BAGHDAD (AP) — A Middle East subsidiary of Russia’s Gazprom Neft has inked two oil deals with Iraq’s self-ruled northern Kurdish region, becoming the fourth major oil company to enter into agreements with Iraqi Kurds that bypass the central government in Baghdad.
The Kurds and the central government are at loggerheads over rights to develop resources. Baghdad wants to manage its energy resources nationwide, but Kurds insist the constitution doesn’t require them to go through Baghdad.
Since the 2003 U.S.-led invasion, the Kurds have signed scores of oil deals with small and mid-sized oil companies. But the entry of the oil majors may be a game changer that could lead to de facto policies the Kurds have long sought.
In a statement issued on Wednesday, the St. Petersburg-based company said it has acquired a 40 percent share in the 1,780-square-kilometer (687-square-mile) Garmian block. The Canada-based WesternZagros company will also hold a 40 percent share.
In the second deal, the company will hold an 80 percent share in the 474-square-kilometer (183-square-mile) Shakal block. The Kurdish Regional Government will hold a 20 percent share in each contract.
Both blocks are located in the southeastern part of the region and are expected to hold about 3.6 billion barrels of oil reserves. Gazprom’s up-front payment is to be around $260 million.
“Gazprom Neft considers the territory of the Kurdistan Region of Iraq promising for further geological study and consequent production at the fields,” First Deputy CEO, Vadim Yakovlev said.
With its latest deals, Gazprom has joined France’s Total S.A., U.S. oil majors Chevron Corp. and Exxon Mobil Corp. who have already made their own forays into the region.
Iraq’s post-invasion governments have until recently blacklisted energy companies that signed contracts with the Kurdish government to prevent them from working elsewhere in the country or purchase crude oil.
But in the case of Exxon Mobil, the Iraqi government has had a light hand. Baghdad prevented the U.S. company from taking part in Iraq’s fourth energy bidding round in May but has not touched its deal to develop the 8.6 billion West Qurna field near the southern city of Basra along with Royal Dutch Shell PLC.
No moves have been made against Total, which has a share in a consortium led by China’s National Petroleum Corporation to develop the 4.945 billion barrel Halfaya field in the south. Gazprom is developing the 100 million barrel Badra field in central Iraq.
Baghdad has so far only blacklisted Chevron, which has no deals with the government.
There is considerable incentive to work directly with the Kurds — unlike the flat fee the central government pays for each of barrel of oil extracted, the Kurds offer lucrative contracts allowing the developers to claim a share in reserves and the oil produced.
Also Wednesday, the Iraqi Kurds announced that they will resume crude oil exports from their region in the first week of August after they were halted in April over a payment row with Baghdad.
In 2011, the two administrations struck a tentative deal by which the Kurds send oil to Baghdad, which then sells it and each side then takes 50 percent of the revenues. But exports were halted in April by the Kurds who claimed that Baghdad failed to send them the money. In return, Baghdad accused the Kurds of keeping billions of dollars that ought to go to government coffers and also of smuggling oil.
The Kurdish statement said the exports will start at 100,000 barrels a day for a month as a “confidence-building” measure and if payments were forthcoming, they could move swiftly up to 200,000 bpd. If not, the exports will be halted again.
Since 2008, Iraq has awarded 15 oil and gas deals to international energy companies, the first major investments in the country’s energy industry in more than three decades.
