The end of the Russian Gazprom gas needle

In 2021, Gazprom represented the power of the Kremlin in Europe, and in 2022, due to record gas prices, this monopolist became the most profitable company in Russia. But in the same year, the company gradually began to surrender its positions due to the fact that Europe began to refuse Russian gas. The year 2023 will be a failure for the company. The Russian gas monopolist is unlikely to be able to reach profits in 2022, and will be forced to cut production by 20%.

In the first half of 2022, the Russian gas monopoly Gazprom made a record profit of 2.5 trillion rubles (about $53 billion). This is more than the company earned in 2020 and 2021. The Russian government took half of this profit from the company in the form of taxes, and the company’s board of directors decided not to share profits with shareholders and not to pay dividends.

Gazprom, unlike Rosneft, was not just a tool for the Kremlin to make money from energy resources. The Russians used gas as a weapon and, with the help of prices for this energy resource, first put pressure on the governments of Eastern European countries, and later provoked an energy crisis in the European Union, due to which the price of gas increased several times during 2021. Therefore, Gazprom, which is a monopoly in the production and sale of natural gas, has long been a serious political tool for the Kremlin, allowing it to lobby its interests in European politics.

After the start of a large-scale war in Ukraine, this tool began to break down. Due to Russian aggression, the European Commission developed a plan for the EU to withdraw from Russian energy resources REPowerEU and began to successfully implement it in the gas sector. Already at the beginning of September, Gazprom’s share in the European market fell from 40% to 9%, and the apotheosis of this was the destruction of the Nord Stream-1 and Nord Stream-2 gas pipelines, which are most likely destroyed by Russians themselves. So already in November, Gazprom was forced to cut exports by more than 40%, and production by almost 20%.

Currently, Gazprom is betting on the diversification of gas supplies to China, as well as the creation of a gas hub in Turkey, and also declares its readiness to launch the previously stopped Yamal-Europe gas pipeline. However, none of these Asian routes will be able to compensate the company for the loss of the European market, and “Yamal-Europe”, which goes through Poland, is unlikely to be launched due to political reasons. Therefore, in 2023, Gazprom will be forced to reduce production by 15-20%.

Director of Analytical Research of DiXi Group, Roman Nitsovich, says that now Gazprom has a record collapse in gas exports. In this regard, the company makes relevant statements about the expansion of exports, the launch of a gas hub together with Turkey, as well as the launch of fields that will become a resource base for increasing supplies in the eastern direction.

“Despite all statements about reorientation, it is clear that the key for Russian gas was the European market. This year, the Russians first forced the EU countries to pay them “in rubles”, then applied a demonstrative punishment in the form of limiting gas supplies to certain countries. This led to the fact that the European Commission began to take measures to reduce the consumption of Russian gas by the countries of the bloc. If earlier the share of Russians in the European market was 40%, now it is less than 10%. In general, the EU is preparing for the complete cessation of Russian gas supplies, as well as taking other steps to stabilize the market, introducing limit prices and preparing for joint gas purchases,” says Nitsovych.

He says that Gazprom’s future will be rather bleak. Therefore, the company is now doing everything to show that they own the situation, expanding and diversifying their exports.

Maksym Bilyavskyi, an expert at the Rozumkov Center, says that 2022 has become a year of deep failure for Gazprom. This is indicated by the fact that the company refused to pay dividends to its shareholders several times in April, June and October 2022.

He notes that the main blow to the company was the loss of pipeline supplies to the EU market. Although there is some revival in the segment of gas supplies through LNG terminals, these volumes will not cover large-scale investment programs, the needs of the Russian government’s finances and the corrupt appetites of the Kremlin dictator’s entourage.

Bilyavsky notes that the Russians would like to restart the Yamal-Europe gas pipeline, which is currently operating in reverse mode, but Poland, through which this gas pipeline passes, will not take this step.

