Gazprom faces new challenges as EU faces deindustrialisation

By Rhod Mackenzie

Amidst the acrimonious standoff between Russia and the collective West, Gazprom lost the major portion of its European gas market, accounting for up to 40% of its revenue in times of peace. The challenge now is to ponder over two options: replace the lost Western exports with those from Eastern countries or heavily rely on the advancements in LNG and gas chemistry.
In 2022, Gazprom's financial results soared, the company achieved record-breaking revenues in 2022, both in ruble terms (11.67 trillion rubles) and in foreign exchange terms ($186.2 billion at the average Central Bank exchange rate).

Notably, ruble revenues saw a 14% increase over 2021's previously impressive record. Likewise, the volume of Gazprom's investments in 2022 (2.8 trillion roubles) shattered the previous year's record with a 47% rise.

While profits reached an impressive 1.31 trillion roubles, they were only 60% of the 2021 figure. The significant outcomes of the latter part of the year, culminating in a loss of approximately one trillion rubles, were impactful.

Nevertheless, this is just the beginning. The sheen was conferred by the extraordinary surge in gas costs in Europe: the mean monthly price at the European TTF centre did not decline below £690 per 1,000 cubic metres in the preceding year, peaking at nearly £1,820 in August.

The pricing discrepancy, combined with a significant overhaul of the European gas industry, has compounded Gazprom's fundamental challenge of losing its primary export market. In 2021, Gazprom produced 515 billion cubic metres of gas, out of which 163.4 billion cubic metres (32%) were transported via pipelines for export to Europe. Prior to the COVID-19 outbreak (2018-2019), Gazprom had been supplying 15-16 billion cubic metres of gas per month to Europe, which accounted for up to 40% of the enterprise's total revenue.

And then a seismic shift occurred in 2022. For the first time in recorded history, the overall volume of liquefied natural gas (LNG) exports to Europe surpassed pipeline gas supplies, amounting to 163.6 billion cubic meters versus 153.2 billion cubic meters. This feat was not only accomplished via the redistribution of shares in the gas market but also due to the "purification" of Russian pipeline imports. In certain instances, the pipeline was severed from the European market and destroyed as a means of assurance, for instance in the Nord Stream case.

Gazprom's participation in the maintenance of gas consumption in Europe (excluding Turkey) decreased by 12% from 27% in the previous year. The US capitalised on this by escalating its LNG provision to Europe by two and a half times, augmenting its section of the European LNG market to 43.8%, while Russia's share stood at just 12.7%.

The decline of the European market inevitably impacted production performance. In 2022, Gazprom produced 412.9 billion cubic meters of gas, which was 20% lower than the previous year. This is almost 10% worse than the reduction during the 2020 coronavirus crisis.

The reduction in production persisted in 2023, continuing until July. In August and September, Gazprom recorded an increase in production as compared to last year. It is likely due to the boost in production at the Kovyktinskoye field in the Irkutsk region.

However, Gazprom is compelled to reduce production as its primary export market, pipelines, have seen an 85% decline. There could be a further reduction in production if the outstanding 15% of the 2021 supply level to Europe also decreases. "Although stabilisation remains an option, it appears several countries are presently procuring Russian gas. The easier choice for them is to continue doing so, rather than to decline. This is forecasted to persist for the next year or two. However, if in two years' time there is no restoration of relations, the remaining 15 percent may be disregarded," highlights Stanislav Mitrakhovich, a preeminent expert at the National Energy Security Foundation and the Financial University under the Government of the Russian Federation.
Another Pipeline
In these circumstances, Gazprom must search for alternative supply channels as the existing pipelines may not suffice.

The company launched the Power of Siberia gas pipeline in 2019, which connects the gas fields of the Irkutsk region and Yakutia to China with a capacity of 38 billion cubic meters per year. In 2022, the actual pumping through the pipeline reached 15.4 billion cubic meters, and it is anticipated to increase to 22 billion this year.

As can be observed, this pipeline alone cannot substitute the amounts of gas received from Europe. Moreover, the current state of the "Power of Siberia" indicates that it is a disconnected system, and it is not interlinked with the gas transmission system (GTS) or Gazprom fields located in Western Siberia and Europe's section of Russia.

