Gazprom pipelines and export capacity

Газопроводы Газпрома и экспортные мощности

Gas pipelines of West Siberia

Газопроводы Западной Сибири

Export flows of Gazprom

Экспортные потоки

Spot, Gazprom, Brent

Цены на нефть и газ

End-use price of gas

Russia and USA

Daily gas production

Суточная добыча


Is Gazprom Losing Money on Domestic Sales of Gas?

Profit or loss of Gazprom depends on the calculation method

Gazprom claims that it is losing money on domestic sales of gas. According to press-release of March 29, 2006, gas supply to the domestic market remains unprofitable for Gazprom. Under projections for 2006 and 2007, the Company’s losses in this sector will be around RUR 9 bln and RUR 11 bln, respectively.

Previous official publications on profitability of domestic sales are contradictory. In June 2004, Gazprom published the following statement:

  • The Company is planning to make some small profit (0.8%) from its sales <to Russian consumers> in 2004 (Source: Gazprom Annual Report 2003, page 64).

Somehow, the second half of 2004 went very different from Gazprom's expectations.

We were unable to identify any external factor that affected the result of domestic sales in 2004, after the time of publication of profit expectations of Gazprom.

  • Gas price and taxation in Russia stayed intact through 2004.

  • Apparently, it was a result of change in internal accounting of Gazprom. Gazprom may have allocated production or transmission costs of domestic and export sales a different way.

According to our calculations, domestic sales did become profitable in 2004 (Figure 1). Our calculations of cost of gas delivered to Russian consumers have the following backgrounds.

  • We use expense data from the official reports of Gazprom according to International Financial Reporting Standards.

  • We use the average production cost of Gazprom for calculation of cost of gas delivered to all market segments.

  • Transmission expenses are divided between domestic sales, exports and transit services for third parties in accordance with the calculated transportation work. Details are explained in RGI-2006-1.

Gazprom is free to use any other method of calculation of cost of gas delivered to different markets.

  • For instance, Gazprom may assume that gas from low-cost reservoirs goes for exports and the most expensive gas is sold domestically.

  • Gazprom may allocate all interest expense to the cost of domestic sales.

  • There are many legally correct ways to allocate transmission costs between different market segments. These methods can show that domestic sales bring losses and make export sales more profitable.

  • New internal accounting of Gazprom is discussed in RGI-2006-1.

According to Gazprom reports, in 2003-2005 the wholesale price of gas in Russia (net of VAT) was growing faster than the cost of fuel gas, or gas burned at compressor stations of Gazprom pipelines (Table 1).

  • Cost of fuel gas is the average cost of gas delivered to compressor stations of Gazprom.

  • It means that theoretically the domestic price was growing faster than the production and transmission expenses of Gazprom.

  • Nevertheless, Gazprom reported the loss from sales of gas to Russian consumers at RUR 3.2 billion in 2003 and at RUR 8.6 billion in 2004.

Table 1. Cost of Fuel Gas and the Average Price of Gas, 2003 = 100

 Cost of fuel gas
 Average Russian price

Source: EEGA based on Gazprom reports

In our view, major share of expensive incremental production goes for exports. Domestic sales of Gazprom grow just marginally (Table 2).

Table 2. Domestic Sales and Exports of Gazprom

 Domestic sales
 Exports to Europe
 Exports to FSU 42.6 52.5 51.5

Sources: Annual reports and press-releases of Gazprom

In the future, Gazprom anticipates a major increase in its exports to Europe, while independent producers are likely to sell more gas in Russia. It means that the domestic sales of Gazprom are likely to stay flat or decline. Therefore Gazprom would need to increase production and build new pipelines mostly because of the growing export sales. Then major share of new production expense (especially, in Yamal) and interest expense should be allocated to export sales.

Gazprom claims that undervalued gas has negative impact on company's financial and economic standing. We believe the following steps can immediately add $2-3 billion to the cash flow of Gazprom (an equivalent of the raise of domestic price by 25-30%).

  • Replacement of RosUkrEnergo by wholly owned subsidiary of Gazprom (ZMB, Gazprom Trading, etc).

  • Elimination of export duty paid on cost of transit out of the Russian Federation.

  • Elimination of numerous brokers that buy steel pipe and other materials and supplies and resell them to Gazprom.

Gazprom has a very high profit rate. The profits exceed Gazprom's needs for expanding gas business segment. However, Gazprom may need additional capitals for the procurement of Sibneft, TV channels, newspapers and other assets not related to natural gas. We are not sure that Russian gas consumers have to pay for that.

We agree with the plan of the Russian government that anticipates gradual increase of regulated price of gas. We disagree with the way Gazprom calculates its costs.

Mikhail Korchemkin

April 6, 2006

Last modified: 12/07/14                    © East European Gas Analysis 2006-2014                                           Email:
Reproduction or use of materials is allowed only with reference to East European Gas Analysis or