The original goal was to boost daily production from about 3 million barrels now to 12 million barrels by 2017. That may be revised downward to fewer than 10 million barrels however, given infrastructure bottlenecks and a possible falloff in demand on international markets [source]
BARROSO AND PUTIN LOCK HORNS ON GAZPROM
Putin has signed a decree giving the government the right to protect natural gas
giant Gazprom from a stupid antitrust probe of Barroso. Galileo muttered the
phrase Eppur si muove, And yet it moves, after being forced
to recant in 1633, before the Inquisition, his belief that the Earth moves
around the Sun. Similarly the new inquisition of regulators forces executives
to admit something they did not do, in order to get smaller penalties. Eppur si
muove!There is an Antitrust Armageddon in Europe between tiptop companies and Fourth
Reich(EU). Eurokleptocrats are willing to do anything in order to get kickbacks
from industry leaders. The European antitrust laws have the unfortunate
consequence of harming Europeans by chilling innovation and discouraging
competition. Instead of protecting competition, EU laws protect competitors who
give kickbacks to kleptocrats! Kickback is the lubricant that allows a European
industry to run smoothly! No European machinery can run without lubricant! Eppur
si muove!The new Russian law prohibits companies deemed strategic from disclosing
information, disposing of assets or amending agreements without Russian
authorities’ ratification in the case that the claims are initiated by foreign
states or entities.European antitrust law is wielded most often by favor-seeking businessmen and
their kleptocrat allies. Instead of focusing on new and better products,
disgruntled rivals try to exploit the law by consorting with kleptocrats. EU
officials routinely direct antitrust regulators to bend the rules in pursuit of
political ends. In reality, the threat of abusive EC power is far larger than
the threat of oligopoly. Eppur si muove!Gazprom declares it is incorporated beyond EU jurisdiction, and is a company
which under Russian law exercises functions of public importance and has the
status of a strategic organization controlled by the state.When a company is forward-thinking, proactive, innovative, and productive, it
will produce good products that customers want to buy. As a result, it will win a
large market share. If the company is much better than its competitors, it might
win most, or almost all, of the market. This is the case with Microsoft. It has
earned its market share by producing good products that customers want to buy.Barroso is investigating whether Gazprom, the world’s largest gas exporter,
resorted to unfair competition and price-fixing in Central and Eastern Europe’s
natural gas markets. The EU, which gets 25% of its gas from Russia, wrongfully
claims that Gazprom has hindered the free flow of gas across its member states,
preventing supply diversification and limiting customer choice in delivery
points. Barroso also suspects Gazprom of imposing unfair costs on its customers
by linking the prices of gas and oil.A company that wins a large market through its own productive efforts deserves
accolades. This is because justice, morally, tells us that we must reward the
good. However, to the government, a large market share is taken as evidence of
anti-competitive behavior, which makes the company a target for antitrust
action. This seems to be the motive behind the antitrust suits against Microsoft
and Google.Barroso notes Gazprom’s long-term supply contracts linking gas prices to oil
prices are no longer justified because of the appearance of a spot market for
gas and increased supplies of shale gas. Gazprom may face a
fourteen-billion-euro penalty, according to estimates based on the fact that
companies found to breach EU competition rules can be fined as much as 10% of
annual revenue.European antitrust laws lead to huge corruption, because government officials
ask for kickbacks in order to erase the alleged violation. The standard kickback
in EU is 10% of the erased penalty! Many Greek officials were caught on tape
asking for the corrupt tithe! Many European political parties make up their
election expenses from kickbacks on antitrust cases! This is the worst possible
blackmail, where tiptop ethical companies are held hostage by European
kleptocrats. Eppur si muove!Putin warns Barroso that there would be losses on both sides if the thorny issue
isn’t tackled. Putin accuses Barroso of trying to burden Russia with the
subsidizing of formerly communist EU states by forcing Gazprom to reduce prices
for customers in Eastern and Central Europe. Gazprom says the Barroso
investigation is an attempt to reduce gas prices, and it won’t give discounts to
Barroso without the Russian government’s go-ahead. [source]
The Gazprom Cables ‘Not a Competitive Global Company’
Gas giant Gazprom was meant to catapult Russia back into its role as a global superpower. Executives dreamed of the “most valuable company in the world.” But secret cables from the US Embassy in Moscow provide a different picture: The Americans consider the mega firm to be chaotically organized and corrupt.