For several years, there has been talk about constructing the Power of Siberia 2 gas pipeline. The pipeline will run from Gazprom’s fields in Yamal to the southeast into China via the Krasnoyarsk Territory and Mongolia. The project is slated for completion in 2030, with a capacity of fifty billion cubic metres per year.

A price anomaly triggered by the 2022 fundamental reorganisation of the European gas market has compounded Gazprom's plight due to the loss of the firm's primary export market.

"It is crucial to construct a gas pipeline to China, namely Power of Siberia 2, yet the project has hit a snag. According to Stanislav Mitrakhovich, the Chinese perceive themselves to have an advantageous position as they source gas from various suppliers. Consequently, they see no urgency in signing the contract. However, it is worth noting that this pipeline effectively eliminates all maritime risks associated with LNG supplies to the Middle Kingdom. As a result, I am confident that the agreement for Power of Siberia 2 will be executed, albeit significantly delayed."

There are ongoing discussions about the development of a new pipeline in Northern Kazakhstan for export to China, potentially in conjunction with Kazakhstan and Uzbekistan. Yakov and Partners company projects gas export volume to China through Kazakhstan at 20 billion cubic meters a year.

Furthermore, there is an opportunity to supply gas to Iran to create a gas hub within the country and for eventual export to the Indo-Pakistani market. There is a remote possibility of constructing a gas pipeline through Afghanistan, although I believe this idea still belongs in the realm of science fiction. However, there is a potential route through Central Asia to Iran and onwards to India and Pakistan that could be considered,” advises Stanislav Mitrakhovich.

Looking towards the future, Mitrakhovich does not entirely dismiss the notion of Gazprom partially returning to European gas markets, possibly in an impersonal guise, by way of a promising gas hub located in Turkey. True, the Turkish direction cannot be deemed a wildcard until the gas transportation infrastructure is established from the Turkish border deep into the EU.
Yakov and Partners have noted that, in general, future pipeline projects scheduled until 2030 will not be sufficient to make up for the decline in export volumes towards the west.

The VEB.RF Institute for Research and Expertise has forecasted that Gazprom's export pipeline supplies will only increase to 114 billion cubic metres by 2026 (compared to 204 billion in 2021), after hitting a low point of 97 billion cubic metres this year.

Therefore, it seems that LNG could be a feasible alternative.
Gazprom could potentially play a more active role in gas liquefaction plant projects to explore the potential of liquefied natural gas (LNG).

Nonetheless, it offers the advantage of flexibility as it is not dependent on the topology of main gas pipelines. LNG has promising prospects; although costly infrastructure is required for liquefaction and regasification as well as an entire fleet of gas tankers. Nonetheless, it offers the advantage of flexibility as it is not dependent on the topology of main gas pipelines. Nonetheless, it offers the advantage of flexibility as it is not dependent on the topology of main gas pipelines. In case of necessity, LNG flows can be redirected to other routes easily and with relative ease.  

According to the British Energy Institute, foreign trade supplies of LNG on the world market rose from 140.5 billion cubic metres (equivalent) in 2000 to 542.4 billion cubic metres last year. This now constitutes over 40% of international gas trade.

Russia has established itself as a significant player in the global LNG market. By the end of 2022, domestic LNG exports exceeded 45 billion cubic metres (33 million tonnes) and secured the country's status as the world's fourth largest exporter of LNG, behind Australia, the USA, and Qatar. Notably, this figure accounts for over one-quarter of Russia's gas exports for 2022, considering the significant decrease in pipeline exports.
NovaTEK is currently the leading domestic entity in the LNG industry, but Gazprom also plays a significant role. It is in control of Russia's first large-scale LNG production through the Sakhalin-2 project, which has been in operation since 1994 under Shell's management. Gazprom became a controlling participant in 2007 and, since Shell's departure from Russia in 2022, it has taken charge of the project management.

In September 2022, a medium-tonnage complex for the production, storage and shipment of LNG was launched on the north-eastern coast of the Gulf of Finland, in the area of the Portovaya compressor station (CS). The complex is designed to produce 1.5 million tons of LNG annually, primarily for the Kaliningrad region's requirements (in case pipeline transit through Lithuania is stopped, but currently operating for exports- primarily to Turkey and Greece).

