Gazprom is unlikely to recover gas sales lost as a result of Vladimir Putin’s full-scale invasion of Ukraine for at least a decade, according to a report commissioned for the Russian energy group’s leaders.
The company’s exports to Europe will average 50bn-75bn cubic metres a year by 2035, barely a third of prewar levels, the research predicted.
Although Gazprom is hoping that a new pipeline to China can help make up for lost European export volumes, its capacity will only be 50 bcm a year and prices in the Asian nation are much lower than in Europe, the report said, while a deal over its construction has yet to be reached.
“The main consequences of sanctions for Gazprom and the energy industry are the contraction of export volumes, which will be restored to their 2020 level no earlier than in 2035,” the document’s authors wrote.
The 151-page report, commissioned by company management and written late last year, is among the most candid acknowledgments yet of how the western sanctions imposed in response to Russia’s war have damaged Gazprom and the wider Russian 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 research. “Gazprom is at a dead end, and they’re very much aware of it.”
Gazprom regularly orders outside research to help it argue for preferential treatment and extra financing from the Kremlin, according to 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 run around with a report like this and demand state support,” he said, although he added that Russian officials were “tough guys, and you won’t get anything out of them”.
Gazprom’s share of Russia’s energy exports will decline as pipeline gas, which has been hit particularly hard by sanctions, takes a back seat to less vulnerable liquefied natural gas, according to the report. It adds that the company will struggle to return to growth without significant state support in finding new markets for its gas.
“Because Gazprom, which doesn’t have its own proven technology for producing LNG at large capacity, is the only company exporting gas via pipeline and those volumes are decreasing, Gazprom’s role in the gas industry is accordingly expected to decrease,” the authors wrote.
The report highlights how sanctions have cut Russia’s energy industry off from crucial technology such as turbines that help move gas through pipelines, as well as the spare parts and expertise required to repair them.
It also studies the impact of western sanctions in countries such as Iran, North Korea, and Venezuela in a sign that Russia “is thoroughly preparing for permanent sanctions”, according to 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 outlook has darkened even further since the report was submitted to senior executives in November, with the company reporting a loss of Rbs629bn ($6.9bn) last year.
Russia is struggling to conclude a proposed deal with China for the Power of Siberia-2 pipeline, which Gazprom hopes will revive its exports.
If completed on schedule in 2030, the Power of Siberia 2 is expected to bring additional capacity of 50 bcm a year. But China’s ability to extract significantly lower prices than Europe paid for Russian gas means Gazprom’s exports will be less profitable even if restored to prewar volumes, according to the report.
“The fundamental problem that they have is that most of the revenues were coming from Europe. Those have been lost, and the gas that was going to go to Europe cannot go to any other good market,” said Craig Kennedy, a Harvard-affiliated scholar and former vice-chair at Bank of America.
The report estimates that Russia’s LNG exports will rise to 98.8-125.8 bcm in 2035 from 40.8 bcm in 2020, and account for about half of total gas exports — increasing the influence of Novatek, Russia’s largest and most technically advanced LNG producer, and other energy companies.
To maintain its dominant position in the domestic gas market, Gazprom will need to exploit its monopoly over gas transit infrastructure and demand preferential treatment from the Kremlin, the report says.
Gazprom will nonetheless lose market share to Novatek or be forced to use its LNG infrastructure, according to the report.
“The logical thing for the state to do is to combine the forces of the two,” Kennedy said. “Gazprom has much more of an upstream portfolio and Novatek has the technology and the knowhow 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 on ships, rather than pipelines, and more difficult to track. Building LNG terminals on Russia’s east coast, the authors write, could diversify exports beyond China and lessen the dependence that has allowed Beijing to control the price it pays for gas.
But Gazprom would struggle to ramp up its own export capacity, the report added, if Russia could not end its dependence on western-designed turbines, which are used for tasks such as electricity generation and compression as well as moving gas.
Russia’s energy ministry has said it expects companies to be able to repair US-made turbines by next year. But Russian manufacturers have yet to reproduce crucial parts of turbine production, the report says, with as much as 75 per cent of the components needed coming from western countries.
Moscow could be forced to mothball or shut down power stations across the country if it cannot produce an alternative domestically, the report warns.
A programme to build gas turbines domestically would cost at least Rbs100bn and take at least five years, the report estimated, adding that Gazprom would struggle to finance its investment program without a significant rise in revenues.
The company, according to Kennedy, is pleading for Moscow to “liberalise domestic gas prices or write us a big check and stop taxing us . . . Stop looking for us to fund the government — the government needs to support us”.