June 10, 2009, Moscow: “Too many political constraints”
XXXXXX: Redacted by the editors. Important note on the dispatches…
<>
10.06.2009 11:02
09MOSCOW2528
Embassy Moscow
CONFIDENTIAL
09MOSCOW367|09MOSCOW403|09MOSCOW971
VZCZCXYZ0000
PP RUEHWEB
DE RUEHMO #2528/01 2791102
ZNY CCCCC ZZH
P 061102Z OCT 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 4993
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: GAZPROM’S REVERSAL OF FORTUNE, PART ONE
REF: A. MOSCOW 971
C o n f i d e n t i a l moscow 002528
Sipdis
Dept for eur/rus, eeb/esc/iec gallogly and wright, s/eee
morningstar
doe for hegburg, ekimoff
doc for jbrougher
nsc for mmcfaul
E.o. 12958: decl: 10/05/2019
Tags: epet, enrg, econ, prel, rs
Subject: gazprom’s reversal of fortune, part one
Ref: a. Moscow 971
b. Moscow 403
c. Moscow 367
Classified By: Econ MC Matthias J. Mitman for Reasons 1.4 (b/d)
1. (U) This is the first of a two-part report on the new
economic realities facing Gazprom, Russia’s state-owned gas
sector giant.
——-
summary
——-
2. (SBU) Far from reaching its ambitions of becoming “the
most valuable company in the world,” Gazprom’s fortunes have
reversed dramatically in the past year. The company’s market
value, production, and sales have all plummeted since the
onset of the economic crisis. With dramatically reduced
cash-flow, the company has been forced to cut back on capital
expenditures and its ambitions, despite political rhetoric to
the contrary. However, as we will examine in part two of
this report, Gazprom’s problems are likely longer term. End
summary.
————————————
massive reversal in major indicators
————————————
3. (U) Major indicators of Gazprom’s performance have all
reversed course dramatically in the past year. (Note:
Figures in this report are taken from Gazprom reports,
statements, and presentations, unless otherwise indicated.
End note.)
Market capitalization —
4. (U) At its peak in May 2008, Gazprom’s market valuation,
based on the small percentage of its shares that trade
publicly, was over $350 billion, and company president Alexey
Miller declared Gazprom would become “the most valuable
company in the world.” Miller suggested Gazprom’s market
capitalization would reach $1 trillion in the near future.
By May 2009, in the midst of the global economic and
financial crisis, the company’s market capitalization had
dropped to its recent low of approximately $75 billion, but
has since rebounded to approximately $120 billion.
Production —
5. (U) Gazprom’s gas production peaked in 2006, at 556
billion cubic meters (bcm). In 2008, it was 550 bcm. In the
first seven months of 2009, however, Gazprom’s production was
down almost 25% over the same period in 2008. As of
September 2009, Gazprom expects 2009 production to reach just
474 bcm, and many analysts believe that figure to be overly
optimistic. In a September note on Gazprom, investment bank
Troika Dialog predicted Gazprom would have difficulty even
reaching 460 bcm. On the low end, some analysts estimate
Gazprom could produce just 450 bcm or less in 2009 — a 100
bcm or more decline from its peak production. Even this
massive drop in production is masked to some degree by the
halt in gas imports from Turkmenistan since April (ref A).
In 2008, Gazprom imported 42 bcm from Turkmenistan, nearly
all of which was re-exported to Ukraine. Having halted these
imports, Gazprom itself is supplying the Ukrainian market out
of Russian production.
Revenues —
6. (U) The Russian Customs Service reports that Russian gas
export revenues were down 50% in the first 7 months of 2009,
compared to the same period in 2008, a decline of almost $20
billion. While Gazprom’s official results for 2009 will not
be published until well into 2010, a back-of-the-envelope
calculation using Gazprom’s own projections for average price
and volumes of exports to Europe in 2009 (ref C) indicates
the company might receive about $30 billion less from exports
to Europe in 2009 than in 2008. This represents a loss of
about 2% of Russian GDP and is in line with estimates from
various analysts. (Note: Given the relative significance of
export sales to Europe (excluding FSU), the relative
reliability of the figures, and to avoid exchange rate
complications, we focus only on export revenues here.