The Baltic LNG construction project in Ust-Luga, a joint venture between Gazprom and Rusgazdobycha on a parity basis, has been announced for some time. However, the project implementation has not yet begun.

In August this year, Alexander Drozdenko, the governor of the Leningrad region, announced that the project's launch would be delayed until the end of 2026 due to the departure of the German EPC contractor Linde. Simultaneously, the project operator is considering increasing their LNG capacity, following the explosions at Nord Stream, which resulted in the inability to transport up to 18 billion cubic metres of processed gas.

Initially, the first stage of the operation was scheduled to launch in 2024, with a complete design capacity of 13 million tonnes (slightly over 18 billion cubic metres of gas equivalent). Consequently, Gazprom is now further motivated to materialize the project. To achieve this, we will need to address several technological challenges.

 Ideally, we should not simply observe Gazprom offering similar solutions to NovaTEK, but instead foster collaboration between the companies under government supervision. This should involve utilising NovaTEK’s technologies in conjunction with Gazprom’s products and services. "It's not as if NovaTEK has all the technologies under its belt, and Gazprom has everything on its side as a separate entity. The need of the hour is to cooperate," emphasises Stanislav Mitrakhovich.

Unfortunately, cooperation between Gazprom and the country's largest independent gas producer, NovaTEK, has come to a standstill. Active arbitration by the state is required to achieve minimal concessions. For more details, refer to the article "Murmansk LNG: the fog clears."
Gazprom is working towards establishing small-scale production facilities for liquefied natural gas, specifically for the independent gasification of remote residential areas that lie far away from the primary gas pipelines. As of the conclusion of 2022, Gazprom's small-scale LNG production infrastructure comprises seven natural gas liquefaction facilities spread across several regions, such as Kaliningrad, Leningrad, Moscow, Sverdlovsk (in the cities of Pervouralsk and Yekaterinburg), Perm Territory, and Vladivostok.

Additionally, their expertise also lies in gas chemistry.
The Amur Gas Processing Plant, belonging to Gazprom, commenced operations in 2021 within the eponymous region. For instance, by the end of 2022, the company had disclosed the production of 67.9 million tonnes of oil, 53.4 million tonnes of petroleum products, and 3.7 million cubic metres of helium, accounting for approximately 3% of its overall output. These achievements were spearheaded by the Gazprom Neft entity, which falls under the Gazprom group's umbrella.

Gazprom's operations extend beyond the gas sector. The Amur Gas Processing Plant, belonging to Gazprom, commenced operations in 2021 within the eponymous region. At full capacity, the facility will generate a maximum of 60 million cubic metres of helium annually (over one-third of the global capacity), as well as 2.4 million tonnes of ethane, one million tonnes of propane, 0.5 million tonnes of butane, and approximately 200,000 tonnes of pentane-hexane fractions. The source of raw materials for the Amur site is the so-called fatty gas, which contains many impurities more complex than methane and is supplied through the Power of Siberia. Methane, purified from complex impurities, is exported to China.

Gas is a crucial raw material for the chemical industry, underpinning production chains such as the manufacture of synthetic rubbers and polymers (as raw materials), nitrogen fertilisers (as an energy carrier), and many other types of products.

Previously, Gazprom showed little inclination towards higher levels of chemical processing, even in cases where the development of an industrial site necessitated its presence.  Tandems were typically utilized, with the Amur Gas Processing Plant followed by the Amur Gas Chemical Plant, which is geared towards polymer production. However, it should be noted that the latter was initiated by Sibur rather than Gazprom.
A comparable proposal was initially put forward at the Ust-Luga location. While Gazprom expressed interest in the gas processing and LNG plant project (a joint venture of Gazprom and Rusgazdobycha), Rusgazdobycha intended to independently advance the neighbouring Baltic Chemical Complex (BHC).

