concessions to the EU. Times are not quite as good as they used to be for Gazprom.
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