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


Gazprom Increases Cost of Russian Sales, Cuts Cost of Exports


Profitability of domestic gas sales depends on the accounting method

Gazprom's financial report for 2006 points out the way the Russian monopoly splits gas production and procurement costs between European exports and domestic sales. Table 1  shows the reported revenues and cost of sales. Dollar values are calculated at the average exchange rates of the corresponding years.

Table 1. Gazprom Revenue and Cost of Sales (by Russian Accounting Standards - RAS)

 Gas sales in Russia
  2006
 2005

 

 Exports to Europe

  2006
 2005
 Millions of Rubles: 
     

 Millions of Rubles:

   
 Revenue from gas sales
366,226 315,202  
 Revenue from gas sales
754,320 562,475
 Purchase cost of gas
137,383
116,932
 
 Purchase cost of gas
58,506 49,425
 Transportation cost of gas 235,933 190,076    Transportation cost of gas 239,089 200,074
 Total cost of sales:
373,316
307,008
 
 Total cost of sales:
297,594 249,499
 Profit (loss) -7,090 8,194    Profit (loss) 456,725 312,976
 Profit divided by total cost of sales -2% 3%    Profit divided by total cost of sales 153% 125%
 Gazprom sales in Russia, bcm 316.3 307.0  

 Gazprom exports to Europe, bcm

161.5 156.1
 Cost of gas, RUR/ 1000 cub m (1) 434 381  

 Cost of gas, RUR/ 1000 cub m (1)

362 317
 Reported cost, RUR/ 1000 cub m (2) NA 335  

 Reported cost, RUR/ 1000 cub m (2)

NA 335
     

 

     
 Millions of US Dollars:        Millions of US Dollars:    
 Revenue from gas sales
13,469 11,142  
 Revenue from gas sales
27,743 19,882
 Purchase cost of gas
5,053 4,133  
 Purchase cost of gas
2,152 1,747
 Transportation cost of gas 8,677 6,719    Transportation cost of gas 8,793 7,072
 Total cost of sales:
13,730 10,852  
 Total cost of sales:
10,945 8,819
 Profit (loss) -261 290    Profit (loss) 16,798 11,063
 Profit divided by total cost of sales -2% 3%    Profit divided by total cost of sales 153% 125%
 Gazprom sales in Russia, bcm 338.0 328.3  

 Gazprom exports to Europe, bcm

150.1 147.1
 Cost of gas, USD/ 1000 cub m (1) 14.95 12.59  

 Cost of gas, USD/ 1000 cub m (1)

14.34 11.88
 Reported cost, USD/ 1000 cub m (2) NA 11.83  

 Reported cost, USD/ 1000 cub m (2)

NA 11.83
 Average exchange rate, RUR/USD 27.19 28.29

 

 Average exchange rate, RUR/USD 27.19 28.29

Notes: (1) Cost of gas per 1000 cub m = (Purchase cost of gas) / (Volume); (2) By IFRS.

Sources: Gazprom Financial Report 2006; Gazprom Quarterly Report Q1-2007; Gazprom IFRS Financial Statement 2005

Table 1 shows the 2005 production cost of Gazprom by International Financial Reporting Standards (IFRS), which is different from that by RAS. Production cost by RAS is not reported.

The accounting method of Gazprom increases the cost of domestic sales and decreases the cost of exports. Specifically, cost of sales is affected by the following factors.

  • Gazprom buys gas from Russian independent producers at a price higher than the average production cost of Gazprom. For instance, Gazprom was buying gas from Rosneft at $18.82/ 1000 cub m in 2005 and at $20.58 in 2006.

  • It looks like all gas purchased from independent producers is allocated to the domestic sales, which raises the total cost of gas sold to Russian consumers.

  • Exports include only gas produced by Gazprom.

It is perfectly legal to use this accounting method for the calculation of cost of sales. Moreover, Gazprom can assume that exports are composed of gas produced at the low-cost fields, while Russian consumers buy gas produced at high-cost reservoirs. That would result in even higher profits from exports and bigger losses from domestic sales. Please note that Gazprom wants the domestic price of gas to provide the same netback as export sales (revenue minus VAT or export duty minus cost of foreign transit). The state-regulated price is to reach the "equal-netback" level in 2011. Apparently, Gazprom uses the reported loss from domestic sales as an argument for faster growth of regulated price and against tax increase.

It is worth noting that consolidated exports of Gazprom to Europe went up from 127 bcm in 2001 to 156 bcm in 2005. In the same period, domestic sales of gas produced by Gazprom increased from 282 bcm to 286 bcm. It indicates that nearly all increase of gas production of Gazprom (and production investment) was caused by growing exports, while the books show higher cost of gas for domestic sales.

In the near future, all production growth of Gazprom will be caused by growing demand out of the former Soviet Union (FSU). Gazprom plans a major increase of gas exports out of the FSU. Sales of Gazprom's own gas in Russia will go down respectively with more independent gas coming to the domestic market. Major share of sales to the FSU is covered by Central Asian gas.

Annual report of Gazprom explains who is going to finance the export program of the Russian monopoly.

  • "In order to develop new deposits, sources need to be found to compensate for the growing cost of natural gas. There are no reserves for the price growth in Europe, as the long-term forecast of the world market situation does not reveal any considerable increase in gas prices. Moreover, there is a noticeable influence of low prices in the spot market on the general price situation in Western Europe. Considering the above, the problem can only be resolved through setting economically reasonable prices in the natural gas markets in Russia and CIS countries." 

This statement is correct under an assumption that major share of expensive gas would go to to the Russian market. It is worth noting that Gazprom's gas fields commissioned before 2006 are capable to meet all Russian demand through 2011. After that, combined output of these fields of Gazprom and production of independent producers can cover Russian demand for another 5-7 years. If the new high-cost reservoirs were fully allocated to the export sales, their expensive production would not be required in Russia until 2016.

I am grateful to the journalists of Vedomosti who pointed out a mistake in the table and an inaccurate definition. Financial report under Russian standards shows non-consolidated sales, so export volumes should reflect only Gazprom's gas. Note that non-consolidated report gives the volume of domestic sales of Gazprom in 2006 at 338.0 bcm, while the consolidated report puts it at 316.3 bcm.

Mikhail Korchemkin, Managing Director

June 8, 2007 (with corrections of June 26, 2007)


Last modified: 12/07/14                    East European Gas Analysis 2006-2014                                           Email: info@eegas.com
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