Baloncici
In recent months, the EU nations have been actively looking for ways to decrease their dependency on Russian fossil fuels after the latter invaded Ukraine earlier this year. If in the past the Russian Gazprom (OTCPK:OGZPY) has been one of the biggest single suppliers of natural gas to Europe, then after the invasion the European countries rushed to sign new natural gas deals with the American companies along with the Middle Eastern states and began to accelerate the building of an LNG infrastructure on the old continent.
Thanks to this, the European exposure to the supplies of natural gas from Gazprom is at its lowest levels, which creates a problem for the Russian company since it makes it nearly impossible for it to replace the revenues that it generated in Europe by changing markets due to logistical constraints. As a result, it’s safe to assume that Gazprom is unlikely to grow its business in the following decade, especially since there’s now a possibility that the company will stop exporting natural gas to Europe through most of its pipelines indefinitely.
The Golden Era For Gazprom Is Over
A month before the Russian invasion, I wrote a bearish article on Gazprom with a strong sell rating in which I highlighted that Europe is unlikely to certify the company’s Nord Stream 2 pipelines anytime soon, as there was a strong consensus among various political elites of the old continent about the need to decrease their overreliance on Russia.
Over the decades, Gazprom, with the help of the Russian government, which is the majority owner of the natural gas giant, has been focused on expanding its pipeline infrastructure to the west. Thanks to this, out of 210 bcm of natural gas that Gazprom exported in 2021 via pipelines, 185 bcm went straight to European consumers, which made Europe its biggest customer by a wide margin. At the same time, over the recent decades, Kremlin has used Gazprom’s dominant position in Europe to its advantage by engaging in various political blackmails to achieve its geopolitical goals. However, everything changed after February 24.
Before the invasion, a pair of Gazprom’s Nord Stream 1 pipelines, which had an export capacity of 55 bcm per year, have been used as the primary source to export the company’s natural gas directly to Germany through the Baltic Sea. In addition to that, for several years Gazprom has been building a second pair of pipelines called Nord Stream 2, with the same export capacity of 55 bcm per year, which along with the first link of pipelines would’ve had a total export capacity of 110 bcm per year combined. However, after the sabotage that occurred underneath the Baltic Sea back in September and damaged the pipelines, Gazprom lost the ability to use those pipelines to export its natural gas to Europe for a considerable amount of time, if not forever.
On top of that, due to Gazprom’s constant conflicts with the Polish state-controlled O&G conglomerate PGNiG, the former first decided to decrease the flow of gas via the Yamal–Europe pipeline, which has an annual export capacity of 32.9 bcm and goes through Poland, and then later announced that it will no longer use it to deliver natural gas.
At the same time, Gazprom has transferred only 15.3 bcm of natural gas to Europe through the Ukrainian system of pipelines called Brotherhood in the first eight months of this year, even though the total export capacity of those pipelines is 146 bcm per year. What’s worse is that instead of maximizing its profits by fully utilizing the Ukrainian system, which continues to be intact despite the war, Gazprom is now threatening to fully cut the supplies through Brotherhood for political reasons at the expense of its shareholders.
As a result of all of those developments, the only intact system of pipelines that continues to fully deliver natural gas to Europe and Turkey is the TurkStream with an annual export capacity of only 34.8 bcm. This undoubtedly is going to have a severe negative effect on Gazprom’s financials not only in 2022 but in the following years as well.
The latest reports show that in 2022, Gazprom would export a total of only ~100 bcm of natural gas to its customers that include Europe, Turkey, China, and others, combined. At the same time, 2023 is expected to be even worse, as the 2022 numbers include exports in January and the first half of February right before Russia invades Ukraine, along with the exports in the first few months after the invasion before the supply disruptions kicked in. The same reports show that in the first half of November, Gazprom exported a total of only 2 bcm of natural gas to all its customers combined, which indicated a rapid decrease in exports in recent months.
Considering this, we could safely assume that going forward the company is unlikely to significantly benefit from the high prices for natural gas, as it’s unable to ramp up its exports due to political and logistical issues, while its production is falling. On top of that, we can’t even figure out what’s the company’s fair value is at this stage, as the Russian government allowed its public businesses to stop fully disclosing their financials after the start of the Russo-Ukraine war.
What we do know though is that the Russian coffers are being drained due to the constant need to fund its war efforts in Ukraine, as most of the country’s surplus has been erased in recent months. This situation has forced the Russian government to propose an additional windfall tax on Gazprom and its peers, which helped to avoid a budget deficit, but also showed that Kremlin would continue to squeeze as much from Gazprom as it can until the music stops.
What’s Next?
Even though there’s a high chance that the natural gas prices in Europe would remain high, it’s highly unlikely that Gazprom would be able to significantly benefit from them going forward due to the reasons stated above. What’s also important to note is that once Europe manages to decrease its reliance on Russian natural gas, there would be no need to work with Gazprom whatsoever in the future due to its unreliability. The European Union has already decreased its reliance on Russian natural gas imports from 40% last year to only 9% in September and has all the chances to fully wean itself from it in the next couple of years due to the increase in import capacity from other countries and companies.
At the same time, Gazprom is also unlikely to greatly benefit from its rapid pivot to Asia, as it won’t be able to replace its European revenues at the very least by the end of the decade, if ever. Let’s not forget that in 2021, Gazprom managed to export only 16.5 bcm of natural gas to China via LNG and its only eastern system of pipelines called Power of Siberia 1.
In the East, Gazprom faces even greater logistical constraints, as the Power of Siberia 1 is expected to have an annual export capacity of only 38 bcm by 2025, while the second system of pipelines called Power of Siberia 2, which is expected to have a total annual export capacity of 50 bcm, is not even constructed yet. Even if it is constructed and both systems of pipelines operate at full capacity by the end of the decade, then Gazprom would still export less natural gas through them to China than it did to Europe last year.
As a result, it’s hard to see any possibilities for Gazprom to replace its European revenues, which are partially funding the war in Ukraine due to the taxes and the dividends that the company pays to its shareholders, the biggest of whom is the Russian government itself. Once Europe fully decreases its exposure to the imports of Russian natural gas, Gazprom would be left with almost nothing. That’s why even the IEA chief believes that Russia will lose the energy battle with the West, which subsequently means that Gazprom would lose it economically as well.
The Bottom Line
It’s hard to see how Gazprom would be able to regain its market share in Europe even if the war in Ukraine stops tomorrow, which is also very unlikely to happen anytime soon. Russia’s invasion of Ukraine showed Europe that it can’t rely on Russia anymore and that’s why the European states have been actively looking for ways to diversify their supplies by signing long-term natural gas deals with more reliable partners.
Thanks to this, the Europeans should be able to fully cut their dependence on Gazprom supplies in the next couple of years, while the Russian company is unlikely to replace the European revenues mostly due to the logistical constraints, which were described in this article. As a result, it’s safe to say that Gazprom won’t be able to grow its business in the following decades even if natural gas prices stay at relatively high levels.
At the same time, the inability to sell the company’s shares directly on an open market even at a loss for non-Russian investors could make it harder to justify any future investment in Russia even if we manage to restore the rules-based international order, the foundations for which were laid down at the end of World War II.
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