Gazprom shows what happens when giants push their weight around for too long

May 3, 2013
Obsession
Energy Shocks
May 3, 2013

If you wrote up a list of the world’s most vilified people and things, it currently would be topped by the Tsarnaev Brothers. Mohammed Soel Rana would probably be next, along with a few other Bangladeshi garment factory owners. But just a few years ago—in the middle-late 2000s—the list might have been led by Gazprom, the Russian gas giant that preferred to cut off service to Ukraine and the rest of Europe in the dead of winter rather than settle utility disputes the normal way.

What a difference five years makes. This mighty spearhead of Vladimir Putin’s foreign policy, according to The Wall Street Journal, finds itself pushed around (paywall) and having to offer discounts to Poland, Bulgaria and other relative small fry.

One thing that has changed Gazprom’s world is the global natural gas boom, which has undermined its previously unassailable dominance in Europe, where it supplies 25% of the market. Last year, outside gas pushed down Gazprom shipments to Europe by 3.6%; Gazprom’s profit fell by 9.5%. Investors have pummeled the stock, sending down Gazprom’s share price by 24% since September.

But a decisive part of its unfavorable revenue report was that Gazprom was forced to disgorge $3.4 billion in rebates to European customers. This is a bit of an accounting trick: Gazprom knows that it has to lower its prices if it does not wish to be relegated to comparative oblivion by the growing competition. Yet it also wants to maintain the fiction that it does not renegotiate long-term supply contracts (in fact, write the Atlantic Council’s David Koranyi and Adnan Vatansever, Gazprom negotiates all the time behind closed doors). In addition, Gazprom wants to avert being seen to buckle to pressure to abandon the archaic pricing link between gas and more valuable oil, a practice that props up the natural gas price. So it rebates fees paid by its customers according to a formula linked to the highly competitive European spot price of gas.

In Russia itself, Gazprom cannot collapse entirely because Putin needs the company–oil and gas taxes together comprise half of Russia’s state budget. But Gazprom has lost the premier power slot to Rosneft. Putin is even contemplating the previously unthinkable—taking away Gazprom’s lucrative monopoly on gas exports. The rationale behind Gazprom’s ability to instill fear has dissipated dramatically.

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