Gazprom looks to fuel growth
Ed Crooks, Energy Editor
9 December 2008
Financial Times
Gazprom, Russia’s state-controlled gas group, is “very comfortable” with commodity prices at present levels and is pressing ahead with its plans to increase capital spending next year, its deputy chief executive tells the Financial Times.
In the past few months Gazprom has been battered by the global financial crisis, with its shares falling sharply and its credit default swaps – the cost of insuring its credit risk – soaring.
In June, it was the world’s third-largest company by market capitalisation, valued at about $350bn, with aspirations to reach $1,000bn by 2015.
Today it is down to 35th place, worth less than $100bn, hit by the double blow of the plunging price of oil, which sets the price of the gas that Gazprom sells in the European Union, and the drying up of funding for many companies, especially for those in emerging markets.
Vampire attack
“The vampire infection” is how Alexander Medvedev describes the spread of the liquidity crisis from the US to the rest of the world.
“American vampires drank the blood from their financial system and have tried to infect countries all over the world,” he says.
His words, echoing some of the more colourful rhetoric of the soviet era, are a sign of the pressure the crisis has put on Gazprom.
“Working capital, as well as investment funds, are very difficult to obtain,” Mr Medvedev says.
“Some banks are just sitting on their cash; they are not performing their function of lending. So we need some injection against this vampire disease.”
Liquidity problems have spread from bank to bank around the world as the “vampire empire” grows, he says. For now, Gazprom can meet its investment needs without raising fresh capital.
When it does need finance, as it will for the planned Nord Stream pipeline from Russia to Germany, scheduled to start operating in 2011, “we hope will be able to find some banks that have not been vampirised,” says Gazprom’s deputy chief.
Alexander Medvedev, Gazprom’s deputy chief executive, says, however, that the company could cope with both lower oil and gas prices and the difficulty of raising finance.
At a time when many oil and gas groups are making cuts to their capital spending plans, Gazprom’s management committee last week approved an investment budget of about Rbs920bn ($33bn) for 2009, an increase of about 10 per cent on this year.
Mr Medvedev says the company has “prioritised” its investment programme, but has no need to cut its budget because of the fall in commodity prices, saying: “We never planned on the basis of $150 oil.”
For a while Gazprom will be insulated from the worst of the fall in the oil price, which sets the European gas price with a six- to nine-month lag.
Gas is set to average about $400 per thousand cubic metres in the first half of next year, down from a peak of over $500 in the final quarter of 2008.
Although gas prices would then fall to $250-$300, Mr Medvedev adds, Gazprom would be helped by lower costs.
“One positive side of the crisis is that the cost of materials and equipment will inevitably become cheaper,” he says. “The cost of supplies was incredibly high, and it was the suppliers who were benefiting.”
He also argues that the decline in prices was unlikely to last.
“If you see the latest report from the International Energy Agency, it is quite clear that $100 oil will come back quite quickly. It is a question of when, not if,” he says.
“The era of cheap energy is obviously over.”
That expectation underpins Gazprom’s confidence that it will be able to meet the huge need for investment to open new fields to replace lost production from declining, ageing fields, and to reinforce Russia’s gas infrastructure.
Mr Medvedev also insists that the state-controlled company is sticking to its ambitious plans outside Russia, including the Nord Stream and South Stream pipelines to carry gas direct from Russia to the EU, bypassing transit countries such as Ukraine.
He points out that the Blue Stream pipeline from Russia to Turkey was built during Russia’s previous financial crisis, in 1997-99.
Another expensive and high-profile project, the vast Shtokman development off Russia’s north coast, being developed with Total of France and StatoilHydro of Norway, will not be put up for an investment decision until 2010.
Mr Medvedev, however, indicates that Gazprom is negotiating hard over Kovykta, the large gas field in eastern Siberia in which Gazprom has agreed to buy a controlling stake from TNK-BP, BP’s 50 per cent-owned Russian joint venture.
“We are in discussions with TNK-BP on a regular basis, but it is quite clear that the new market situation has forced us to look into this deal with open eyes,” he says.
For its planned Rbs100bn investment in Russia’s electricity industry, Gazprom would seek state support, Mr Medvedev says, but for the rest, it could cope from its own resources.
“Even when the market was fine, the share of new borrowing in our cash flow did not exceed 10 per cent. We could manage our investment programme without borrowing at all,” he says.
If the oil price continues to fall and the financial crisis persists beyond next year, then Gazprom’s defence of its investment programme is unlikely to be tenable. But with the backing of the state, which owns just over half its shares, and vast resources behind it – it controls 17 per cent of the world’s gas reserves – it is better placed than most Russian companies to weather the storm.