Gazprom reduces production forecast

Gazprom's board of directors the other day again corrected the forecast of the company's gas production. The 2015 figures were cut by 6% to about 570bn to 580bn cu m. In 2010 the gas giant expects to produce some 515bn cu m; this was not the first change in this parameter and there are risks it will not be met.

The situation for the gas concern is not pleasant; declining forecasts of production testify to seriousness of three main challenges. Firstly, despite availability of objectively strong reasons in favor of the scenario with high prices of hydrocarbons in the next few decades, risks posed to oil and gas producers by new technologies should not be shrugged off. Moreover, a high degree of mutual distrust between the EU and Russia is still here and attempts to "reduce dependence on authoritarian Russia through involvement of other suppliers" will not stop for a long time.

Secondly, there are serious risks for Gazprom on the domestic market. Although growth in domestic prices is planned in line with the plan of transfer to the principle of equal profitability of supplies, strong competitors are emerging like companies controlled by Gennady Timchenko. Rosneft is also craving for a breakthrough on the gas front.

Thirdly, on the background of investments in numerous expensive pipelines, the concern's investments in production projects may stall. It is not ruled out that the end of the economic crisis, continuing growth of the population and advancing consumer demands in Asian countries, as well as possible war in the Middle East will contribute to the surge in prices and demand for Russian gas. And in this case, Gazprom that is curtailing investments in upstream risks finding itself in a rather unpleasant and even silly situation of losing profits.

Yet, there are no grounds to say that Gazprom is in a catastrophic situation. The company possesses huge reserves that should help if hydrocarbons keep playing the role of the main energy source in the next few decades. Long-term take-or-pay contracts with European companies remain, which enables the company to hold its ground during the period of excessive LNG supply and cheap spot prices. There are good opportunities for operations on the Russian market where prices will be growing even amid competition against other firms. So, Gazprom has good chances to succeed with rational optimization of investments and adoption of real measures aimed at improving the quality of corporate management.

By Stanislav Mitrakhovich, NESF leading expert.