Gazprom Expected to Trim Natural Gas Production

LONDON (Dow Jones Newswires), Feb. 10, 2009

The global economic downturn is squeezing Russian natural-gas giant OAO Gazprom as falling demand for energy forces it to cut gas sales to Europe and deprives the company of valuable export revenue.

In an interview, Alexander Medvedev, Gazprom's deputy chief executive, said the price its European customers pay for gas will fall 32% to $280 per thousand cubic meters this year from $409 per thousand cubic meters last year. Exports to Europe will decline 5% to 170 billion cubic meters.

Analysts said Gazprom would clearly have to trim production to reflect falling demand, though Mr. Medvedev declined to say by how much. "We will not produce and sell more gas than the market demands," he said. "Our target is not to chase volumes."

But he said that despite sliding prices, Gazprom is committed to investing billions of dollars in new export pipelines to Europe and new gas fields in Siberia -- although overall dollar-denominated investments are likely to fall from last year because of the weakening ruble, which has shed a third of its value since the autumn.

State-controlled Gazprom, which supplies a quarter of Europe's gas needs, is coming under growing financial pressure as falling gas prices squeeze revenue. It is also laboring under a vast debt burden -- $47.6 billion at the middle of last year -- at a time when access to credit is tight even for such large, state-backed companies.

Meanwhile, last month's price dispute with Ukraine, which led to a temporary shutoff of Russian gas supplies to parts of Europe in the middle of winter, damaged Gazprom's reputation as a reliable supplier and revived concerns about the Continent's growing dependence on Russian gas.

It is a big change from last summer, when Gazprom boasted it would be the world's largest company by market value by 2015, with a capitalization of $1 trillion. Its market value is now about $74 billion.

The root of the problem is the falling price of oil. That hurts Gazprom because the price of its gas in European markets is linked to the crude-oil price with a lag of six to nine months. Gazprom Chief Executive Alexei Miller predicted last summer that crude would soon be trading at $250 a barrel. It is now about $40 a barrel.

Mr. Medvedev denied Gazprom has problems with its debt. "For this year, we'll manage debt service without restructuring and refinancing," he said. Banks still have an "appetite" to lend to Gazprom, he said, but "we don't like their conditions." The company has assured investors that cash flow this year should be enough to cover investment, debt and interest payments.

Mr. Medvedev was speaking as senior Gazprom management converged on London to address investors as part of a charm offensive that started in Moscow and will move to New York later this week. The aim is to show that Gazprom is strong enough to ride out the economic downturn and its weak share price doesn't reflect its robust fundamentals.

But he said exports to Europe will fall as the recession and a warm winter hurt demand. Shipments to the former Soviet republics also are set to decline this year, he said, largely because Ukraine is consuming less gas in the aftermath of its price dispute with Gazprom. But this would be compensated by the higher price Russia's neighbors now have to pay for its gas: The average price this year would be $198 per thousand cubic meters, up from $159 per thousand cubic meters last year.

In its presentation to investors, the gas company says it is sticking with its earlier investment target for this year of 920 billion rubles, or $25.4 billion at the current exchange rate. But Mr. Medvedev said that figure might be revised downward later this year, depending on how deep the recession in Europe turns out to be, and also to reflect a slide in industry costs, especially for Russian-supplied equipment and materials. "Right now, no one can give a picture" of future gas demand in Europe, he said. "We need time to determine the long-term consequences of the slowdown for the economies of Europe and Russia."

Yet some analysts say these levels of investment may not be enough to prevent a drop in production. Gazprom is highly reliant on large gas fields in Western Siberia that are mature and in decline. It is committed to developing huge new gas fields in the Yamal Peninsula, in northwest Russia. But there is widespread skepticism that the main field there, Bovanenkovo, will start up on schedule in 2011.

Hiroshi Hashimoto, a natural-gas analyst at the International Energy Agency in Paris, said Gazprom may be unable to meet growing demand for gas once the economies of Europe recover from recession. "Demand may be weak now, but there is clearly a danger of a gas-supply crunch in the long term," he said.  

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