“Now the gas pipeline works in the reverse mode, so the gas coming to Germany from the Netherlands can be transferred to Poland, and when necessary, the Poland-Germany section can work in the reverse mode – gas from Poland can reach Germany. Therefore, this gas pipeline currently ensures the flexibility of the European gas transportation system,” says Bilyavskyi.

He notes that currently the Russians are not abandoning the idea of shelling the Ukrainian gas transportation system, so the launch of additional transit capacities, which will replace transit through Ukraine, could untie aggressors hands.

A turn to the east and a drop in production

Bilyavsky notes that despite the statements of the Gazprom management about the reversal of supplies to the eastern direction, in fact there is no reversal. Pipeline gas supplies to China in 2022 did increase compared to 2021, but these supplies do not and will not cover the lost volumes in the European gas market.

“In general, if we talk about covering the lost volumes on the EU market, then we need to talk about the construction of several threads of the “power of Siberia”. I don’t think China will be interested in that. The leadership of the People’s Republic of China is quite actively flirting with Saudi Arabia and is unlikely to seriously invest in Russia, which will lose in this war,” says Bilyavskyi.

He notes that China can lease gas carriers to the Russians, accepting gas as payment, and also provide them with appropriate nodes for the construction of gasification plants, which will allow Russia to work in the liquefied gas market. However, the Russians themselves do not have such technologies.

At the same time, the record number of cases of COVID-19 and the pandemic restrictions in China could lead to a large-scale economic crisis in that country, which would affect China’s GDP and its ability to import energy resources. Thus, Gazprom is unlikely to be able to increase gas supplies to China next year.

Nitsovich notes that the Russians will not be able to single-handedly expand the capacity of the Power of Siberia gas pipeline, which Gazprom is counting on. They have pipe production, but the history of Siemens turbines has shown that the Russians cannot service such equipment on their own

“So if such projects are implemented, the Russians will count on Chinese technologies and implement these projects together with Chinese companies. But such large-scale projects require multi-billion dollar investments. In the conditions when the company’s exports and export revenue are experiencing a huge drop, there is a question of how this investment resource will be created?” – says the expert.

He notes that if the Russians had the opportunity to build these gas pipelines on which the relevant contracting companies were enriched, now there will be a question as to how much the accumulated financial resources will allow to do it. It is clear that in the current year, Russians’ incomes from oil and gas exports broke records, but mainly due to the increase in prices, not volumes. But next year, they will not have such an opportunity because the oil embargo started, the Russians discredited themselves on the European gas market and lost their share there. Therefore, the question arises as to how effective Gazprom is in selling its gas to someone.

Gennadiy Ryabtsev, director of special programs at the National Research Center “Psyche”, says that the Russians are currently supplying China with up to 10 billion cubic meters of gas, while 155 billion cubic meters were supplied to the EU before the full-scale invasion.

Currently, Gazprom supplies 18 billion cubic meters to the EU. m per year through Ukraine and another 20 billion cubic meters. m through the GTS of Ukraine, but the situation here is extremely unstable.

“The restoration of supplies in another way or the launch of Yamal-Europe is impossible, the “Nordic Stream” is also impossible. Therefore, due to the lack of a fleet of gas carriers and gas liquefaction technology, starting next year, Gazprom will be a company that will mainly focus on domestic supplies. That is, the lion’s share of the extracted gas will be directed for domestic consumption, about 500 billion cubic meters. m. And of the exportable 200 billion cubic meters, maybe a quarter, maybe 80 billion cubic meters will remain. m. And for everything else there will be a reduction in production”, – says the expert.

He notes that the Turkish hub for Russian gas is currently only a statement. In fact, Turkey has long been a gas hub and transits not only Russian but also Azerbaijani gas.

“If the projects of construction of gas pipelines through the Caspian Sea are implemented, gas from Turkmenistan, Kazakhstan, and Uzbekistan may reach Turkey. Although these countries are mostly focused on China. But in this case, Russia will be among powerful competitors. And the main role in the hub will be played not by Russians, but by Turks,” Ryabtsev says.

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