According to its recent bond prospectus, Gazprom’s exports
are divided into sales to the FSU, and to Europe. Sales to
the FSU and Europe represent 16% and 63%, respectively, of
its sales by revenue — meaning exports represent 79% of
Gazprom’s revenues. End note.)
Domestic sales —
7. (U) Gazprom’s domestic sales are not down as dramatically
as one would expect given the economic crisis, due primarily
to artificially low domestic prices, which prop up demand.
While Gazprom has not yet reported official results for the
first half of 2009 (1H09), various analysts predict a drop of
about 10% in gas volumes to the domestic market.
Export volumes —
8. (U) Gazprom’s overall exports peaked in 2008 at 281 bcm.
Gazprom’s sales to the FSU peaked in 2007, at 101 bcm,
dropping slightly to 97 bcm in 2008. Sales to the rest of
Europe peaked in 2008, at 184 bcm. (Note: Interim
statements regarding 2009 sales often do not coincide in
definition with audited annual reports. Thus 1H09 sales
estimates only give an indication of the trend and are not an
exact comparison with 2008 figures. Gazprom has not yet
released official results for 1H09 and only released first
quarter (1Q09) results on August 26. End note.) Through
1H09, Gazprom has said it shipped about 33% less gas to
European customers than in 1H08. In a recent statement, the
company said its exports to the FSU in 1H09 dropped 54%
compared to 1H08. A weighted average of those estimates
indicates overall exports shrunk by about 40% 1H09.
9. (U) As Gazprom and many analysts point out, however, 2H09
should be much better for Gazprom exports as many European
customers restrained purchases in 1H09, knowing that prices
— which are tied to oil prices with a six to nine month lag
— would drop dramatically in 3Q09. Furthermore, export
volumes in 2H08 were already dropping rapidly due to the
economic crisis and high gas prices that were reaching their
peak in 4Q08. Results for 1H09 were also significantly
affected by the 21 day gas cutoff to Ukraine and 10 day
cutoff to Europe in January. That said, 2009 will still be a
dismal year for Gazprom export volumes.
—————
forced cutbacks
—————
10. (C) Facing financial realities, Gazprom recently cut its
capital expenditure budget by $7.5 billion, or about 25%,
including cuts to Shtokman and Yamal development. However,
Gazprom and GOR leadership continue to take the tack that
“everything is fine” (ref B). One attendee at the recent
gathering of the “Valdai” group of international Russia
experts told us that Gazprom CEO Alexey Miller told the group
that the company’s plans for the Nord Stream and South Stream
gas pipelines, and for the development of the Shtokman and
Yamal gas fields are “all on track.”
11. (C)xxxxxxxxxxxx told us recently that
Miller’s and other GOR leaders’ public statements on Gazprom
should be ignored. xxxxxxxxxxxx said these leaders understand well
that Gazprom is in trouble but they just don’t know what to
do about it.
12. (C) According to xxxxxxxxxxxx, Gazprom simply doesn’t have the
money to move forward on all its so-called “priorities,” and
it will need to choose which are most important, while facing
insatiable political demands on its revenue streams. xxxxxxxxxxxx, told us
recently that he believes Gazprom has “a heck of a lot of
cost-cutting capacity” still available, but that the company
has too many political constraints preventing it from taking
the most necessary and painful measures. Furthermore, he
figures the company needs to spend about $5 to $8 billion a
year just to maintain its aging system and that these costs
will rise in the future. xxxxxxxxxxxx is thus also very
skeptical of Gazprom’s other major commitments such as South
Stream and Shtokman.
——-
comment
——-
13. (C) Gazprom’s capital expenditure cuts reflect an
understanding that, public rhetoric aside, the company can’t
spend money it doesn’t have. However, Gazprom’s longer-run
problems are largely beyond its control and require
fundamental reforms that will be difficult to achieve. In
part two of this report, we examine the constraints to
Gazprom’s return to dominance.
