A trillion has disappeared: why Russian Gazprom is suffering colossal losses

The gas business brings huge losses to the Russian Gazprom, which in a year or two could grow to 1 trillion rubles. This is not IPSO or data obtained by Western intelligence services, but information disseminated by representatives of the Russian government. “Apostrophe” found out what caused such serious problems for the company, which the Kremlin has long and quite successfully used as a political and economic weapon, and what its near future will be.

The Russian Gazprom is rapidly losing profits, while the company’s gas business itself is generating losses.

According to data published by the monopolist, its net profit for the first nine months of 2023 fell by 44% in annual terms, from 779.8 billion rubles to 446.1 billion rubles (at the current exchange rate - from 8.46 billion dollars to 4. 84 billion dollars).

During this period, Gazprom's revenue decreased by 1.6 times, to 3.96 trillion rubles ($43 billion).

At the same time, the sale of gas brought the company a loss of 107.23 billion rubles ($1.16 billion). As for profit, it is, in fact, generated through the sale of oil (through the subsidiary company Gazprom Neft).

The main reason for the loss is a significant reduction in gas supplies to Europe against the backdrop of an equally significant drop in gas prices (if at the end of the summer of 2022 prices reached $3,000 or more per 1 thousand cubic meters, now they are approximately $500 per 1 thousand cubic meters) .

Due to weak financial performance, Gazprom has reduced investments this year by 334 billion rubles ($3.62 billion), to 1.97 trillion rubles ($21 billion).

The fall in exports also forces the monopolist to reduce gas production. At the end of the first half of 2023, it amounted to 179.45 billion cubic meters, which is 25% less than in the same period last year. At the same time, in comparison with the pre-war period, production fell by almost a third (in the first half of 2021, the monopolist’s production was at the level of 260.8 billion cubic meters).

“Mind Power 2”

All this does not prevent the head of Gazprom, Alexey Miller, from voicing fantastic plans for the future of the company. Thus, in October, he stated that in the near future, pipeline gas supplies to China will become comparable to pre-war export volumes to Europe.

To be honest, it is obvious even to a non-specialist that the implementation of such plans is, at a minimum, controversial. For example, in 2021, which was not the best year for the monopolist, exports amounted to 140 billion cubic meters. In 2022, it fell to 85 billion cubic meters, and this year, as expected, Gazprom can supply up to 25 billion cubic meters of gas to European countries.

As for China, in 2023 Russian gas exports should amount to 22 billion cubic meters, and deliveries in the amount of 30 billion cubic meters are planned for 2024.

This is despite the fact that the design export capacity of the Power of Siberia gas pipeline, through which gas is mainly supplied from Russia to China, is 38 billion cubic meters per year.

Perhaps Alexey Miller means the use of the Power of Siberia-2 gas pipeline, which is still only being designed, and it is far from a fact that it will be put into operation, at least in the near future. But even if Power of Siberia-2 is completed and gas flows through it to the Celestial Empire, it will be no more than 50 billion cubic meters per year, since this is the design capacity of this gas pipeline.

However, it is possible that the head of Gazprom was guided by data from 2022, when, let us recall, gas exports to Europe amounted to 85 billion cubic meters. In this case, indeed, there is logic in Miller’s words, but then, obviously, there can be no talk of any “turn to the East.”

At the same time, oddly enough, there are still people in Russia who are able to think soberly.

Thus, the head of the Russian State Duma Committee on Energy, Pavel Zavalny, having familiarized himself with the forecast of the Institute of Energy Research of the Russian Academy of Sciences, publicly declared that Gazprom was confidently moving towards disaster.

“In the context of a sharp decline in revenue, an increase in gas production, plus an additional tax burden, it turns out that under these conditions Gazprom is being driven into losses that will reach about 1 trillion rubles in 2025,” Zavalny said.

In a word, they were managing things.

Along the old track

True, it is quite difficult to say how accurate this forecast is, since there is no particular confidence in the data published by Gazprom.

However, the fact that Gazprom has problems has happened before,” Mikhail Gonchar, president of the Strategy XXI center for global studies, said in a commentary to Apostrophe. – In essence, Gazprom presented one accounting department to the outside, but inside it was completely different. Especially during the period of low prices, in particular in 2020. And taking into account the fact that they have practically lost the European gas market, which has traditionally been the most profitable for Gazprom, then, in principle, it is clear that it is making losses. The Chinese market will not cover them, even when (or rather, if) the Power of Siberia-2 is launched.

What will happen to the monopolist next is also unclear.

One of the options is to reorient it towards the domestic Russian market, says Gennady Ryabtsev, head of special projects at the Psyche scientific and technical center.

According to him, in fact, the domestic gas market of the Russian Federation is quite large, and it would be quite possible to launch vigorous activity on it, for example, in the gasification of Siberia and the Far East.

“No one was involved in domestic consumers, and nothing beyond the Urals was gasified at all. The company's entire development was focused on increasing exports and creating excess pipeline capacity in order to use gas as a lever for political pressure. And this was not hidden. Therefore, what is happening now is a pattern, which is that Miller put all his eggs in one basket, and now this basket is leaky,” Ryabtsev said in a conversation with the publication.

Another thing is that it is impossible to receive super-profits from the domestic market that Gazprom previously had.

“Will Miller agree to switch from a Bentley or Rolls Royce, or whatever he has, to a Chinese Moskvich or Lada Kalina? Most likely, he will jump out of the window of his skyscraper in St. Petersburg (Gazprom’s headquarters is located in the Lakhta Center in St. Petersburg - “Apostrophe”),” the expert added.

Moreover, Gazprom continues to operate according to the old scheme, only now, instead of Europe, it wants to “tie” China to itself.

“And China pretends that it does not hear what Russia is shouting at it. There was a meeting between Putin and Xi, and not a word was said about gas at all. And all these stories about the construction of “Power of Siberia-2” - it’s simply not clear what they are counting on? This indicates that no political decision has been made to reorient Gazprom towards the domestic market, and it is unlikely that it will be made in the near future,” Ryabtsev concluded.

We need a sanctions package

Therefore, most likely, no fundamental changes will occur in the near future.

Gazprom will be able to support as long as necessary. A loss-making position does not mean that operating activities will cease. As a last resort, they will give him some money, although it is clear that now the number one priority is the war budget,” explains Mikhail Gonchar.

According to the expert, the Kremlin has always needed Gazprom as a political instrument, and therefore the attitude towards it is appropriate.

At the same time, now, against the backdrop of a collapse in pipeline gas supplies, the export of liquefied gas to Europe is rapidly increasing, which is mainly carried out by the non-state company NOVATEK: “Gazprom was a tool, now it is not so powerful. Now there is another tool – NOVATEK, and these are Putin’s friends – (Gennady) Timchenko and (Leonid) Mikhelson.”

Increasing LNG purchases from Russia does not particularly help reduce Europe's dependence on Russian gas. Therefore, the EU should accept a gas sanctions package similar to the one that applies to Russian oil, despite its imperfections, Mikhail Gonchar is convinced.

Gas exports bring significantly less money to Russia than oil trade, but it would be the right step to deprive the aggressor country of tens of billions of dollars that it is directing to the war against Ukraine, even despite the decline of the once powerful gas monopolist.