Russia’s gas giant faces falling demand at home and abroad, lowest output in company history
Gazprom (ticker: OGZPY), Russia’s state-owned gas giant, is seeing rapidly declining production as demand for its gas falls both at home and abroad. The company’s output in June fell by 19% compared to the same month in 2014 to a record low of 24.7 Bcm, reports The Moscow Times. In the first half of the year, Gazprom’s gas production dropped by 12.9% according to a report from Sberbank CIB, a Russian investment bank.
Lower demand in domestic markets, as well as abroad, where Gazprom is the only company allowed to sell Russian gas, have led to what Sberbank analysts believe will be the lowest output year in the company’s 22-year history.
Rigid pricing set by the government is making Gazprom increasingly uncompetitive against companies like Rosneft (ticker: RNFTF) and Novatek (ticker: NVTK), all while international sanctions sent the ruble tumbling last year, leaving Russian consumers very sensitive to the price of gas when choosing where to buy domestically.
The weak ruble will likely help to offset the company’s revenues, however, which Sberbank expects to come in at approximately $105.8 billion, down 27% from last year.
In international markets, many of Gazprom’s largest customers are looking to diversify away from Russian supplies. Exports of Gazprom’s gas abroad have fallen 8% in the first half of the year compared to the same period last year.
Europe is looking to reduce its dependence on Russian gas supplies and increase its use of renewable energy sources, while Ukraine tries to lower the amount of gas imported from Russia amid increasing tense political relations. The share of direct Russian gas exports to Ukraine for domestic consumption, which was 74% in 2014, declined to 37% in the first half of the year as Kiev switched to European suppliers.
Foreign sales account for two-thirds of Gazprom’s revenue, said Valery Nesterov, oil and gas analyst at Sberbank CIB. The company sells about half of its gas inside Russia, but domestic pricing is kept low by regulation.
Gazprom plans to increase production volumes in the second half of the year in anticipation of increased demand from Europe as the countries replenish their fuel reserves before the start of winter. Sberbank notes that the company has seen an uptick in exports over the last two months, but this will do little to help it in domestic markets.