Beyrle
Gazprom headquarters in Moscow: “Private bank accounts and dirty deals”
Gas giant Gazprom was meant to catapult Russia back into its role as a global superpower. Executives dreamed of the “most valuable company in the world.” But secret cables from the US Embassy in Moscow provide a different picture: The Americans consider the mega firm to be chaotically organized and corrupt.
Info
High-ranking representatives of Russian gas giant Gazprom are hard to pin down for appointments. So when American diplomats finally got the chance, they cut right to the chase: What are the giant energy company’s actual business aims?
The Gazprom man was candid. The first priority, he said according to US diplomatic cables obtained by WikiLeaks and shared with SPIEGEL and other partners, is to provide reliable and affordable gas to the domestic population. The second, he said is to “fulfill its social obligations,” including charitable projects all across Russia.
The American envoys persisted in their questioning. Was it not also the goal of the company to maximize its shareholder value and its market share? Yes, of course. The cable cites the official also adding a third priority to his company’s goal: to maximize “control over global energy resources.”
A “Gazprom official describes the company as a socialist rent-seeking monopolist,” the US envoys reported after a September 2008 meeting in a dispatch cabled to Washington.
‘Huge Wealth, but Inefficient’
That’s the tenor of a number of secret US Embassy reports about the model Russian company, cables that are filled with critical American assessments about a bureaucracy that has gone overboard and a mafia-like political system in Russia.
But the assessments are particularly pointed when it comes to Gazprom, the company the Russians themselves most like to celebrate and to deploy in their battle to regain lost power in the world. Even as recently as May 2008, Chairman Alexei Miller was pledging that Gazprom would soon be “the most valuable company in the world,” with market capitalization that would reach $1 trillion in the near future. But around one year later, in the midst of the global economic and financial crisis, the company’s market capitalization had dropped to $75 billion.
“Gazprom is,” the Americans summed up in one cable, “what one would expect of a state-owned monopoly sitting atop huge wealth — inefficient, politically driven, and corrupt.” The American diplomats also painstakingly detailed the sectors in which the energy giant is engaged in and in which falling gas prices are creating problems for it.
Falling Demand for Gas
Their results are sobering. One 2009 cable states: “Far from reaching its ambitions of becoming ‘the most valuable company in the world,’ Gazprom’s fortunes have reversed dramatically this year. The company’s market value, production, and sales have all plummeted since the onset of the economic crisis.” With dramatically reduced cash-flow, the cable reads, the company has been forced to cut back on capital expenditures and its ambitions, despite political rhetoric to the contrary.
The US diplomats described Gazprom’s problems as likely being “longer term,” and not just a by-product of the crisis. That’s because demand for gas in Germany and Europe is in decline because industrial production there and across Europe has become more efficient.
At the same time, a cable noted, few new markets are opening up in the former Soviet states. Ukraine, for example, indicated it was considering halving its gas purchases. Gazprom Chairman Miller has for some time now been longing to establish a new market in the US but, as a cable states, the country is “looking more and more saturated every day with ever larger estimates for domestic production.”
According to the assessment by the US diplomats, Gazprom’s greatest problem is the company’s own Byzantine structures. “Gazprom is not a competitive global company,” the assessment reads, despite sitting on the world’s largest gas reserves. “Gazprom is the legacy of the old Soviet Ministry of Gas and still operates much the same way.”
A Top Executive with a Love for Hockey
There were many indications that this was the case. The Americans learned from an informant that a senior partner in an international accountancy firm needed two years just to unravel Gazprom’s holdings. The empire included one of Russia’s largest banks, an important Russian media company and a major construction firm.
