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As Gazprom stares into the abyss, oil companies get ready to do business

January 21, 2009

Carl Mortished: world business briefing

Carpe diem. For the great power utilities of Europe, for the oil and gas multinationals, this is the opportunity they have been waiting for. Their suppliers and rivals, the state oil and gas producers, are weakened, starved of cash.

The price of a barrel of oil has fallen to levels at which investment in new frontier oilfields is uneconomic. The price of natural gas is tumbling and the Kremlin’s unofficial banker, Gazprom, is troubled. In the second quarter of this year, its revenues from selling gas to Europeans will plunge but the world’s biggest gas utility is committed to spend heavily – many billions of dollars for pipelines in the Baltic and gas developments in Siberia. It will struggle over the next few years to fulfil its three obligations – provide cheap fuel for Russians, sell more gas profitably to Europeans and invest for the future.

For much of the past decade, oil and gas-consuming nations have watched the National Oil Companies (NOCs) of Opec and Russia grow fat and confident as their incomes doubled and tripled. With such bounty they could pay their own bills and hire the best engineers. They could dispense with brash expat oilmen and their snooty wives and from Bolivia to Venezuela via Siberia, the Western multinationals were given the boot. There have been expropriations, bullying, harassment and the shredding of contracts.

But in just six months the rent from oil has gone from flood to trickle. Reports from Venezuela indicate that the bumptious President Chávez is thumping his tub more gently and PDVSA, the national oil company, is offering deals to former outcasts: Total, Chevron and Shell. Iran is desperate for cash to develop the South Pars gasfield and wants to export to the honeypots of Europe.

The Russian state has passed an economic watershed, moving from five years of oil-soaked budget surpluses into what will be years of deficits. Its economy will slide into recession in the first half of this year and its corporate sector, dominated by companies that sell minerals and metals, is weighed down by debt. In order to shore up the fortunes of business allies and prop up crumbling financial markets, the Kremlin raided its rainy day savings. The rouble is under pressure and the Treasury has spent $160 billion (£114 billion) in foreign currency reserves in a failing attempt to shore up its value. It is expected to continue to fall. There is a risk of a banking crisis and jobs lost among the young and newly affluent white collar workers of Moscow and St Petersburg.

Discontent may soon surface among these, the loyal supporters of United Russia and Vladimir Putin, the Prime Minister. There is no safety net in postcommunist Russia except for oligarchs and those with foresight who stashed dollars into sock drawers.

The drying up of cashflows is important because it explains events in Russia. It explains the extraordinary battle between BP and its Russian oligarch partners. The latter’s demand for more dividends from the TNK-BP joint venture became strident when they discovered last year that Gazprom had abandoned plans to buy out their share of the joint venture.

Cash is lacking. Gazprom has $33 billion in borrowings and more than a quarter must be repaid this year. It has promised to spend $32 billion this year building pipelines through the Baltic and new gas reserves in remote Arctic regions. Meanwhile, gas production is stretched like a rubber band.

Between 2005 and 2007, a period when European consumption soared, Gazprom’s output was flat and it fell in 2007. Revenues are poised to collapse; Gazprom was charging its European customers close to $500 per thousand cubic metres last year. It expects that price to almost halve by the middle of this year.

Hence the lengthy tussle with Ukraine over unpaid gas bills. Old school Russophobes delighted in accusing Gazprom of postSoviet imperialism, characterising the supply cut as punishment of a former vassal state.

If it were just politics, it would have been over in a week. If you want to solve the puzzle, chercher l’argent – $2 billion – cash that Gazprom desperately needs and a sub-prime customer (Ukraine) that Gazprom would jettison were it not for the pipelines that traverse its territory. Ukraine is virtually bust. It is now reliant for survival on IMF loans and Gazprom pipeline transit fees. Both institutions will exact a heavy price if Ukraine calls again on their charity.

But the cash crunch facing Gazprom affords an opportunity for Western companies. An obvious solution to the Ukrainian crisis is for a cash-rich EU utility, such as Gasunie of the Netherlands to buy the Ukrainian transit pipelines, offering long-term money that could be used to finance gas purchases.

Meanwhile, Russia needs to step up investment in the Arctic and it is becoming clear that Gazprom, sucked dry by its political masters, its share price hammered, cannot do it alone. This could be the moment for a company such as ExxonMobil, riding high and unburdened by borrowings, to offer a solution. The Kremlin won’t like it but over the past decade both the multinationals and the NOC rivals have seen how markets always destroy the arrogant, the foolish and the greedy.

It is time to do good business.


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