GAS 2 September, 2020 12:00 pm   

Black swans in Gazprom’s results

Gazprom has recorded an almost 20-fold drop in net profits, while its revenue in the first quarter of 2020 slumped by 30 percent in comparison to the same period last year. Despite that, the company’s board has not lost its spirit and is expecting a frosty winter, which will disperse the “black swans” and make room for the “white ones” only. One can only wonder whether this will actually happen – writes Bartłomiej Sawicki, editor at

It’s a nose dive

After the coronavirus caused a significant drop in gas prices and demand, Gazprom concluded the first half of the year with a RUB 45 bn profit. That is 19.5 times less than in 2019. The revenue sank by almost 30 percent and landed at RUB 2.9 bn. The profit from gas net sales plummeted by 35 percent. These drops were mostly caused by the decline of average prices and volumes of gas sold in the “Europe and other countries” segment.

The profits from net gas sales to Europe and other countries went down by 47 percent. In terms of volume that is 98.2 bcm of gas, in comparison to the 117.9 bcm of gas sold in the first six months of 2019. The profits from net gas sales to former Soviet Union countries dropped by 23 percent in the first half of the year as compared to the same period in 2019.

A Turkish gambit

According to the Federal Customs Office, in the first quarter of 2020 the deliveries to the biggest gas recipient in Europe – Germany, declined by 45 percent and totalled at 2.6 bcm. However, Russians sold even less gas to Turkey.

The volume of gas sold to Ankara was 7-fold lower in comparison to March 2019. The Turkish Energy Regulatory Agency reported that in March the country imported only 210 mcm from Russia, even though it was obliged to purchase over 1.1 bcm. Despite that, Turkey’s debt to Russia has exceeded a billion dollars because Ankara is taking its time to pay it back. Initially Ankara encouraged Gazprom to cooperate by promising to buy more gas. After the prices dropped and new gas deposits were discovered near the Black Sea, the Turks used their improved negotiation position and took over the initiative.

For some time now Turkey has been limiting its imports of the blue fuel from Russia. In 2017 Turkey bought 29 bcm of gas, a year later the figure dropped to 23.96 bcm and last year it went down by almost 40 percent – to 15.5 bcm. At the same time, Turkish companies are actively purchasing gas from Azerbaijan, as well as LNG from Algeria , Qatar and Nigeria. The first line of the Turkish Stream gas pipeline needs to operate in these circumstances. Before its completion, the only way to transmit gas from Russia to Turkey had been via the Blue Stream pipeline, which has a capacity of 16 bcm. It turns out that it is still enough to satisfy Turkish orders from Russia.

Waiting for the black swans to leave and white ones to return

Despite the existing problems, Gazprom is expecting the coming future to be better. Famil Sadygov, Deputy Chairman of the Management Committee at Gazprom, stated at a press conference that the situation on the market would improve in the third quarter. “In August spot gas prices exceeded the psychological barrier of USD 100 per 1 tcm, and demand is growing,” he explained.

After the market picked up, Gazprom slightly upgraded its expectations on its gas exports in 2020. According to Andrei Zotov, department head at Gazprom Export, it is possible for the export to slightly increase in the nearest future – up to 170 bcm. In July Zotov claimed export should be at 166-167 bcm.

Gazprom expects the upcoming winter to be more severe and to end the presence of “black swans” on the market. Alexander Ivannikov, head of a department responsible for financial and economic policy of Gazprom, stated that according to the weather forecast the coming winter will be harsh. “Like we said at the beginning of the year, we believe that “black swans” (highly unexpected events – reg.) will leave and only white ones will arrive,” Ivannikov said. “The next winter should allow us to go back to our previous, good results,” he added.

However, this optimism does not have a strong foundation. The coronavirus caused the European economy to shrink and the virus is not backing off. While it looks like there won’t be another shutdown like in the spring, new limitations are possible and they will impact gas demand. Secondly, after the previous, mild winter, European gas depots are full of cheap gas. LNG providers also suffered because of the dropping gas prices, but the ongoing market recovery is an opportunity for them as well. Even before the coronavirus, LNG was becoming an increasingly more serious competitor to gas deliveries via pipelines, including from Russia. LNG’s advantage is its flexibility, which seems attractive considering the volatility of the market.

Other issues

The other problem Gazprom needs to face is the March decision of the Arbitration Court in Stockholm on the six-year dispute with Poland’s PGNiG. The court decided the Russian giant had to to pay its Polish client USD 1.5 bn on the basis of their 1996 agreement. That’s not the end of it. In August, Bulgartransgaz, Bulgaria’s gas transmission system operator, signed a contract to buy 20 percent of shares in the planned LNG terminal in Alexandroupoli, Greece. Last year Bulgaria bought its first half a billion of cubic meters of LNG via a terminal in Greece, which caused exports from Russia to drop by almost a quarter. The Kommersant daily reported that in reality only four European states (Serbia, Hungary, Austria and Czechia) still dis not have direct access to LNG terminals Last year liquefied gas purchases soared in Europe by 75.6 percent.

Chinese uncertainty

At the beginning of 2019 spot gas prices in the most liquid gas hub in Europe – the Title Transfer Facility (TTF) – were at USD 249 per 1 tcm, at the beginning of this year it was USD 135. In July 2020 the prices landed at USD 60.

At the same time, when China was still in negotiations with Gazprom, it simultaneously developed its LNG import capacity on the Pacific. Experts believe that China treats Russian gas as a back up option, which will become available only in a few years, because the Power of Siberia gas pipeline, which had been completed at the end of last year, should reach its nameplate capacity of 38 bcm as late as in 2025. It is also impossible to tell whether or when the construction of the Power of Siberia 2 will start. It is difficult to determine whether Gazprom starting another costly project makes sense economically. So far none of the company’s gigantic pipeline projects, in which it had invested tens of billions of dollars, paid for themselves.