Russian state-controlled gas giant Gazprom has reported record declines in natural gas production and exports for 2022, despite strong gas prices at its former prime target, the European market, while stepping up its efforts to increase gas deliveries to China despite uncertain sale economics.
Gazprom executive chairman Alexei Miller said in a statement that the company produced some 413 billion cubic metres of gas last year, of which 101 Bcm was exported.
The totals were down sharply from 2021, when the company produced 515 Bcm and exported more than 185 Bcm, an increase of 13% and 3% over respective volumes in 2020, according to Moscow-based news agency Interfax.
Last year's steep drop in production reversed Gazprom's recovery from the challenging year of 2020, when Covid-19 forced closures and restrictions in Russia and its export markets.
With international sanctions against Russia and its major corporations in place, Gazprom has opted to use a government-provided permission not to disclose its financial results for this year.
That has left investors with few indicators to independently assess the health of the company's business after such steep performance declines.
Although Gazprom's gas deliveries to the European market have always been smaller than its supplies to the domestic market, government-imposed domestic price regulation has meant sales to European customers traditionally generated the greater share of its revenues, according to previous financial reports.
Doubts raised
Independent analysts have meanwhile pointed out that Gazprom’s efforts to replace the decline in its pipeline gas supplies to Europe with deliveries to China may not be an effective way to improve its top line.
This is because the contractual price formula for its gas exports to China usually results in a final price that is significantly lower than the one the Russian giant has been able to achieve in Europe.
According to official customs data, China paid almost $3.55 billion for the delivery of Russian pipeline gas in the period from January through November 2022.
Though Gazprom has avoided the disclosure of monthly shipments to the country and the price paid, a top Russian energy industry executive said recently that the country is set to deliver just over 15 Bcm of gas to China through the Gazprom-operated Sila Sibiri pipeline for the whole of 2022.
That suggests an average price of between $250 and $264 per thousand cubic metres for gas delivered to China via Sila Sibiri, Russian internet portal ProZakupki has estimated.
Russian opposition leader and economist Vladimir Milov has blamed President Vladimir Putin and Gazprom’s top management for implementing a “reckless decision” last year to reduce gas sales to European markets, where prices averaged $1000 and more per thousand cubic metres, peaking at $3600 per thousand cubic metres last August.
Milov has pointed out that Gazprom’s focus on increasing gas deliveries to China to replace lost European market supplies is meeting with the country’s tough negotiating stance, aimed at securing future gas supplies at the lowest possible price.
Strict price formulas would probably make any increase in Russian pipeline gas deliveries to China a loss-making exercise for Gazprom, according to Milov.
Speaking last year in Vladivostok, President Vladimir Putin acknowledged that the price issue is the toughest nut to crack in gas sales talks with China.
Already having to deal with the loss of European gas sale revenues, the Russian giant still has to source tens of billions of dollars to invest into building two more export pipelines to China, Sila Sibiri 2 and Sila Sibiri 3, from West Siberia and Sakhalin Island.
According to Miller, Gazprom intends to add about 100 Bcm of shipping capacity to China after the two planned pipelines are built. The Sila Sibiri 1 contract, signed in 2014, calls for annual gas supplies of 38 Bcm.
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