Gazprom is unlikely to recoup the gas sales lost due to Vladimir Putin’s massive invasion of Ukraine for at least a decade, according to a report commissioned by the leaders of Russia’s energy group.
The company’s exports to Europe will average 50 to 75 billion cubic meters per year by 2035, barely a third of pre-war levels, the study predicted.
Although Gazprom hopes a new pipeline to China can help make up for lost European export volumes, its capacity will only be 50 billion cubic meters per year and prices in the Asian country are much lower than in Europe, the report said. its construction has yet to be accomplished.
“The main impact of the sanctions on Gazprom and the energy industry is the contraction of export volumes, which will be restored to 2020 levels not earlier than 2035,” the authors of the document wrote.
The 151-page report, commissioned by the company’s management late last year, is one of the most frank acknowledgments yet of how Western sanctions imposed in response to Russia’s war have affected Gazprom and the wider have damaged Russia’s energy sector.
“It’s very grim,” said Elina Ribakova, a non-resident senior fellow at the Washington-based Peterson Institute for International Economics, after reading the study. “Gazprom is at a dead end, and they are well aware of that.”
Gazprom regularly commissions external research to argue for preferential treatment and additional funding from the Kremlin, said Sergei Vakulenko, a senior fellow at the Carnegie Russia Eurasia Center in Berlin and former head of strategy at the company’s oil arm, Gazprom Neft.
“You can walk around with a report like that and demand state aid,” he said, although he added that Russian officials “are tough guys, and you won’t get anything out of it.”
Gazprom’s share of Russia’s energy exports will decline as pipeline gas, which has been particularly hard hit by the fallout from the invasion, takes a back seat to less vulnerable liquefied natural gas, the report said. It adds that the company will struggle to return to growth without significant state support in finding new markets for its gas.
“Since Gazprom, which does not have its own proven technology to produce LNG at large capacities, is the only company exporting gas through pipelines and those volumes are decreasing, Gazprom’s role in the gas industry is expected to decrease accordingly,” the wrote authors. .
The report highlights how sanctions have cut off Russia’s energy industry from crucial technology, such as turbines that help transport gas through pipelines, and from the spare parts and expertise needed to repair them.
It is also studying the impact of Western sanctions in countries such as Iran, North Korea and Venezuela, a sign that Russia is “thoroughly preparing for permanent sanctions,” said Tatiana Mitrova, a research fellow at Columbia University’s Center on Global Energy Policy.
“To their credit, its authors are not afraid to say that sanctions always lead to a decline in living standards and a loss of international competitiveness,” Mitrova said.
Gazprom’s prospects have deteriorated even further since the report was presented to senior executives in November, with the company reporting a loss of Rbs629 billion ($6.9 billion) last year.
Russia is struggling to strike a proposed deal with China over the Power of Siberia-2 pipeline, which Gazprom hopes will revive exports.
If completed on schedule in 2030, the Power of Siberia 2 is expected to provide an additional capacity of 50 billion cubic meters per year. But China’s ability to demand 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, the report said.
“The fundamental problem they have is that most of their revenue came from Europe. Those have been lost, and the gas that was going to Europe can’t go to another good market,” said Craig Kennedy, a Harvard scientist and former vice chairman of Bank of America.
The report estimates that Russian LNG exports will increase from 40.8 billion cubic meters in 2020 to 98.8-125.8 billion cubic meters in 2035, accounting for about half of total gas exports. This increases the influence of Novatek, Russia’s largest and most technically advanced LNG producer, and other energy producers. businesses.
To maintain its dominant position in the domestic gas market, Gazprom will have to exploit its monopoly on gas transit infrastructure and demand preferential treatment from the Kremlin, the report said.
According to the report, Gazprom will nevertheless lose market share to Novatek or be forced to rely on its LNG infrastructure.
“The logical thing for the state to do is to join forces,” Kennedy said. “Gazprom has much more of an upstream portfolio and Novatek has the technology and the 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 pipelines and is harder to track. Building LNG terminals on Russia’s east coast, the authors write, could diversify exports beyond China and reduce the dependency that has allowed Beijing to control the price it pays for gas.
But Gazprom would struggle to boost its own export capacity, the report added, if Russia could reduce its reliance on Western-designed turbines, used for tasks such as electricity generation and compression and moving gas to end.
Russia’s Energy Ministry has said it expects companies to be able to repair U.S.-made turbines next year. But Russian manufacturers have yet to reproduce crucial parts of turbine production, the report says, with as much as 75 percent of the required components coming from Western countries.
Moscow could be forced to mothball or close power stations across the country if it cannot produce an alternative domestically, the report warns.
A program to build gas turbines domestically would cost at least 100 billion rupees and take at least five years, the report estimates, adding that Gazprom would struggle to finance its investment program without a significant increase in revenues.
According to Kennedy, the company is advocating that Moscow “liberalize domestic gas prices or write us a big check and stop taxing us. . . Stop looking for us to fund the government; the government must support us.”