How Russia’s Gas Monopoly Plans to Survive Its Divorce With Europe

Russia's gas giant Gazprom CEO, Alexei Miller (2nd R), and Gazprom's board of directors chairman, Viktor Zubkov (R), attend the world biggest gas company's annual meeting in Moscow, on June 27, 2014, with the logo of Gazprom in the background. The Russia's map in the background includes the Crimea peninsula. Crimea's largely Russian-speaking residents voted in March to become part of Russia, in a hastily organised referendum held as Russian troops patrolled the region. Photo by Vasily Maximov/AFP/Getty Images.

Russia’s gas giant Gazprom CEO, Alexei Miller (2nd R), and Gazprom’s board of directors chairman, Viktor Zubkov (R), attend the world biggest gas company’s annual meeting in Moscow, on June 27, 2014, with the logo of Gazprom in the background. The map in the background includes the Crimea peninsula. Crimea’s largely Russian-speaking residents voted in March to become part of Russia, in a hastily organised referendum held as Russian troops patrolled the region. Photo by Vasily Maximov/AFP/Getty Images.

As oil companies fret over meager quarterly earnings because of the low price of oil, Russia’s gas monopoly, the government-controlled Gazprom, says it will be increasing its deliveries to Europe during the next three years and is looking to Asia for more opportunities to sell gas and attract investment.

Aleksandr Medvedev, Gazprom’s deputy CEO, said at an investor conference in Hong Kong on February 3 that the company will increase its exports to Europe by between 5% and 8% to a level of 155 to 160 billion cubic meters through 2017 because of “continuing, gradual reduction of gas production in Europe.”

This would be a meaningful rebound for Gazprom, the world’s largest producer of gas. In 2013, its exports dropped by 9% from 162 billion cubic meters to 147 billion cubic meters. At that time, the price of the gas in Europe – not including former Soviet republics – dropped from $403 per 1,000 cubic meters in 2012 to $385 for the same volume in 2013 and to $341 per 1,000 cubic meters in 2014.

Still, Gazprom remains the largest single gas supplier to Europe, providing it with about 30% of its needs, and the company plans to keep it that way, according to Dmitry Lugai, the director of Gazprom’s prospective development.

Gazprom’s plans don’t coincide with those of the European Union, which has been looking for alternate sources of fuel. About half the Russian gas going to the EU is piped through Ukraine, which has a difficult relationship with Russia. Two recent disputes between Moscow and Kiev have led to a shutoff of the Ukrainian pipeline, and reduced much-needed gas deliveries to EU customers.

Russia has already built one pipeline that sidesteps Ukraine, called the Nord Stream, which delivers gas to Northern Europe via the Baltic Sea. A second, called the South Stream, was in the works, but Moscow was forced to abandon it because of objections from the EU.

Even if Europe manages to remove Russia altogether as a source of gas, Gazprom won’t feel much of a pinch. On November 9, 2014, Russia and China signed a preliminary agreement under which Gazprom would supply as much as 30 billion cubic meters of gas per year from western Siberia to China in the next 30 years.

In an interview in Hong Kong with TASS on February 3, Medvedev said Russia wants that deal with China to be the beginning of greater expansion throughout Asia.

“First, this is a geographical diversification,” Medvedev told TASS. “That’s because Asia is the most attractive and prospective market for both pipeline gas and liquefied natural gas.” Gazprom’s deputy CEO pointed to the strong rates of economic growth throughout the region and its increasing use of gas to generate electricity.

“Second, our target group of investors also has a huge potential,” Medvedev said. “This refers to Asian investors who have both financial resources and the whole infrastructure for investments,” including well-developed stock markets and banks capable of financing large energy projects.

Medvedev said Gazprom has proven itself to be financially stable and financially cautious, a perfect match for Asian investors and a reliable source of steady energy.

Originally written for OilPrice.com, a website that focuses on news and analysis on the topics of alternative energy, geopolitics, and oil and gas. OilPrice.com is written for an educated audience that includes investors, fund managers, resource bankers, traders, and energy market professionals around the world.

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