-Analysis-
In February, Russian state-owned energy giant Gazprom officially celebrated its 30th anniversary, which makes it a bit older than modern Russia itself. It was originally the brainchild in 1989 of the Soviet Minister of the Gas Industry Viktor Chernomyrdin, bound to absorb 50 enterprises and 16% of the world’s gas reserves. In Feb. 1993, it was simply transformed into a joint-stock company.
Gazprom has always had a superpower that was often called upon by the authorities. The company was known as the “Government’s Purse”. In the 1990s, Gazprom paid pensions and supported the ruble exchange rate. Many people wanted control of the energy superpower. In the 1990s, Gazprom almost came under the control of gas oligarch Rem Vyakhirev, who was Chernomyrdin’s deputy, and would grow fabulously rich by nurturing a vast monopoly.
Legend has it that in 1999, incoming Russian President Vladimir Putin declared: “Give me Gazprom,”
When he came to power, Putin immediately took up this issue. In 2000, at the very first meeting of shareholders of Gazprom under Putin’s presidency, Dmitry Medvedev became chairman of the board of directors.
“They had me like a bear in a trap with all their nonsense checking up, it was impossible to work,” Vyakhirev recalled. A year later, he resigned, and since then Gazprom has been headed by Alexey Miller, Putin’s former colleague from the St. Petersburg mayor’s office.
The core of the Russian economy
Gazprom is Putin’s main personal project, Boris Nemtsov and Vladimir Milov wrote in their report “Putin and Gazprom”. It is “the energy core of the Russian economy; the stability and prospects of our economy largely depend on how efficiently and reliably this company operates.”
Gazprom had every chance to become a pioneer.
Russia set itself the goal of becoming an “energy superpower”, which Gazprom played a key role in. Gas prices were rising, and in 2006 Gazprom received a monopoly on exports through pipelines. In 2008, it was worth 0 billion, making it the third most valuable company in the world after ExxonMobil and Apple. Miller then promised that the stock market capitalization would reach trillion in 7–8 years. Less than a year later, the state corporation fell in price to 0 billion, and it currently costs half as much.
But things were going so well in the 2000s that the first mistake went almost unnoticed.
Gazprom ignored the liquefied natural gas (LNG) revolution. They had begun liquefying gas decades ago in order to deliver it not through a pipe but by sea. The first plant was built in the US in the 40s and in the USSR in the 50s. However, the true boom in LNG happened in the 2000s.
Gazprom had every chance to become a pioneer, but Gazprom and Putin considered pipelines better than LNG.
The second Russian Foreign Ministry
After Miller became head of Gazprom, mega-constructions began. Their effectiveness was doubtful, but geopolitical considerations were obvious. Instead of reaching an agreement with Ukraine, more and more pipes were built to bypass it.
Nord Stream was followed by Nord Stream 2, Turkish Stream and Power of Siberia to China.
“The Kremlin has decided that Gazprom is part of Russia’s national security and geopolitics, not a commercial company,” Chris Weafer, the founder of business consultancy Macro Advisory, said in 2013. “We are going back to Soviet times, when Gazprom was a government ministry.” But now Gazprom has also begun to perform the functions of the Foreign Ministry.
The main loss
As the Ukraine war dragged on, the goal of the Russian authorities was to convince Europe to withdraw its support for Ukraine. So a second front was opened — the energy one. The EU sought to limit Russia’s oil and gas revenues, and Russia threatened to cut gas supplies, hinting at an imminent winter disaster.
In the summer, deliveries began to decline, and gas prices in Europe began to rise. In August, when they reached ,823 per 1,000 cubic meters, Medvedev, with warm wishes to the European leaders, raised his forecast to 62 at the end of the year. Gazprom’s forecast was a bit more modest — ,000.
Europe has paid a high price and will continue to pay for the gas war (this year it may not be enough for 57 billion cubic meters), but its losses are temporary. And Gazprom has lost the lion’s share of export earnings for a long time, if not forever. The share of Russian gas in total EU consumption fell from 40% to 10%. Before the war, it would have seemed unbelievable, but the EU began to buy more LNG from the US than it received from Gazprom.
Losing “excess weight”
For any other company, such mistakes could be fatal, but not for Gazprom.
It has accumulated a fair amount of “fat”: at the end of 2021, gas prices in Europe were high, and with the outbreak of war they skyrocketed. As a result, Gazprom in the first half of 2022 received a record net profit of 2.5 trillion rubles (.4 trillion), 2.6 times higher than a year earlier.
The additional tax, fallen production and collapsed exports did not drive Gazprom into losses. Its net profit has halved compared to 2021 but is still impressive — 747 billion rubles (0 billion).
Reduction, not death.
The collapse of Gazprom will not happen soon, Tatiana Mitrova, a researcher at the Center for Global Energy Policy, says: “The National Treasury made huge profits in 2022 from exceptionally high prices (even with export cuts of 80% by the end of the year), and in 2023-2025 it is likely to have higher revenues for the same reason as in 2019-2020.”
Now Gazprom supplies gas to China at about 0 per thousand cubic meters, and the prices of European contracts are about ,000, analyst Ronald Smith estimated based on Chinese customs data. Another analysis had a similar result: the effective average price for China in 2022 could be from 0 to 0 per thousand cubic meters.
Scenarios for the development of Russian gas exports until 2030 by the Center for Global Energy Policy show that even in the worst-case scenario, Russian exports (pipeline gas and LNG) will not be lower than 125 billion cubic meters per year.
“This, of course, is only half of the level of 2021, but still comparable to the exports of Qatar or the United States,” Mitrova notes.
Vyugin says Gazprom’s recent history is “a reduction, but not death: which is exactly what is happening with the entire Russian economy.”