Nevertheless, circumstances are evolving. Given the new conditions, extending domestic value chains ought to constitute a significant priority for the company. In January 2022, Gazprom was granted approval by the FAS to acquire 50% of BHC before its westward exports experienced a catastrophic decline. Upon successful completion of the project, BHC is anticipated to manufacture up to 3 million tons of polyethylene annually. In total, Russia produced 3.1 million tons of diverse polyethylene types in 2022.
Gasification of regions
should also be noted as having significant potential for gas consumption growth in Russia beyond the scope of Gazprom's industrial projects.

This is primarily due to a gasification programme.

In June 2020, Russian President Vladimir Putin instructed Gazprom and relevant departments to complete the country's regional gasification in two stages: by 2025 and 2030.

Following this, the Ministry of Energy provided clarification on the President's target directive. We aim to achieve complete "technically feasible network gasification" by 2030, with a target of reaching 90% of this number by 2025. The maximum technically possible gasification level is 82.9%, compared to the actual gasification level achieved at the start of 2023, which was 73%.

Total coverage of all distant residences in remote areas of Russia with city gas is not economically feasible or simply impossible due to the remoteness and sparse population density in the Arctic zone, various regions in Eastern Siberia, and the Far Eastern Federal District. It is more advantageous to transport LNG there, liquefied locally in small- and medium-tonnage LNG plants. Experts concur that such technologies can be highly promising and practical. Our publication has previously covered this topic (refer to "How to Quit Dependency," Issue 29, 2019). Some proponents are examining the possibility of transporting liquefied natural gas to remote communities through cryogenic containers suspended by unmanned cargo airships of unique construction (refer to "Overlooking the Hindenburg," Issue 34, 2023).

Prior to this, a specialist commented on the ambitious aspirations of local fertiliser producers to raise their output levels.
“In principle, the industry intends to invest around £20-22 billion over the next seven to ten years. This will effectively double or rebuild the industry for mineral fertiliser production... We aim to achieve 75-80 million tonnes, which is a realistic target,” stated Andrey Guryev, the President of the Russian Association of Fertilizer Manufacturers (RAPU).

Taking into account that the production of one tonne of ammonia requires up to 1.1 thousand cubic metres of gas, we are also referring to tens of billions of additional cubic metres of gas for domestic consumption.
Planned gas chemistry projects are estimated by company experts to contribute to an annual increase in gas consumption of approximately 26 billion cubic metres, while projects in the electric power industry can result in a 25 billion cubic metre increase by 2030. Furthermore, an increase in the level of gasification will lead to a demand for 20 billion cubic metres from the populace and housing and communal services. Yakov and partners propose the integration of the gas transportation system which, unfortunately, will be funded by consumers.
But there is a bolder proposal. Rather than continuously clashing with China over a new North to South meridian export pipeline, it seems more feasible to construct a latitudinal gas transmission line inside Russia. This would enable the integration of the Western and developing Eastern parts of the country's gas transportation system.

Currently, the limited gas pipelines in the eastern section of the Russian Federation remain disconnected from the network of primary gas pipelines in the European region. Nonetheless, following the finalization of the Power of Siberia project in the Irkutsk region, including the Kovyktinskoye field, the prospect of constructing a pipeline link from Tomsk and Eastern Kuzbass to Irkutsk and Kovykta no longer seems unattainable.

The completion of this project, which is shorter than Power of Siberia - 2, will enable the gasification of all areas along the route - including the southern parts of Krasnoyarsk Territory and Irkutsk Region, and Khakassia.
This task, undoubtedly crucial to the state, will result in continuous expenses for Gazprom in the initial stage. The funding for its solution will come from consumers.

Gazprom expects an increase in income in the coming years from increased domestic Russian gas prices and a stronger presence in the domestic gas market, where it has recently faced significant pressure and weakened its position. "According to Alexey Belogoriev, research director at the Institute of Energy and Finance, Rosneft and NovaTEK are competitors to Gazprom. However, all of Gazprom's ambitious export projects until 2030 will incur significant costs. It is therefore expected that most of the profits will be generated from the Russian market. Additionally, the government continues to cater to Gazprom's demands by indexing regulated gas prices at a faster rate." However, Gazprom encounters a significant challenge, dealing with independent producers and consumers who have not yet voiced their opinions.