Rising demand tests Gazprom. Will it deliver?

Energy forecasters predict Gazprom will face difficulties satisfying demand for natural gas in the future. The warning comes as production at existing fields peaks while tapping new reserves involves huge technical difficulties.

The good news is Gazprom has $US 250 billion in contracts until the year 2020. But the bad news – according to many European experts – is Gazprom’s declining production. It will make it difficult for the gas giant to support its commitments, they say.

Analysts within Russia disagree.  Sobinbank analyst Aleksandr Razuvaev says the company has “never failed to meet its contract obligations”, even during the war in the former Yugoslavia.  

“I believe all these so-called ‘concerns’ are politically motivated,” Razuvaev said.

Although some of Gazprom’s fields may be past their peak output, the monopoly relies on the Central Asian states – Turkmenistan, Kazakhstan, and Uzbekistan – to pick up the slack. It buys gas there at below-market prices.

And while these states are indeed eyeing energy-hungry China as an alternative export route, Denis Borisov from Solid Investment says Russia has nothing to fear.

“Considering that coal plays a significant role in China’s energy balance, it’s unlikely the Chinese would be willing to pay market prices for Turkmen gas. And since Gazprom agreed to raise the price for Turkmen gas, it’s obvious this gas will be sold to the Russians,” he said.

The production crunch might not have been as noticeable if it had not been for mushrooming domestic consumption. Gas already dominates Russia’s energy balance.

Unlike other developed countries, where various energy sources play equally important roles, Russia’s balance is tipped, with gas accounting for more than half of the total.

But that’s not for long. Experts say as of next year, when Russia begins to liberalize its domestic gas prices, coal will slowly replace gas as most the cost-effective fuel for power production while independent suppliers will swap Gazprom on the home market.

Gradually divesting itself of the domestic market will allow Gazprom to concentrate on the lucrative export business, reassuring its European partners.