Gazprom is unlikely to recover gas sales lost to Vladimir Putin’s large-scale invasion of Ukraine for at least a decade, according to a report commissioned for the leaders of the Russian energy group.
The company’s exports to Europe will average 50 to 75 billion cubic meters a year by 2035, barely a third of pre-war levels, the research predicted.
Although Gazprom hopes the new pipeline to China can help make up for lost European export volumes, its capacity will only be 50 billion cubic meters a year and prices in the Asian country are much lower than in Europe, the report said, while the deal expires. its construction has not yet been completed.
“The main consequences of the sanctions for Gazprom and the energy industry are a reduction in the volume of exports, which will be restored to the 2020 level no earlier than 2035,” the authors of the document wrote.
The 151-page report, commissioned by the company’s management and written late last year, is among the most candid acknowledgments yet of how Western sanctions imposed in response to the Russian war have hurt Gazprom and the wider Russian energy sector.
“It’s very grim,” said Elina Ribakova, a non-resident fellow at the Washington-based Peterson Institute for International Economics, after reading the research. “Gazprom is at a dead end and they are very well aware of it.”
Gazprom regularly commissions outside research to help it push for preferential treatment and additional funding from the Kremlin, according to Sergey Vakulenko, senior fellow at the Carnegie Russia Eurasia Center in Berlin and former head of strategy at Gazprom Neft’s oil arm.
“You can run with a message like that and demand state support,” he said, although he added that Russian officials are “tough guys and you’re not going to get anything from them.”
Gazprom’s share of Russia’s energy exports will decline as pipeline gas, which has been hit particularly hard by sanctions, takes a backseat to less vulnerable liquefied natural gas, according to the report. He adds that the company will struggle to return to growth without significant government support to find new markets for its gas.
“Since Gazprom, which does not have its own proven large-capacity LNG production technology, is the only company exporting gas through pipelines and these volumes are declining, Gazprom’s role in the gas industry is expected to decline,” the authors wrote. .
The report highlights how sanctions have cut off Russia’s energy industry from key technologies such as turbines that help move gas through pipelines, as well as spare parts and expertise needed to repair them.
It is also studying the impact of Western sanctions on countries such as Iran, North Korea and Venezuela, a sign that Russia is “hardly preparing for permanent sanctions,” says Tatiana Mitrova, a research fellow at Columbia University’s Center for Global Energy Policy.
“It is to their credit that its authors are not afraid to say that sanctions always lead to a decline in living standards and a loss of international competitiveness,” Mitrová said.
Gazprom’s outlook has worsened since the report was presented to top executives in November, with the company reporting a loss of Rbs 629 billion ($6.9 billion) last year.
Russia is trying to seal a proposed deal with China on the Power of Siberia-2 pipeline, which Gazprom hopes will boost its exports.
If completed as planned in 2030, Power of Siberia 2 is expected to add an additional 50 billion cubic meters of capacity per year. But China’s ability to extract significantly lower prices than Europe paid for Russian gas means Gazprom’s exports will be less profitable, even if they are restored to pre-war volumes, according to the report.
“The basic problem they have is that most of the revenue has come from Europe. Those have been lost, and the gas that was supposed to go to Europe cannot go to any other good market,” said Craig Kennedy, a Harvard-affiliated scholar and former vice chairman of Bank of America.
The report estimates that Russia’s LNG exports will rise to 98.8-125.8 bcm in 2020 from 40.8 bcm in 2035 and account for around half of total gas exports – increasing the influence of Novatek, the largest and technically the most advanced Russian producer of LNG, and other energy. company.
To maintain its dominant position in the domestic gas market, Gazprom will need to use its monopoly on gas transit infrastructure and demand preferential treatment from the Kremlin, the report said.
However, Gazprom will either lose market share to Novatek or be forced to use its LNG infrastructure, according to the report.
“The logical thing for the state to do is to combine the forces of both,” Kennedy said. “Gazprom has a much more upstream portfolio and Novatek has the technology and know-how on the LNG side.”
The report’s authors said LNG could be a more reliable source of export revenue for Russia because it is transported by ship rather than by pipeline and is more difficult to track. Building LNG terminals on Russia’s east coast, the authors write, could diversify exports away from China and reduce the dependence that has allowed Beijing to control the price it pays for gas.
But Gazprom would struggle to increase its own export capacity, the report added, unless Russia could end its reliance on Western-designed turbines, which are used for tasks such as electricity generation and compression as well as gas transportation.
Russia’s energy ministry said it expected the companies to be able to repair the US-made turbines by next year. However, Russian manufacturers have yet to reproduce key parts of turbine production, the report said, with up to 75 percent of the components needed coming from Western countries.
The report warns that Moscow could be forced to ban or close power plants across the country if it is unable to produce an alternative domestically.
A program to build gas turbines domestically would cost at least Rb100 billion and take at least five years, the report estimated, adding that Gazprom would struggle to finance its investment program without a significant increase in revenue.
According to Kennedy, the company is asking Moscow to “liberalize domestic gas prices or write us a big check and stop taxing us. . . Stop looking for us to fund the government – the government needs to support us”.