Originals: Key Gazprom Cables
July 10, 2009, Moscow: “Huge wealth … corrupt’
XXXXXX: Redacted by the editors. Important note on the dispatches…
<>
10.07.2009 13:42
09MOSCOW2541
Embassy Moscow
CONFIDENTIAL
09MOSCOW2528|09MOSCOW854|09VLADIVOSTOK110
VZCZCXRO4339
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHMO #2541/01 2801342
ZNY CCCCC ZZH
P 071342Z OCT 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5023
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY
TAGS: EPET, ENRG, ECON, PREL, RS
SUBJECT: GAZPROM’S REVERSAL OF FORTUNE, PART TWO; COMEBACK
REF: A. MOSCOW 2528
C o n f i d e n t i a l section 01 of 04 moscow 002541
Sipdis
Dept for eur/rus, eeb/esc/iec gallogly and greenstein,
s/eee morningstar
doe for hegburg, ekimoff
doc for jbrougher
nsc for mmcfaul
E.o. 12958: decl: 10/06/2019
Tags: epet, enrg, econ, prel, rs
Subject: gazprom’s reversal of fortune, part two; comeback
unlikely
Ref: a. Moscow 2528
b. Vladivostok 110
c. Moscow 854
Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)
1. (U) This is part two of a two-part cable on the new
economic realities facing Gazprom, Russia’s state-owned gas
sector giant.
——-
Summary
——-
2. (C) Gazprom faces many external and internal constraints
to renewed growth, following a dismal year in which all main
indicators of its performance deteriorated dramatically. The
globalizing gas market, a gas glut that shows no signs of
reversal, and politicized management likely mean that Gazprom
will not reach the heights of revenues and power achieved at
its peak in 2008. Unfortunately, the types of reforms (e.g.
privatization) that would result in a more valuable and
productive gas industry are stymied by the GOR’s seemingly
firm belief in a state-controlled sector. While Gazprom will
remain a major economic force, its influence on GOR policy
and its relative role in the Russian economy likely will
diminish in the short- and medium-term. End summary.
———————————
external constraints to a rebound
———————————
3. (SBU) Gazprom’s current problems (ref A) are not solely
the result of one-off contractions in demand due to the
economic crisis. Gazprom faces a fundamental shift in the
gas demand picture at a time of increasing competition.
Demand stabilization and decline —
4. (SBU) xxxxxxxxxxxx told us recently that Gazprom was simply unprepared
for the inevitable leveling off and current decline in
European gas demand. He explained that Gazprom’s management
has only known rapidly rising European demand for Russian gas
as most European countries “gassified” their economies over
the past two decades. He noted that anyone looking at the
trend could have been excused for thinking it would continue
perpetually; but now the period of gassification is over.
According to xxxxxxxxxxxx demand for gas in Germany is
actually in decline, as industrial production in Germany (and
across Europe) has become more efficient and as much of it
has been outsourced.
Competition —
5. (SBU) Gazprom not only faces a demand problem, but also
competition from an increasingly globalized gas market —
“for the next 5 to 10 years, gas will clearly be a buyers
market,” said xxxxxxxxxxxx has calculated (using data
from the BP Statistical Review of World Energy) that
Gazprom’s share of EU 27 gas imports has dropped steadily
from about 50% in the mid-90s (when gassification increased
demand) to just 34% in 2009. xxxxxxxxxxxx expects Gazprom’s share to
decline to about 30% and stabilize at that level. xxxxxxxxxxxx also
calculated that LNG’s contribution to EU imports over the
last decade has increased from about 10% to about 20%, a
figure he projected to continue to grow. In addition,
Gazprom will have to cope with massive new volumes of LNG on
the global market from projects already underway in Qatar and
elsewhere (ref C).
No help from other markets —
6. (C) Gazprom is unlikely to get any relief from its former
Soviet Union(FSU) customers either. Despite the likely rise
to “market prices” for gas sales to the FSU, lower demand
will continue to hurt Gazprom. Ukraine, Gazprom’s major
export market outside of non-FSU Europe, earlier signed a
take-or-pay contract which outlines a minimum amount of gas
which Ukraine is obliged to purchase from Russia. Ukraine
Moscow 00002541 002 of 004
has recently indicated it might take as little as 50% of the
52 bcm of gas it had earlier agreed to buy in 2010. Russian
government officials remain concerned over Ukraine’s ability
to pay for gas this winter and are already signaling they are
prepared to shut off exports to Ukraine in the event of
non-payment.
