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

Russia and Gazprom Are Ready to Take a Loss to Spite the Nabucco Project

The South Stream pipeline project will generate losses for both the Russian budget and Gazprom

Gazprom has made a statement on the implementation of the South Stream project regardless of financial conditions. In fact this means that Gazprom and Russia’s government are willing to take a loss if it helps to win the race with the competing Nabucco pipeline. The South Stream project, same as the Nord Stream pipeline in the Baltic Sea, makes no commercial sense. According to Gazprom, both pipelines are not to increase volumes of gas exported to Europe, which means no additional revenues and profits. The two pipelines are designed to improve flexibility of gas supplies. The losses to be taken by Russia are significant.

First, Gazprom wants to invest over $26 billion (Gazprom’s share in foreign and Russian sections of South Stream) into the project that increases costs without generating extra profits. South Stream is unable to give any added value for Gazprom. I wonder what the foreign shareholders of Gazprom think about it.

Second, Gazprom is willing to buy all Central Asian and Azeri gas and to re-export it to Europe instead of Russian gas, losing a profit of $100 million per 1 bcm. Note that re-exports of foreign gas generate no profits, because the sellers do not give Gazprom any profit margin and pay no commission. To export more Turkmen or Azeri gas, Gazprom has to reduce exports of its own gas, which means reduction of the most profitable business segment of the company.

Third, the government of Russia is willing to cut its budget revenues. Re-exports of foreign gas are tax free, while exports of Russian gas are subject of customs duty – 30% of the contract value. A the current price, exporting 1 bcm of Azeri or Turkmen gas instead of gas produced in Russia means a loss of $85 million for the state budget. Apparently, the government considers spiting Nabucco a higher priority than maximizing budget revenues and profits of Gazprom.

The EU should find an answer to a simple question. Why Russia is promoting a money-losing project? As the Kremlin and Gazprom side put it now, the EU gets all the benefits and Gazprom gets all the costs. It is too good to be true.

Mikhail Korchemkin

April 27, 2009

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Reproduction or use of materials is allowed only with reference to East European Gas Analysis or