Gazprom may be forced to rethink many of its massive long-term investments as the Russian supplier’s projects face a wall of challenges. Technological difficulties, the emergence of US shale gas, Europe’s supply glut and a steep drop in net profits have already led to a scaling back in investments.

The world’s biggest gas producer recently indicated for the first time
that it may revise timelines for some of its projects after profits
fell by half during the first half of 2009. Falling demand both at home
and abroad, weak gas prices, rising debt levels as well as the January
dispute with Ukraine were to blame for the slump in profits from $21
billion to $10 billion compared to the same period one year prior.

Gazprom, which supplies over a quarter of the EU’s gas needs, has
already lowered its production this year by one fifth. The energy
giant’s profits are expected to face further pressure from the ongoing
disputes over long-term take or pay contracts, where European utilities
are battling Gazprom over liability for billions of cubic meters of
unwanted gas. This, in turn, has contributed to weak prices and an
oversupply, as many utilities, suffering from a shortage of demand,
have been forced to sell unwanted gas back onto spot exchanges.

The European gas glut, which the International Energy Agency estimates
could grow to 200bcm per year by 2015, could not have come at a worse
time for Gazprom. Russia’s largest corporation plans to shift its
interest towards liquefied natural gas (LNG), while diverting more
supply from Europe to Asia and the US. Gazprom launched its first LNG
terminal in February, on the Pacific island of Sakhalin, and by 2020
aims to achieve a production target of between 80 million and 90
million metric tons a year: about one fifth of global LNG demand.
However, the ambitious timelines for this and other projects, which
already face numerous technological difficulties, are likely to be
delayed as Gazprom turns to saving cash. The company has already cut
back its investment projects by 30% in 2009.

Elsewhere, Gazprom has had its eyes on the US market, where by 2018 it
plans to ship the majority of production from its Shtokman project.
However, the emergence of US shale gas – which has already led to a
substantial diversion of LNG to Europe (with many US LNG terminals
running at 10% of capacity) – presents yet another potential roadblock
to Russia’s rise as a dominant player in LNG markets. Should shale
indeed prove to be a game changer and the glut in supply continue,
Gazprom may be forced to critically rethink some of its long-term
investment projects.

Source: Datamonitor

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