Gazprom Squeezed by Central Asian Contracts

What seemed like sweet deals with Central Asian energy producers just about a year ago is turning into albatross contracts for Gazprom, Russia's suddenly embattled natural gas conglomerate.

Political considerations seemed to play a role in state-controlled Gazprom's decision to commit to paying top dollar for natural gas from Kazakhstan, Turkmenistan and Uzbekistan. [For background see the Eurasia Insight archive]. The Central Asian states are at the center of a geopolitical tussle between Russia and the United States over control of energy export routes in the Caspian Basin. During the spring of 2008, it made sense for the Kremlin to pay a premium for Central Asian energy in order to retain a dominating energy position in the region. In the intervening year, however, the Russian economy has fallen off a cliff, pushed by the global financial slump. [For background see the Eurasia Insight archive].

Gazprom, which just a short time ago acted as the Kremlin's cash cow, now finds itself increasingly stressed. According to Ministry of Energy figures, Gazprom production during the March 17-22 this year was down 25 percent over the same period in 2008. The company recently downwardly revised its price forecast for the sale price of gas to Europe to $257.9 per thousand cubic meters (tcm) of gas. Just weeks earlier, the company was projecting the price at $280/tcm. In 2008, Gazprom sold gas to Europe at a price of $409/tcm, the Russian newspaper Vedomosti reported March 23. "With an average price of $260/tcm, [2009] revenues [are projected to be] $44 billion, instead of last year's $73 billion," the report noted.

Dmitry Alexandrov, an analyst with Financial Bridge Investment Company, said Gazprom's need to fulfill its Central Asian obligations will cost the firm dearly -- to the tune of about $3.5 billion in losses. "This is a fee for its monopoly position in the exporting of fuels from these countries," Alexandrov was quoted as saying in a March 24 report published by the Russian daily Nezavisimaya Gazeta.

Gazprom currently buys about 50 billion cubic meters (bcm) of Turkmen gas, 15 bcm of Kazakh gas, and 7 bcm of Uzbek gas, amounting to about 14 percent of the company's total production in 2008, according to the Nezavisimaya Gazeta report. Rising transit costs and falling consumer demand in Europe and Russia mean that the company's operating costs in Central Asia are becoming a big burden. The company has already scaled back development plans for the region.

Gazprom officially acknowledged in early March that gas production in 2009 may decrease by 7 percent this year. But analysts say the cut in output could likely to be much higher.

"In the worst case scenario, Gazprom could see gas production drop by 20 percent by the end of the year," RusEnergy analyst Mikhail Krutikhin told Nezavisimaya Gazeta. He added that Gazprom could barely afford to buy Central Asian gas at European prices.

"It's not very profitable, but a contract is a contract and [Gazprom] will have to comply even at the expense of production," he said.