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January 7, 2009 7:20 pm
As the dispute between Russia and Ukraine appeared to be edging towards resolution, the cost of the showdown for Gazprom, Russia’s state-controlled gas company, was already apparent.
Gazprom has been caught in a very difficult position.
In the short term, it needs to extract as much revenue as possible from Ukraine. In the long term, its tactics in the crisis could stand in the way of its ambition of becoming a leading global energy business.
Last summer Gazprom was riding high. Already the world’s third-largest company by market capitalisation, valued at about $350bn (€255bn, £230bn), it was taken seriously when it predicted a $1,000bn valuation by 2015.
Alexei Miller, its chief executive, predicted that oil would soon rise to $250 per barrel. Today, with oil below $50, Gazprom is valued at just $86bn, and is down to 46th place in the international rankings.
Financial market indicators of the company’s health, such as its share price and the cost of insuring its debt against default, have improved from their low point last October, but Gazprom still faces a very difficult outlook.
The price of its gas in European markets is tied to the price of oil, with a six-to- nine-month lag. So the steep fall in oil prices in the second half of last year means the price of Gazprom’s gas will also fall sharply.
Gas cost more than $530 per thousand cubic metres towards the end of last year, but if oil stays at about $40-$50 a barrel it will end the year at about $250-$300.
Meanwhile, the price Gazprom pays for gas from central Asian countries such as Turkmenistan, an important supplement to its own production, has been rising to reflect European market prices.
Gazprom paid just $100 per thousand cubic metres for Turkmen gas in the first half of 2007 and is paying about $365 today, although that will fall under the oil-linked formula as the year goes on.
As a result, Gazprom’s profits are being squeezed at a time when it faces a massive demand for investment to sustain Russia’s crumbling infrastructure and open up new sources of production, particularly the vast gas fields of the Yamal peninsula in north-west Russia.
Chris Weafer of Uralsib, a Russian bank, estimates that Gazprom will have to invest at least $20bn a year in the coming years.
It is also hampered by a debt burden that was about $61bn at the end of 2007, at a time when raising funds is difficult for the most credit-worthy borrowers, let alone a company from an emerging economy that defaulted on its debts a decade ago.
Mr Weafer argues that to reassure investors Gazprom has to make Ukraine pay significantly more than the below-market gas price it has been paying until now.
“This is a critical juncture for the company, where it really needs to raise more money,” he says. “So it has to get rid of the legacy of the Soviet Union where it was selling gas to Ukraine at a price that would mean it is making a loss.”
The cost of that action, however, has been to wipe out much of the progress that Gazprom has made since the 2006 dispute with Ukraine in establishing its reputation in the European Union.
As Colette Lewiner of Capgemini, the consultancy, puts it: “Gazprom has tried to be a normal company and to expand its footprint in other countries. It has been holding press conferences and talking nicely. But this crisis has shown another image: a facet of Gazprom that is not so good.”
Katinka Barysch of the Centre for European Reform, a think-tank, argues that European reactions to the current dispute are different from the instinctive support for Ukrainian democracy that was the dominant feeling in 2006. “Now Ukraine’s squabbling, self-serving leaders attract little sympathy,” she says.
Nevertheless, for many Europeans the apportioning of blame is less important than the sense that Russia is no longer a reliable supplier.
Alexander Medvedev, Gazprom’s deputy chief executive, told reporters in London this week: “We are very seriously thinking about our reputation as a company. because we have a lot to be proud of. We have 40 years of supply in some very difficult times.”
Attempts to use the 2006 confrontation to galvanise a common European energy security policy may have been ineffective, but the disruption to supplies left a legacy of mistrust of Gazprom that was not easy to dispel.
After this more serious conflict, Europe’s wariness of Gazprom will run even deeper.
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