OAO Gazprom, together with its subsidiaries, is engaged in the exploration, production, transportation and sale of gas in the Russian Federation and other countries. Its principal shareholder is the Russian government, with a present holding of 50%.
In terms of size, Gazprom is one of the world’s largest energy groups with proven portable hydrocarbon reserves of about 149.7 billion bboe. The medium- to long-term outlook for Grazprom is based on its dominant market share in Russia (currently around 70% of Gazprom’s sales), while its Western European sales account for about 27%, and sales to Asia, represent about 3% of total sales. It is expected that the European market share will constantly increase in the near future at the expense of the Russian sales.
According to the South Stream consortium (whose shareholders are Eni and Gazprom, each with a 50% stake), European countries will require an additional 80 billion cubic metres of gas by 2020 and 140 billion cubic metres by 2030. With the construction of the South Stream pipeline, the company will be able to increase its dominance in Europe. At this stage, the competitor project “Nabucco” (whose shareholders are: OMV Group with 24.34%, BOTAS Petroleum Pipeline Corporation, Bulgarian Energy Holding EAD, MOL Group, and Transgaz each with 16.67% and GDF SUEZ Company with 9%) will mostly like not go beyond the planning stage as there are too many objections to clear.
OAO Gazprom is the world’s largest producer of gas, with the principal market so far being Europe. With gas being the most efficient alternative to gasoil, the opportunities for Gazprom are excellent. Given the geographical location of its principal sources ((Achimov-field, Bovanenkovo-field, Zapolyarnoye-field, etc) it can serve European consumers just as well as Asian clients. It is for this reason that Gazprom has the intention to build an important plant to provide LNG to the Asian countries – Indonesia, Korea, Thailand, China and India.
However at present, the company’s short-term concerns are centred on the extraction tax rates which are set to increase by 23.65% from RUB 859 to RUB 1062 by 2015 (per 1,000 cubic meters), and the court decision that after 40 years, gas prices will no longer be tied to the oil price. From now on, the gas price will be a function of the traditional supply and demand process.
Additionally, there is an oversupply of gas in the United States and possibilities exist for US producers to export to the European market (by means of LNG). Therefore, investment in Gazprom, and any other gas related companies, will be a bit more unpredictable in the future. In order to safeguard the long-standing relationships Gazprom has with its European partners, the company has made provisions and rebates for a total of USD 6 billion.
Furthermore, Gazprom’s principal government shareholder exercises constant management supervision and hence decisions are not always based on economic rationale, but rather on political considerations.
Strengths and weaknesses analysis / Fundamental analysis:
Strengths:
- Gazprom is a key player in the delivery of gas to European consumers,
- In the next 6 years, European gas consumption is expected to increase by 15%, and another 24% within the next 16 years,
- Whichever pipeline project succeeds, Gazprom will always be able to feed the network from one or another of its fields,
- Gas is currently regarded as the most efficient alternative energy source to petroleum,
- With the rise in the standard of living across Asia, end consumer demand for gas is largely untapped.
Weaknesses:
- The government of Russia is the most important shareholder (50%),
- Gazprom is currently involved in building too many pipelines. Repayment of its investments will need more time than initially projected as the pipelines will never be able to reach their optimal utilization capacities and prices will fluctuate more than in the past,
- The price link between gas and oil has been lifted. This will make the company’s earnings much more volatile, especially as US companies could also deliver shale gas and LNG to Europe,
- The E&P of gas fields occurs under difficult conditions (i.e. Arctic conditions),
- Depressed gas prices and announced rebates will make the company unprofitable for some time ahead,
- Due to a political decision, Gazprom has no longer the monopoly to act as the sole Russian gas exporter.