Gazprom Woos Investors in New York
Gazprom, the world’s biggest gas company, held its annual investor day in New York on February 11, seeking to drum up interest in its shares by pointing to its resilient earnings and firm growth trajectory.
The company delivered “solid” financial performance last year, it told investors, despite lower sales and weaker prices in Europe, its main export market.
The state gas giant is not due to publish its full results for 2019 until later this month. But in its investor presentation, it estimated it would earn $21.4bn in net income, down from $23.3bn in 2018. The company's profits were much lower in 2016 and 2017, at $14bn and $12.2bn respectively. It expects to gross $126bn in revenues for the year, down from $132bn in 2018, but more than what it generated in 2016 and 2017.
The stable result for 2019 comes despite bearish conditions on the European gas market, which it typically relies on for almost 70% of its gas sales revenues: a fraction of its volume but a multiple of the price it gets at home. The company’s sales to the continent were down 1.4% at 199bn m3, as the market saw a higher influx of LNG imports from the US, Qatar and even Russia itself, supplied by Novatek’s Yamal LNG project. Amid this stiffer competition, the price at which Gazprom sold its gas fell from $246/'000 m³ to $203/’000 m³ last year.
Gazprom did not specify which areas of its business helped prop up revenues last year. But its nine-month results showed increased earnings from gas sales in Russia and other former Soviet states, as well as higher revenues from sales of oil, condensate, refined products, electricity and heating sales.
The company said it was too early to say the average price it would sell its gas at in 2020. The coronavirus outbreak in China is expected to cut into demand, exacerbating the global supply glut.
Stick to what you know
Gazprom’s long-term strategy remains firmly pipeline-based. Currently, the company exports over 95% of its gas via pipeline and 5% in the form of LNG. By 2030, the ratio will shift only slightly, with piped sales accounting for 90% and LNG 10%.
Gazprom expects to launch a new 13mn mt/yr LNG export terminal in the Baltic port of Ust-Luga in 2023, though the project is currently only at the front-end engineering design stage. In the nearer term, it intends to commission later this year a 1.5mn mt/yr LNG bunkering station near Vyborg, also in northwest Russia. Gazprom has plans to position two similar bunkering hubs on the Black Sea and in the Far East, but neither project has been greenlit.
Interestingly, Gazprom’s presentation still listed the construction of a third 5.4mn mt/yr liquefaction train at its Sakhalin-2 project in the Far East as a prospective project, with commissioning expected in the mid-2020s. The investment has been in limbo for years, amid gas supply concerns. Gazprom had hoped to use gas from the Yuzhno-Kirinskoye field, but this project was targeted by US sanctions. It is now attempting to develop the field alone, forecasting annual production of 21bn m3/yr.
With Power of Siberia now complete, Gazprom is now seeking to advance talks with China on routing a second pipeline through Mongolia. Studies are underway, though neither side has suggested a timeframe for the pipeline’s construction, nor its capacity.
Russia has long aspired to be a major LNG exporter, but has lagged behind other major gas producers in this area. The government ended Gazprom’s monopoly over LNG exports in 2013, after growing frustrated with the company’s lack of progress in developing projects. This cleared the path for Novatek, the country’s largest private gas producer, to take the lead in Russia’s LNG development drive.
This is not to say Gazprom’s sales strategy is static. The company has steadily shifted in recent years to more flexible pricing and delivery in Europe, largely because of customer demands. Oil-indexed sales – once the company’s mainstay – now account for only 16.5% of its exports. Quasi oil-indexed sales amount to 15.5% and hub indexed sales, 56.7%. Gazprom saw an 8.5 percentage point rise in sales from trading operations and at its electronic sales platform, launched in September 2018, to 11.3%.
Gazprom’s target is to ramp up production to 600bn m3/yr by 2030, it told investors, from around 500bn m3 last year.
Most of the company’s gas currently comes from large Soviet-era deposits in Western Siberia, many of which are now in decline, including Yamburg and Urengoi. It plans to replace these fields with a raft of new projects further north on the Yamal Peninsula. The move north was one of the reasons for the route of the Nord Stream pipelines: they are a shorter route to market.
At present, Gazprom’s production on Yamal is confined to the Bovanenkovo gas field, which is working up to its third-phase capacity of 115bn m3/yr. But in 2023, it plans to commission the first 32bn m3/yr stage of the Kharasaveyskoye field near Bovanenkovo. By 2025 it also intends to start production at its first offshore Arctic field, Kamennomysskoye-more in the Gulf of Ob off Yamal, projected to flow 14.5bn m3/yr.
Kamennomysskoye-more lies very near the shore, in waters only 11-17 metres deep, and would be able to share infrastructure with the coastal Kamennomysskoye field, driving down development costs.
By the middle of the decade Gazprom will also bring the 25bn m3/yr Kovyktinskoye field in eastern Siberia on stream, helping Power of Siberia reach its full 38bn m3/yr capacity. In the meantime, Chayandinskoye, Power of Siberia’s first source field, is due to ramp up to its plateau production rate, also 25bn m3/yr.
In the Far East, Gazprom will benefit from rising output at the 5.5bn m3/yr Kirinskoye field and, later, South-Kirinskoye’s launch.
Gazprom’s focus will remain on Yamal during the second half of the decade. It aims to launch an additional, 25bn m3/yr stage at Bovanenkovo, and expand Kharasaveyskoye’s output by a further 18bn m3/yr. The neighbouring Kruzenshternskoye field will add a further 33bn m3/yr, with other production coming from Tambeyskoye, further north on Yamal, and other projects.
Gazprom boasts several large fields in the Pechora and Barents seas off Russia’s Arctic coast, and it is telling that none of these projects feature in its pre-2030 development plans. Offshore Arctic production is costly, making it far from suitable for the current price environment.
A notable case in point is Shtokman, the 3.8 trillion m3 field in the Barents Sea that Gazprom hoped to start production at in 2015. Despite having good reservoir quality, its harsh operating environment and remote location posed significant challenges. After abandoning its plans, Gazprom said the field would be left for “a future generation.”
Gazprom presided over an 87% growth in its share price this year, after adopting a more generous dividend strategy. The company plans to pay out 30% or more of net profits for last year in dividends, rising to 40% for 2020 and 50% for 2021, it said. The rate was previously set at 27%.
Gazprom has traditionally been a high spender, with its capex peaking at rubles 1.8 trillion ($28bn) in 2018. It fell to rubles 1.32 trillion last year, as work on the Power of Siberia and TurkStream projects began to wind down, and is expected to slide to rubles 1.1 trillion in 2020. Gazprom said it wanted to keep investments at 11% below last year’s level on average between 2020 and 2030.
Whether or not Gazprom makes good on this promise to investors will depend on the implementation of its projects. The company has long struggled with cost overruns, and with major projects on the horizon such as the Ust-Luga gas complex, budgeted at rubles 700bn, keeping a lid on spending could prove difficult.