7. (SBU) Global markets will also offer little hope for
Gazprom, at least in the medium-term. Gazprom executives
have often expressed the expectation that the company would
become a global gas supplier, perhaps through newly expanded
LNG capacity. However, their preferred future export
destination, the U.S., is looking more and more saturated
every day with ever larger estimates for domestic production.
In a recent meeting with Embassy officials in Sakhalin,
Shell oil representatives stated that no LNG had been shipped
from the Sakhalin II facility to the U.S. due to soft prices
in that market. Much of this LNG has been shipped to Japan
instead.
Domestic market —
8. (SBU) Gazprom often touts future revenue gains from
domestic market price liberalization. However, it neglects
to account for demand elasticity in the wake of sharp
proposed increases in prices. With one of the most energy
intensive economies in the world, future hikes in domestic
gas prices would likely cut domestic demand substantially, as
evidenced in other countries that have implemented rational
pricing. Thus Gazprom’s revenue gains from higher domestic
prices would be at least partly offset by lower sales volumes.
External politics —
9. (SBU) In addition to the headwinds from market forces,
Gazprom faces the political and PR difficulties in external
markets that it has largely brought on itself through the gas
cutoffs of 2009 and 2006. Despite some pain in certain
Central and Eastern European countries, Ovchinnikov
explained, the 2009 gas cutoff showed that Europe could get
by without Russian gas. This should bolster EU determination
to minimize its dependence on Russian gas, and to explore new
options to diversify energy supplies.
——————————
internal constraints to growth
——————————
The Ministry of Gas —
10. (SBU) A Gazprom that behaved more like a competitive
global company would probably find a new path to growth more
quickly. But Gazprom is not a competitive global company,
despite sitting on the world’s largest gas reserves. Gazprom
is a legacy of the old Soviet Ministry of Gas and it still
operates much the same way. As a Gazprom executive himself
admitted to us, the company’s first two priorities are to
provide reliable and affordable gas to the domestic
population, to “fulfill its social obligations.” One contact
with direct information told us it took a senior partner from
a major accounting firm two years of full-time investigation
just to unravel Gazprom’s holdings, which include one of
Russia’s largest banks, one of Russia’s major media
companies, and a major construction company.
Technologically backward —
11. (SBU) Gazprom’s legacy and the government’s ownership of
the company also mean that it must act in the interests of
its political masters, even at the expense of sound economic
decision-making. From building unneeded pipelines (ref B) to
maintaining employment at some unneeded facilities, Gazprom
declines to solely act on financial and economic grounds. As
a state-controlled monopoly during the flush times of the
past decade, Gazprom had little incentive to develop new
technologies and capabilities long enjoyed by other global
oil and gas companies. Despite management’s interest in
expanding Gazprom’s LNG capacity, the company has only one
LNG export terminal, which it took over by forcibly becoming
the majority owner in a Shell-led consortium. Rapid
Moscow 00002541 003 of 004
expansion of LNG export capacity is unlikely without the help
of international oil companies (IOCs), who are still trying
to find an acceptable future working model in Russia.
Inability to adapt —
12. (SBU) Gazprom’s inability to meet competitive pressures
is apparent in the current European gas market. According to
xxxxxxxxxxxx Gazprom is the only major European supplier that
has had to cut production. xxxxxxxxxxxx blames Gazprom’s “self
inflicting wound” of tying gas prices to oil prices. He said
this convention dates back to when gas was a substitute for
fuel oil for heating. xxxxxxxxxxxx explained that this oil
price link has made Gazprom the high-price supplier in
Europe, a situation that is likely to continue into the near
future. xxxxxxxxxxxx said that with European gas demand unlikely to
recover to pre-crisis levels until 2013 and Europe facing
“excess supply” for at least the next decade, Gazprom will
have a very tough time just maintaining market share. A
major oil company senior executive echoed this analysis in a
recent meeting with us, noting “if you are a European
consumer, the last molecule of gas you want to buy is from
Gazprom.”
