Wed, May 22, 2024

Gazprom’s $7B Annual Loss Amid EU Sales Drop & Asia Pivot

Gas Prices Helped Gazprom Reach Great Results

Quick Look:

  • Gazprom faces its first net loss since 1999 due to a sharp 55.6% decrease in EU gas exports.
  • Expansion into China through the Power of Siberia pipeline yields lower revenues because of reduced pricing power.
  • Gazprom seeks new revenue from gas processing products amid changing global market prices.

Gazprom, Russia’s state-controlled energy giant, has disclosed a staggering annual net loss of $7 billion, marking its first loss since 1999. This financial downturn underscores the company’s substantial hurdles as it grapples with filling the significant shortfall in gas sales to the European Union, adjusting to trade declines due to sanctions, and endeavours to establish a robust trading relationship with China.

EU Gas Exports Plunge 55.6%, Earnings Dip from $3.3B Monthly

Gazprom’s struggles are largely attributed to the geopolitical landscape shaped by increased EU-Russia tensions, primarily stemming from the Ukraine conflict. The company’s gas exports to the EU plummeted by 55.6% in 2022, dropping from a peak supply of 200.8 billion cubic metres (bcm) in 2018 to just 63.8 bcm. This decline represents a significant reduction in revenue. Earnings from Europe from 2015 to 2019 averaged about $3.3 billion per month. This figure is now a fraction of past profits.

China Gas Deals at $6.5B: Lower Yields Vs. Europe’s $12.9/mmBtu

In 2019, Gazprom began supplying gas to China through the Power of Siberia pipeline. Plans include a capacity increase to 38 bcm. Additionally, exports of 10 bcm from Sakhalin were agreed upon in 2022, and there is a proposed Power of Siberia 2 pipeline, set to pass through Mongolia with a capacity of 50 bcm per year. Despite these developments, the revenue from China in 2023 is estimated at $6.5 billion. The figures showcase a lower yield than European markets due to the reduced pricing power Gazprom holds in Asian markets.

3.1T Roubles from Gas, Doubts Over Future Profitability

The company reported last year’s natural gas revenue at 3.1 trillion roubles, with oil and gas condensate sales rising 4.3% to 4.1 trillion roubles. However, experts remain sceptical about Gazprom’s financial recovery solely through its gas business. Industry analyst Kateryna Filippenko observed that although Gazprom can gain additional export revenues once all those pipelines are operational, it will never fully compensate for the business it has lost to Europe.

Dr Michal Meidan emphasized that while China provides Russia with an outlet, it comes at lower prices and revenue than Europe, underscoring the economic trade-offs associated with the shift eastward. Additionally, Alexei Belogoriyev expressed scepticism about Gazprom’s profitability, suggesting that relying solely on its gas business would not suffice. He also noted that China might not require as many additional imports in the 2030s due to an anticipated slowdown in demand growth and high domestic gas production rates.

Hungary Seeks 700M More Cubic Metres Amid 85% Dependency

Amid this upheaval, Hungary remains heavily dependent on Russian gas, with a dependency rate of 85%. Hungary has a long-term supply deal for 3.5 bcm per year via Bulgaria and Serbia, with an additional 1 bcm sourced through a pipeline from Austria. Recent developments have seen Hungary requesting an additional 700 million cubic metres of gas, engaging in talks with Russia for further purchases, and discussing redirecting gas shipments to the Turkstream pipeline.

Gazprom Prices Gas at $6.6/mmBtu to China, $12.9 in Europe

Gazprom is also considering a strategic pivot towards gas processing products such as ammonia and methanol to diversify its portfolio in light of changing market dynamics and geopolitical pressures. Market prices indicate a significant disparity, with Russian gas priced at $6.6 per million British thermal units (mmBtu) to China in 2023, compared to the $12.9/mmBtu average price in Europe last year. Projections suggest a 45% price decline by 2027 to $156.7 per 1,000 cubic metres.

Gazprom faces a complex future, navigating financial losses, shifting geopolitical alliances, and the imperative to diversify and innovate within an increasingly challenging global energy market.

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