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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:
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.
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Gas price and taxation
in Russia stayed intact through 2004.
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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.
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We use expense data from the official
reports of Gazprom according to International Financial Reporting
Standards.
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We use the average production cost of
Gazprom for calculation of cost of gas delivered to all market segments.
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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.
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For instance, Gazprom may assume that gas
from low-cost reservoirs goes for exports and the most expensive gas is
sold domestically.
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Gazprom may allocate all interest expense
to the cost of domestic sales.
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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.
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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).
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Cost of fuel gas is the average cost of
gas delivered to compressor stations of Gazprom.
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It means that theoretically the domestic
price was growing faster than the production and transmission expenses
of Gazprom.
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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
|
2003
|
2004
|
2005E
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Cost of fuel gas
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100
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109
|
131
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Average Russian price
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100
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120
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147
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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
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2003
|
2004
|
2005E
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Domestic sales
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291.0
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292.1
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296.5
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Exports to Europe
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132.9
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140.5
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147.0
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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%).
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Replacement of RosUkrEnergo by wholly
owned subsidiary of Gazprom (ZMB, Gazprom Trading, etc).
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Elimination of export duty paid on cost of
transit out of the Russian Federation.
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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
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