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Russian oil and gas major Gazprom announces budget reductions for next year

Russia’s state-owned Gazprom (ticker: OGZPY) announced its investment program and budget for 2015, cutting its capital budget substantially from 2014.

With Russia reporting its first economic contraction today, it is little surprise that its oil industry giant decided to reduce spending for 2015. Russia’s Economy Ministry said gross domestic product shrank 0.5% last month, the first drop since October 2009, reports Reuters. With oil forming the backbone of the economy, analysts expect contraction are only likely to worsen as prices continue to hold well below the $104 a barrel necessary for Russia to balance its budget.

In a release from the company, Gazprom announced its 2015 investment program will be $15.05 billion (840.35 billion rubles), while the company expects its cash flow for the year to total $105.41 billion (5.89 trillion rubles). These numbers represent a 40% and 39% drop, respectively, from the investment program and cash flow set by the company for 2014 if both are converted into U.S. dollars.

Using a conversion rate of $1=55.85 rubles, the exchange rate on December 23, 2014, the day Gazprom announced its 2015 budget, and $1=31.87 rubles, an average of the ruble’s value in 2013, when Gazprom announced its 2014 investment program and budget, Gazprom’s investment budget and expected cash flow have contracted along with the rest of the Russian economy against the U.S. dollar.

Looking at Gazprom’s budget year-over-year in rubles, the company plans to increase investment by 4%, to 840.35 billion rubles from 806 billion rubles in 2014, and cash flow by 6%, to 5.887 trillion rubles from 5.552 trillion rubles. These increases are smaller than those seen between the 2013 and 2014 budgets, which showed a 12% increase in investment and an 8% increase to cash flow.

Gazprom said in its announcement that its priorities for the 2015 budget will be developing the Yamal Peninsula, creating gas production, transmission and processing capacities from the Yakutia gas production center, constructing the Southern Corridor gas pipeline system and developing an underground gas storage system.

Russian oil and gas companies do their best to dampen inflation

The ruble had lost more than half of its value at one point in December, although it has since recovered after the government introduced informal capital controls and raised interest rates steeply. The government issued orders to large state-controlled oil and gas exporters like Gazprom and Rosneft (ticker: RNFTF) to sell off foreign currency in order to support the ruble.

Gazprom

Gazprom Neft (ticker: GZPFY), a subsidiary of Gazprom, announced that it would be selling more than 50% of its foreign currency revenue, at the behest of the state, reports Russian news agency TASS. Gazprom Neft’s CEO, Alexander Dyukov, said Friday that he thought “that the central bank has enough instruments to influence the ruble rate and that this measure is excessive,” but that the company would comply.

At 2p.m. GMT yesterday, December 29, the ruble had lost over 3% against the dollar and was trading at 56.00, hurt by exporters scaling back foreign-currency sales after meeting their end-of-month tax payments, reports Reuters.

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Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.