—————————————
possible tensions, but reforms unlikely
—————————————
13. (SBU) The tough times may be creating (or exacerbating)
tensions within Gazprom and the GOR over the company’s
future. Several contacts have told us they have heard of
such tensions. One Russian company executive said he has
heard that xxxxxxxxxxxx has been pushing for dismantling
Gazprom, to at least take away its control over the domestic
gas pipeline system. An executive at a Western company told
us recently that there are two camps within the upper levels
of the GOR on the issue of Gazprom’s direction. One camp
favors the current “one national company” approach, while the
other favors competition to spur a more efficient and modern
gas sector. Unfortunately, this executive explained, “the
number one factor” in managing Gazprom from the GOR
perspective is “how to increase government revenues from the
company.”
14. (C) xxxxxxxxxxxx, brushed off rumors of infighting
at Gazprom as nothing new. xxxxxxxxxxxx said there has always been
infighting at the company because it is such a bureaucratic
behemoth. “Everyone is always looking to make others look
bad in order to move ahead themselves,” xxxxxxxxxxxx said. While
xxxxxxxxxxxx acknowledged Gazprom’s substantial problems, xxxxxxxxxxxx did
not think any major reforms would be forthcoming.
15. (SBU) Rumors aside, nobody with whom we have talked
believes Gazprom is in any danger of losing its monopoly on
exports or its preferred status within the Russian economy.
Nor is the government likely to give up control of the
company anytime soon. Without such fundamental reforms, it
is difficult to see how Gazprom can transform itself into a
modern corporation in the current environment.
——-
comment
——-
16. (C) Gazprom is what one would expect of a state-owned
monopoly sitting atop huge wealth — inefficient, politically
driven, and corrupt. For years, with its exports and export
prices rising rapidly, it could easily pretend that all was
well and that the future was bright. That pretense may now
be giving way to the new reality of declining sales, lost
market share, and an inability to maneuver adeptly in the
face of global competition. Although Gazprom will likely
muddle along as a major corporation and major contributor of
jobs and budget funds, its economic contribution will likely
be diminished. While Gazprom can still shut off gas to
Ukraine or to other parts of Europe, each such threat further
undermines the company’s credibility as a reliable energy
supplier, and underscores the fact that Gazprom is
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politically subordinate to the Kremlin. Gazprom’s influence,
both domestic and international, has been directly tied to
its cash flow — money that funds employment, suppliers,
budgets, charities, foreign ventures, and, surely, many
private bank accounts and dirty deals. Unfortunately for
Gazprom and for the GOR, the massive revenues and profits
that the company produced in 2008 are unlikely to return
anytime soon. End comment.
Beyrle
Experts estimated that the company had to also spend between $5 billion and $8 billion on keeping its aging infrastructure in good working order — costs that will only increase in the future. A prominent Western oil executive told the US diplomats that while drilling a borehole in Canada only took 10 days in Russia it took twice as long.
A meeting with top Gazprom executives, such as Deputy CEO Alexander Medvedev, were also sobering. In a discussion with US diplomats, the hockey fan complained that there was still no cooperation between the Russian and American hockey leagues — and fulminated against Ukraine, which he claimed had orchestrated the gas dispute with Russia.
The Americans’ conclusion is devastating: “Gazprom’s legacy and the government’s ownership of the company … mean that it must act in the interests of its political masters, even at the expense of sound economic decision-making.” The company had made funds available for many “private bank accounts and dirty deals,” one cable wrote, though it lacked any concrete proof for this claim. Gazprom itself has consistently defended itself against accusations of corruption.
In any case, the Gazprom money was not flowing as much as previously, the US diplomats wrote. “Unfortunately for Gazprom and for the Russian government, the massive revenues and profits that the company produced in 2008 are unlikely to return anytime soon,” one cable reported. Although Gazprom would remain a major company, its economic contribution was likely to be diminished, the US diplomats concluded.
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