[ad_1]
Balloons
In recent months, EU countries have actively sought ways to reduce their dependence on Russian fossil fuels after the latter attacked Ukraine earlier this year. If in the past Russia’s Gazprom (OTCPK:OGZPI) had was one of the largest single suppliers of natural gas to Europe, then after the invasion, European countries rushed to sign new natural gas contracts with American companies along with Middle Eastern countries and began to accelerate the construction of LNG infrastructure on the old continent.
Thanks to this, European exposure to natural gas deliveries from Gazprom is at its lowest level, which creates a problem for the Russian company, as it is almost impossible for it to offset the revenues it has made in Europe by changing markets due to logistical constraints. As a result, it is safe to assume that Gazprom is unlikely to grow its business in the next decade, especially since there is now the possibility that the company will indefinitely stop exporting natural gas to Europe through most of its pipelines.
The golden era for Gazprom is over
A month before the Russian invasion, I wrote a bearish piece on Gazprom with a strong sell rating in which I pointed out that Europe was unlikely to certify the company’s Nord Stream 2 pipeline anytime soon, as there was a strong consensus among the various political elites of the old continent about the need to reduce their excessive reliance on Russia.
For decades, Gazprom, with the help of the Russian government, which is the natural gas giant’s majority owner, has been focused on expanding its pipeline infrastructure westward. As a result, of the 210 billion cubic meters of natural gas that Gazprom exported through pipelines in 2021, 185 billion cubic meters went directly to European consumers, making Europe the largest buyer by a wide margin. At the same time, over the past decades, the Kremlin has used Gazprom’s dominant position in Europe to its advantage, engaging in various political blackmails to achieve its geopolitical goals. However, everything changed after February 24.
Before the invasion, Gazprom’s Nord Stream 1 pair of pipelines, which had an export capacity of 55 billion cubic meters per year, were used as the primary source for the company’s natural gas exports directly to Germany via the Baltic Sea. In addition, Gazprom has been building a second pair of gas pipelines called Nord Stream 2 for several years, with the same export capacity of 55 billion cubic meters per year, which together with the first link of the gas pipeline would have a total export capacity of 110 billion cubic meters per year. However, after the sabotage that took place under the Baltic Sea in September and damaged the pipelines, Gazprom lost the ability to use those pipelines to export its natural gas to Europe for a long time, if not forever.
On top of that, due to Gazprom’s ongoing conflicts with Poland’s state-owned O&G conglomerate PGNiG, the former first decided to cut gas flow through the Yamal-Europe pipeline, which has an annual export capacity of 32.9 billion cubic meters and runs through Poland. , and then later announced that it would no longer be used to deliver natural gas.
At the same time, Gazprom transferred only 15.3 billion cubic meters of natural gas to Europe through the Ukrainian pipeline system called Bratstvo in the first eight months of this year, although the total export capacity of those gas pipelines is 146 billion cubic meters per year. Worse, instead of maximizing its profits by fully exploiting the Ukrainian system, which remains intact despite the war, Gazprom is now threatening to completely cut off supplies through the Brotherhood for political reasons at the expense of its shareholders.
As a result of all these developments, the only intact pipeline system that continues to fully deliver natural gas to Europe and Turkey is Turk Stream with an annual export capacity of only 34.8 billion cubic meters. This will undoubtedly have a serious negative effect on Gazprom’s finances not only in 2022, but also in the following years.
The latest reports indicate that in 2022, Gazprom would export a total of only ~100 billion cubic meters of natural gas to its customers, including Europe, Turkey, China and others combined. At the same time, 2023 is expected to be even worse, as the 2022 figures include exports in January and the first half of February just before Russia invaded Ukraine, along with exports in the first few months after the invasion before disruptions occurred in supply. in. The same reports show that in the first half of November, Gazprom exported a total of only 2 billion cubic meters of natural gas to all of its customers combined, indicating a rapid decline in exports in recent months.
Taking this into account, we can safely assume that the company will not benefit significantly from high natural gas prices in the future, as it is unable to increase its exports due to political and logistical problems, while its production is declining. On top of that, we can’t even figure out what the fair value of the company is at this stage, since the Russian government allowed its public companies to stop fully disclosing their financials after the start of the Russo-Ukraine war.
What we do know is that Russia’s coffers are being depleted by the constant need to fund its war effort in Ukraine, as much of the surplus land has been wiped out in recent months. This situation forced the Russian government to propose an additional windfall tax for Gazprom and its peers, which helped avoid a budget deficit, but also showed that the Kremlin will continue to squeeze as much as it can from Gazprom until the music stops.
What’s next?
Although there is a good chance that natural gas prices in Europe will remain high, it is unlikely that Gazprom could benefit significantly from them in the future due to the above reasons. What is also important to note is that once Europe manages to reduce its reliance on Russian natural gas, there will be no need to deal with Gazprom in the future due to its unreliability. The European Union has already reduced its reliance on Russian natural gas imports from 40% last year to just 9% in September and has every chance of weaning itself off it completely in the next few years due to increased import capacity from other countries. countries and companies.
At the same time, Gazprom is unlikely to benefit much from its rapid pivot to Asia, as it will not be able to replace its European revenues until at least the end of the decade, if ever. Let’s not forget that in 2021, Gazprom managed to export only 16.5 billion cubic meters of natural gas to China via LNG and its only eastern pipeline system called Power of Siberia 1.
To the east, Gazprom faces even greater logistical constraints, as Power of Siberia 1 is expected to have an annual export capacity of just 38 billion cubic meters by 2025, while another pipeline system called Power of Siberia 2, which is expected to to have a total annual export capacity of 50 billion cubic meters, it has not even been built yet. Even if it is built and both pipeline systems are operating at full capacity by the end of the decade, Gazprom would still be exporting less natural gas through them to China than it did to Europe last year.
As a result, it is hard to see any possibilities for Gazprom to replace its European revenues, which partly fund the war in Ukraine due to the taxes and dividends the company pays to its shareholders, the largest of which is the Russian government itself. . When Europe completely reduces its exposure to Russian natural gas imports, Gazprom would be left with almost nothing. That is why even the head of the IEA believes that Russia will lose the energy battle with the West, which consequently means that Gazprom would also lose it economically.
lower limit
It is hard to imagine how Gazprom would be able to regain its market share in Europe even if the war in Ukraine ends tomorrow, which is also unlikely to happen anytime soon. The Russian invasion of Ukraine has shown Europe that it can no longer rely on Russia, and that is why European countries are actively looking for ways to diversify their supply by signing long-term natural gas contracts with more reliable partners.
Thanks to this, the Europeans should be able to completely reduce their dependence on Gazprom supplies in the next few years, while the Russian company is unlikely to replace European revenues mainly due to the logistical constraints described in this article. As a result, it is safe to say that Gazprom will not be able to develop its business in the coming decades even if natural gas prices remain at relatively high levels.
At the same time, the inability to sell the company’s shares directly on the open market even at a loss to non-Russian investors could make it difficult to justify any future investment in Russia even if we succeed in restoring the rules-based international order, the foundations for which were laid at the end of World War II .
[ad_2]
Source link
