Gazprom focuses on cost control [NGW Magazine]
For many years Russia’s Gazprom has relied on a handful of key private contractors to advance its flagship projects. According to recent Russian press reports, however, the state gas supplier is now bringing these companies in house.
Gazprom reportedly closed the purchase in May of Stroytransneftegaz (STNG) from billionaire businessman Gennady Timchenko and his partner Alexei Mityushov, the RBC news agency reported on July 25.
STNG has worked at many of Gazprom’s largest projects over the years, including the 38bn m3/yr Power of Siberia pipeline to China launched in December; and the Chayandinskoye gas deposit in Yakutia that supplies its gas. Its work at both sites continues. STNG earned some rubles 164bn ($2.26bn) in revenues last year.
Timchenko, who is also a major investor in private gas producer Novatek, previously disclosed that he owned a 31.5% stake in STNG, while a further 18.5% is held by his relatives. According to RBC, a further 45% had been controlled by Mityushov, a former Gazprom manager. The agency’s sources valued the transaction at rubles 50bn ($700mn).
STNG is second only to Stroygazmontazh (SGM) in terms of how much business it has with Gazprom. SGM was likewise sold to the producer by oligarch Arkady Rotenberg for rubles 75bn ($1.04bn) in November last year, according to reports by RBC, Vedomosti and others. Gazprom is also reported to be eyeing another Rotenberg-owned contractor called Gazprom Bureniye, or Gazprom Drilling.
Reports indicate that Gazprom subsidiary Gazstroyprom will become the ultimate owner of STNG, SGM and other contractors. None of these transactions appear on Gazprom’s financial records. And the company did not respond to NGW’s request to comment on the deals. However, VTB Capital noted in a research note on July 27 that Gazstroyprom had rubles 508bn ($7bn) in assets at the end of March.
Gazprom is eager to improve its cost control, after promising shareholders increased dividends and lower capital expenditure in the coming years.
The company has pledged to raise dividends to at least 30% of its adjusted IFRS net profit in 2019, rising to at least 40% in 2020 and at least 50% in 2021. The aim is to generate more revenue for the Russian government, Gazprom’s main shareholder, and bolster the company’s share price, which has historically trailed behind those of its main domestic rivals.
Gazprom also told investors in February it intended to keep its annual investments at under rubles 1.2 trillion on average between 2020 and 2030. This compares with a peak of rubles 1.8 trillion in 2018, when spending on the Nord Stream 2, Power of Siberia and TurkStream pipelines was at its height.
Despite its leaner capex plan, however, Gazprom’s appetite for mega-projects has not diminished. The company is now drawing up plans for a 50bn m3/yr pipeline to China via Mongolia, and is also developing a major gas processing and LNG project on the Baltic Sea.
To progress these ventures while keeping its promises to investors, Gazprom’s new watchwords will have to be cost control.
Gazprom used to earn much greater margins on its gas sales to Europe when demand was bullish, prices were high and oil-indexed and competition less fierce. Keeping spending in check was therefore less of a concern.
But those days are over. Thanks to EU efforts, Europe’s gas markets have grown steadily more interconnected over the past decade, while an anti-trust settlement with Brussels has reduced Gazprom’s ability to abuse its dominant market position.
“The period where they could earn these excessive profits selling gas to Europe are over,” Dmitry Marinchenko at Fitch Ratings says. “Now they need to take a much more prudent approach.”
A lack of transparency surrounding Gazprom’s contracts with STNG, SGM and other contractors, often awarded without tenders, have long been a source of concern among investors and analysts. Timchenko and Rotenberg are both very influential in Russia’s power circles, with close personal ties to Russian president Vladimir Putin.
In a controversial report in May 2018, Sberbank CIB slammed Gazprom’s costly investment programme as “a way to employ the company’s entrenched contractors at the expense of shareholders.” One of the authors of the report was promptly fired.
Given the current market stress, Russian producers are scouring for ways to cut costs, and some might decide to bring more services in-house as a solution.
Russian oil giant Rosneft long sought to reduce its dependency on third-party oilfield services providers. In 2006 it set up its own drilling unit RN-Bureniye, which now boasts 267 rigs and 202 drilling crews. The company is currently eyeing a drilling business owned by Russia’s IDS Group, Reuters reported in early July.
“The contractors’ market is “not transparent, not very competitive and very fragmented,” Marinchenko says. The sector could become more consolidated, he said, either through oil producers expanding their inhouse operations or larger services providers acquiring smaller ones.
Eyes on China
Cost control will be vital for Gazprom’s second pipeline to China to make an adequate return on investments. Power of Siberia 2, as it is known despite the different route, is still on the drawing board, although it enjoys strong political support from Moscow.
Gazprom CEO Alexei Miller claimed in June that the company could one day send up to 130bn m3/yr of piped gas to China. To reach this goal, Gazprom would not only need to build Power of Siberia 2, but also expand the original Power of Siberia by 6bn m3/yr and lay another pipeline in the Far East. No contracts are in place for any of these extra supplies, however.
Gazprom hosted a roundtable with independent experts on July 22 to discuss prospects for the Chinese gas market. More or less in line with CNPC’s latest 2050 energy output, released last year, it was estimated that Chinese gas imports would increase from 140bn to 310bn m3 by 2035, as rising domestic production is outpaced by growth in consumption. Of these imports, some 160bn m3 of supplies are not contracted yet.
“In general, there was nearly a consensus about the superb potential of Chinese gas demand growth in the long term and about how much gas China would need to import,” Sberbank CIB, which attended the roundtable, said in a research note the following day.
This said, Power of Siberia will not reach its full capacity until 2025 and China has plenty of other options in the medium term, including spot LNG cargoes. Therefore, Beijing is in no rush to sign new contracts with Moscow.
Furthermore, China will first want to see if Gazprom can deliver on its first $400bn supply deal agreed in 2014 that underpinned Power of Siberia’s construction. “The fields for Power of Siberia are not straightforward; China wants to test Russia to see if it can meet its obligations,” Marinchenko says.