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    Gazprom Pursues Higher Sales, Lower Costs



Hit by sanctions and a weak economy, Gazprom goes for domestic products and higher revenues from sales

by: William Powell

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Natural Gas & LNG News, Corporate, Import/Export, Infrastructure, Liquefied Natural Gas (LNG), Pipelines, Nord Stream 2, Power of Siberia, News By Country, China, Russia

Gazprom Pursues Higher Sales, Lower Costs

Executives at Russian state-run monopoly Gazprom have resolved to extend its ambitions in the pursuit of higher export sales and lower costs at home.

At a meeting February 16 the board approved an updated list of measures to increase its share in the global gas market. These include improving contractual cooperation in pipeline gas supply, such as the introduction of auctions last autumn.

Chairman of Gazprom's management committee Alexei Miller said during the board meeting: “In 2015 Gazprom's supply share in the European consumption reached a historic high of 31%.”

A key element in the Gazprom's geographic presence expansion is its position in the Asian market, chiefly in pipeline gas supplies to China.

The growth in LNG supply is also crucial, meaning more flexibility in its global portfolio, achievable primarily through its own production. Large-scale LNG production is complemented by wider geographic presence and more small-scale LNG production.

It also plans to strengthen its presence abroad, including through developing gas supply to end consumers such as the power sector and further expansion into transport.

Joint ventures and asset swaps would be among the means to achieve this, it said.

Cost cutting at home

Gazprom has been cutting costs in response to the weaker rouble and sanctions, including using Russian-made engineering and other high-specification products and services whose quality meets its standards.

While projects such as Nord Stream 2 involve foreign partners and are likely to be project-financed, other ambitious export schemes, such as the Power of Siberia pipeline, require a vast amount of line pipe to be laid on Russian soil.

Using domestic goods has already cut operating costs and maximised value for money without sacrificing transparency, according to the company.

Stringent control is maintained at every stage of the tendering process, from proof of need to make a purchase and the control of its initial maximum price to the decision making about the final cost, Gazprom said.

The management committee was tasked to continue with the cost-cutting efforts this year.

Long-term contracts for engineering

Gazprom is working with Russian companies who can provide innovative products and new technologies, and developing the Gazpromcert system for specifications. Gazprom says it has almost completely (99.5%) sourced its large-diameter pipes from the domestic market.

It is also buying some gas compressor units at home, such as two 16-MW gas compressor units of the GPA-16U type, manufactured jointly with a local industry group. It claims the aggregate economic effect, including savings on operating costs in design, manufacture, installation and operation, have already reached roubles 3bn ($39mn, although the true dollar figure is higher given the recent slide in the strength of the rouble).

It has also signed long-term supply agreements with pipeline manufacturers although it has had to revise the pricing formula to reflect changing market conditions. One agreement is with TMK that covers batch production, supply, and maintenance of import-substituting products. TMK will make six types of casing and pump and compressor pipes of cold- and corrosion-resistant design that will replace imported goods. First deliveries are expected this year, for use at the sour gas Astrakhan field.

Earlier this month, Gazprom signed a contract with OMK subsidiary Trubodetal (Pipe Parts) covering high-pressure ball valves ranging in size from 100–1,420 mm and capable of operating in a harsh environment, all made on the same basis.

R&D saving money

The company’s "innovative development program" is bearing fruit, with fuel and energy demand for auxiliary needs down by 19.7% in 2014 compared with the base year of 2010 and greenhouse gas emissions in CO2 equivalent down by 17.8%.

Between 2011 and 2014 the 15 main R&D activities within the program brought benefits of over roubles 31bn.

It says it spent roubles 4.6bn on development and implementation of energy efficiency programs between 2011 and 2014 while savings of fuel and energy resources are estimated at roubles 24.4bn.

The development of a corporate intellectual property management system is ongoing. The total number of patents increased by nearly one and a half times, reaching 2,131 by the end of 2014 versus 2010. At the same time, the number of patents used in production activities more than doubled – to 351, and the economic effect from their use exceeded roubles 3bn – three-and-a-half times the figure for 2010.


William Powell