Gazprom’s net profits may have slipped 61 percent in the first quarter of 2009, but the world’s largest gas company expects second-half exports to increase. Gazprom employs a certain formula to relate gas prices which is closely tied to oil prices, Konstantin Batunin, chief economist at Gazpromneft, explained to New Europe by phone from Moscow. The falling demand for gas the past several months was associated not only with lower demand due to the economic crisis, but also because of the lagging effect in Gazprom’s prices. Several European consumers were reluctant to buy Gazprom gas at expensive prices because of the lagging effect. However, now that prices are going up and there is certain lag in Gazprom’s gas prices, an increase in gas prices will lead to an increase in volumes, Batunin said. “Firstly, demand will increase just because of the economic environment. Secondly, demand should increase because relative to other sources Russian gas would be cheaper because of the lagging effect,” Batunin said.
Ron Smith, chief strategist at Moscow’s Alfa Bank, shrugged off the decrease in Gazprom’s first quarter profits. “This is a solid company of massive financial resources,” he told New Europe by phone, adding that “the Russian company will rebound now that volumes are increasing.” As of August we have seen exports return to 2008 levels, and actually a bit above. “They are coming back full board right now,” Smith said.
“They are going to do okay and their cash flows are going to improve especially in the fourth quarter when the current 70-dollar oil finally gets fully factored in. But right now they are at their lowest point for Gazprom prices. I don’t think they are under any particular pressure; they trying to cut some costs,” Smith said. “Their first quarter capex is still pretty high but that was also before the new investment programme really kicked in.”
Asked if Gazprom is a little short on cash right now, especially given the company’s massive projects, Smith said the Russian gas giant has always needed foreign partners’ cash and expertise. “For example the Shtokman project involved and envisioned to have a significant foreign partner who will end up paying for the bulk of it actually and Gazprom would donate the asset and the foreign partner would come up with lots of cash and everything else,” Smith said. This remains an option especially for those projects that fall outside of the current level of Gazprom’s expertise like LNG and drilling far from Russia’s shore.
Smith also reminded that some of Gazprom’s clients in Europe are running behind in their “take or pay” provision in export contracts.
He also pointed out that Gazprom has managed to cut its export duties substantially. “They have done so by re-designating which gas they’re sending to Europe and which gas they’re sending to the  former Soviet Union. They’re apparently taking what Central Asian gas they are taking, they’re designating it and selling it to Western Europe as supposed to the former Soviet Union and therefore they’re not paying export duties on it,” Smith said.
Some Russian banks are supposedly telling clients that the EU-Russia contacts are under threat. But Smith said that’s not the case at all. “Some of the our competition is being pushing an idea that the export contracts for Europe are going to be renegotiated which I find highly unlikely because these are long term — 20-30-year contracts concluded under western law,” Smith said. “There is not a lot of wiggle room for the foreign buyers. They can, of course, buy below their minimum, but they have to pay penalties to do so or take an extra amount the following year so I think Europe is going to hesitate to violate those contracts because Europe still provides roughly one quarter of Europe’s gas. Say what they want, they can’t live without Russian gas.”
 

KGeropoulos@NEurope.eu