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On April 23, 2013, the board of directors of
Gazprom is going to discuss the issues of investment in power generation sector
in the Russian Federation and abroad.
Actually, buying
power plants in the EU now may make sense. Gazprom is one of
the least taxed companies in the
Russian oil & gas sector, so only a small portion of high profits
from gas exports may be needed to cover losses from power generation
in Europe. At the current price of gas, the overall corporate profit
from additional sales of gas to Gazprom-owned power plants
may exceed $3/MMBtu, after deducting anticipated loss at the power
generation side.
However,
profitability of Russian gas exports will continue to decline
because of the large-scale construction of extremely expensive
pipelines. In 2007-2012, the value of pipeline assets of Gazprom has
more than
tripled while the volume of total gas sales dropped 10%. By
2020, the value is likely to double (from the current level), but
there are no new contracts signed. Notably, Gazprom diverts its
export flows to the new routes and keeps the existing transit
expenses in accordance with the ship-or-pay contracts.
To make profit
from the sales of additional gas volumes to its power plants in
Europe in the long run, Gazprom would need to abandon the South
Stream project with its extremely
expensive feeding pipelines linking the Yamal peninsula with the
Black Sea. Otherwise, the profit margin is likely to disappear
before 2020.
Mikhail Korchemkin
East European Gas
Analysis
Malvern, PA, USA
April
21, 2013
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