Gazprom bides time as new gas sources erode market

This weeks Gazprom shareholder meeting provided an outline on how the company has fared throughout the economic downturn with the impact of shale gas and LNG in the spotlight.

The affects of the global financial crisis made 2009 a bad year for the Russian energy giant. Gas exports to the European market – crucial for Gazprom – slumped by almost 12%, while extraction fell to 460 billion cubic meters.

Part of the problem was the emergence of alternative sources for the fuel. Shale gas in particular caught the attention of CEO Alexey Miller, but he thought the threat was more hype than real.

“This is a well-organized and very well-financed information campaign like the global warming or biofuel and suddenly everyone became aware of what shale gas is." 

Some investors have been charmed by the prospect of shale gas. But Aleksandr Medvedev, General Director, Gazprom Export believes it is not sustainable unless prices rise.

“We expect prices for shale gas to inevitably go up, as its current price only allows its US producers to cover the operational expenses – a situation like that cannot last long.”

Despite the doubts over its profitability, shale gas along with liquefied natural gas brought in from the Middle East have made an impact on Gazprom’s plans.

Sergey Pravosudov, General Director, Institute of National Energy says the company is delaying one of its biggest projects until the outlook becomes clearer.

“There were great plans to launch Shtokman project to deliver liquefied gas to the US, but now those plans are postponed for an uncertain period of time to watch the market. The Americans themselves realize that shale gas can’t compensate the decline production of traditional gas so they won’t avoid buying LNG – the question is how much, when and whose gas they will buy.”

Gazprom recently reduced its forecast for exports to Europe this year by 10 percent. This did not come as a surprise to many analysts who thought the company was being overly optimistic when it made its initial predictions at the beginning of the year. Now Gazprom believes there won’t be a full recovery in demand from Europe for three years.