Russia’s Gazprom Needs to Make Severe Cutbacks Due to the Commodity Crises

Originally appeared at DWN, translated by Karin exclusively for SouthFront

The largest gas company in the world, Gazprom, is suffering more under the low prices for natural gas than previously assumed. Analysts estimate that the company needs to cancel future projects or massively increase its debt.

The Russian gas company Gazprom is feeling the low price of natural gas. The Financial Times reported, the company will either have to shut down new projects or has to significantly increase its total debt. Last year, it was calculated in rubles that the operating profit fell by about 6 percent. Observers that were quoted by The Financial Times are expecting that the revenues of Gazprom could fall in the current year even below expenditures.

Natural Gas prices are, just like the oil prices, for months at an unusually low level. On the spot market, the price of natural gas for delivery to Europe – Gazprom’s most important market – has approximately halved in the past two years. In addition, corresponding to the oil market, a young competitive industry is establishing itself in the US. It is pushing onto the European market and because of it Gazprom is expected to lose some market share. The company expects that export prices will average $ 200 per thousand cubic meters of gas this year. In 2014 they were still at about 350 dollars.

Low prices for natural gas are not the only problem for the gas company. On the home market political pressure is increasing – most recently rivals have called for splitting up the company. Market capitalization has fallen in dollar terms since 2008 by over 80 percent. Earlier this year, the rival oil company Rosneft even took over for a short time the title of Russia’s most valuable company.

“Gazprom had become accustomed to live by the communist idea that everything is available in abundance. They never had to cope with a real deficit. They were able to afford everything. Soon they will have to rethink everything”, a Moscow investment bankers was quoted by the Financial Times.

Gazprom is already starting to organize its projects according to importance and analyze potential savings. For example, only 400 instead of 800 km of a gas pipeline to China will be completed this year. Additionally or as an alternative to the cost savings it would also make sense for new borrowing. The net gearing ratio, according to the Financial Times, is currently just 0.9 percent of the revenues. Analysts of Sberbank believe that the company’s debts could double in the next three to four years.