Reuters: Gazprom's lost European sales cannot be compensated by China

The Kremlin-owned energy giant Gazprom, once Russia's most profitable company, could face a prolonged period of poor performance as it struggles to make up for lost gas sales to Europe with domestic and Chinese exports, Reuters reports, UNN writes.

Details

The company recently announced an annual net loss of $7 billion for the first time since 1999, following a sharp decline in trade with Europe.

Gazprom's problems reflect the profound impact of European sanctions on Russia's gas industry, as well as the limitations of Moscow's growing partnership with China, the newspaper notes.

The impact of international sanctions on oil exports was easier for Moscow to bear, the publication notes, as Russia was able to redirect oil exports by sea to other buyers.

"Gazprom relied on Europe as its largest market until 2022, when Russia's war against Ukraine prompted the EU to cut Gazprom's gas imports.

According to Gazprom and Reuters calculations, in 2022, Russia supplied a total of about 63.8 billion cubic meters of gas to Europe via various routes. Last year, the volume decreased by another 55.6%, to 28.3 billion cubic meters.

This compares to a peak of 200.8 billion cubic meters of gas that Gazprom pumped into the EU and other countries such as Turkey in 2018.

The mysterious explosions on the Nord Stream subsea gas pipeline from Russia to Germany in September 2022 also significantly undermined Russian gas trade with Europe, the publication points out.

Russia has turned its attention to China, seeking to increase pipeline gas sales to 100 billion cubic meters per year by 2030. "Gazprom started supplying pipeline gas to China via the Power of Siberia in late 2019.

By the end of this year, the Power of Siberia is expected to reach an annual capacity of 38 billion cubic meters, and Moscow and Beijing have agreed to export 10 billion cubic meters from the Pacific island of Sakhalin in 2022.

Russia's biggest hope is the Power of Siberia 2 pipeline through Mongolia, which is expected to export 50 billion cubic meters of gas a year. But this has led to some pitfalls due to a lack of agreement on prices and other issues, the newspaper notes.

"Although Gazprom will receive some additional export revenues when all these pipelines are operational, it will never be able to fully compensate for the business it lost in Europe," said Kateryna Filippenko, director of gas and LNG research at Wood Mackenzie.

"Russia has also been trying hard to establish a gas trading center in Turkey, an idea first expressed by President Vladimir Putin in October 2022. Since then, there have been no reports of any significant developments," the publication points out.

Even if Gazprom manages to establish pipeline deliveries to China, the newspaper writes, sales revenues will be much lower than from Europe.

According to the Moscow-based brokerage company BCS, Gazprom's revenue from gas sales to Europe averaged $3.3 billion per month in 2015-2019, thanks to monthly deliveries of 15.5 billion cubic meters.

Given the price of $286.9 per 1,000 cubic meters, according to the Russian Ministry of Economy, and Gazprom's gas exports of 22.7 billion cubic meters last year, the total value of the company's gas sold to China could reach $6.5 billion for the entire year 2023. 

"Gazprom did not disclose revenue from sales to Europe and China separately for 2023.

Dr. Michal Meydan, Head of China Energy Studies at the Oxford Institute for Energy Studies, said that China is unlikely to replace Russia as a highly profitable market for gas exports.

"China is giving Russia an exit, but with much lower prices and incomes than Europe," she said.

In 2023, Russian pipeline gas was sold to China at a price of $6.6 per million British thermal units and slightly lower than in the first quarter of 2024, at $6.4 per million BTU.

This compares to the average price for Russian gas in Europe of $12.9 per million BTU last year.

According to a document seen by Reuters last month, Russia expects the price of gas for China to continue to decline gradually over the next four years, while the worst-case scenario does not exclude a 45% drop to $156.7 per 1,000 cubic meters (about $4.4 per million BTU) in 2027 from 2023.

It does not say what could lead to lower prices, but Russia faces competition from other suppliers of pipeline gas to China, such as Turkmenistan, as well as LNG delivered by sea.

Gazprom's financial reports, which also include data on its oil and energy divisions, showed that revenue from the gas business more than halved last year to just over 3.1 trillion rubles, while sales of oil and gas condensate totaled 4.1 trillion rubles, up 4.3%, according to brokerage BCS.

According to the above data, a strategic transition to the production and export of ammonia, methanol and other gas processing products is possible for Gazprom, but it will not yield a quick return.

"At the same time, the prospects for Power of Siberia 2 remain vague: China is not likely to need as many additional imports in the 2030s due to a likely slowdown in demand growth and high domestic gas production," he said.

Russia will sell gas to China almost 30% cheaper than to EuropeApr 24 2024, 03:06 PM • 18070 views