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### Viewing cable 09MOSCOW2528, GAZPROM'S REVERSAL OF FORTUNE, PART ONE

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09MOSCOW2528 | 2009-10-06 11:11 | 2011-01-05 11:11 | CONFIDENTIAL | Embassy Moscow
Appears in these articles: http://www.spiegel.de/

`

    VZCZCXYZ0000
    PP RUEHWEB

    DE RUEHMO #2528/01 2791102
    ZNY CCCCC ZZH
    P 061102Z OCT 09
    FM AMEMBASSY MOSCOW
    TO RUEHC/SECSTATE WASHDC PRIORITY 4993
    INFO RUCNCIS/CIS COLLECTIVE PRIORITY
    RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
    RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
    RHEHNSC/NSC WASHDC PRIORITY
    RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
    RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

` `

    C O N F I D E N T I A L MOSCOW 002528

    SIPDIS

    DEPT FOR EUR/RUS, EEB/ESC/IEC GALLOGLY AND WRIGHT, S/EEE
    MORNINGSTAR
    DOE FOR HEGBURG, EKIMOFF
    DOC FOR JBROUGHER
    NSC FOR MMCFAUL

    E.O. 12958: DECL: 10/05/2019
    TAGS: EPET ENRG ECON PREL RS

    SUBJECT: GAZPROM'S REVERSAL OF FORTUNE, PART ONE

    REF: A. MOSCOW 971
    ¶B. MOSCOW 403
    ¶C. MOSCOW 367

    Classified By: Econ MC Matthias J. Mitman for Reasons 1.4 (b/d)

    ¶1. (U) This is the first of a two-part report on the new
    economic realities facing Gazprom, Russia's state-owned gas
    sector giant.

    -------
    summary
    -------

    ¶2. (SBU) Far from reaching its ambitions of becoming "the
    most valuable company in the world," Gazprom's fortunes have
    reversed dramatically in the past year. The company's market
    value, production, and sales have all plummeted since the
    onset of the economic crisis. With dramatically reduced
    cash-flow, the company has been forced to cut back on capital
    expenditures and its ambitions, despite political rhetoric to
    the contrary. However, as we will examine in part two of
    this report, Gazprom's problems are likely longer term. End
    summary.

    ------------------------------------
    massive reversal in major indicators
    ------------------------------------

    ¶3. (U) Major indicators of Gazprom's performance have all
    reversed course dramatically in the past year. (Note:
    Figures in this report are taken from Gazprom reports,
    statements, and presentations, unless otherwise indicated.
    End note.)

    Market capitalization --

    ¶4. (U) At its peak in May 2008, Gazprom's market valuation,
    based on the small percentage of its shares that trade
    publicly, was over $350 billion, and company president Alexey
    Miller declared Gazprom would become "the most valuable
    company in the world." Miller suggested Gazprom's market
    capitalization would reach $1 trillion in the near future.
    By May 2009, in the midst of the global economic and
    financial crisis, the company's market capitalization had
    dropped to its recent low of approximately $75 billion, but
    has since rebounded to approximately $120 billion.

    Production --

    ¶5. (U) Gazprom's gas production peaked in 2006, at 556
    billion cubic meters (bcm). In 2008, it was 550 bcm. In the
    first seven months of 2009, however, Gazprom's production was
    down almost 25% over the same period in 2008. As of
    September 2009, Gazprom expects 2009 production to reach just
    474 bcm, and many analysts believe that figure to be overly
    optimistic. In a September note on Gazprom, investment bank
    Troika Dialog predicted Gazprom would have difficulty even
    reaching 460 bcm. On the low end, some analysts estimate
    Gazprom could produce just 450 bcm or less in 2009 -- a 100
    bcm or more decline from its peak production. Even this
    massive drop in production is masked to some degree by the
    halt in gas imports from Turkmenistan since April (ref A).
    In 2008, Gazprom imported 42 bcm from Turkmenistan, nearly
    all of which was re-exported to Ukraine. Having halted these
    imports, Gazprom itself is supplying the Ukrainian market out
    of Russian production.

    Revenues --

    ¶6. (U) The Russian Customs Service reports that Russian gas
    export revenues were down 50% in the first 7 months of 2009,
    compared to the same period in 2008, a decline of almost $20
    billion. While Gazprom's official results for 2009 will not
    be published until well into 2010, a back-of-the-envelope
    calculation using Gazprom's own projections for average price
    and volumes of exports to Europe in 2009 (ref C) indicates
    the company might receive about $30 billion less from exports
    to Europe in 2009 than in 2008. This represents a loss of
    about 2% of Russian GDP and is in line with estimates from
    various analysts. (Note: Given the relative significance of
    export sales to Europe (excluding FSU), the relative
    reliability of the figures, and to avoid exchange rate
    complications, we focus only on export revenues here.
    According to its recent bond prospectus, Gazprom's exports
    are divided into sales to the FSU, and to Europe. Sales to
    the FSU and Europe represent 16% and 63%, respectively, of
    its sales by revenue -- meaning exports represent 79% of
    Gazprom's revenues. End note.)

    Domestic sales --

    ¶7. (U) Gazprom's domestic sales are not down as dramatically
    as one would expect given the economic crisis, due primarily
    to artificially low domestic prices, which prop up demand.
    While Gazprom has not yet reported official results for the
    first half of 2009 (1H09), various analysts predict a drop of
    about 10% in gas volumes to the domestic market.

    Export volumes --

    ¶8. (U) Gazprom's overall exports peaked in 2008 at 281 bcm.
    Gazprom's sales to the FSU peaked in 2007, at 101 bcm,
    dropping slightly to 97 bcm in 2008. Sales to the rest of
    Europe peaked in 2008, at 184 bcm. (Note: Interim
    statements regarding 2009 sales often do not coincide in
    definition with audited annual reports. Thus 1H09 sales
    estimates only give an indication of the trend and are not an
    exact comparison with 2008 figures. Gazprom has not yet
    released official results for 1H09 and only released first
    quarter (1Q09) results on August 26. End note.) Through
    1H09, Gazprom has said it shipped about 33% less gas to
    European customers than in 1H08. In a recent statement, the
    company said its exports to the FSU in 1H09 dropped 54%
    compared to 1H08. A weighted average of those estimates
    indicates overall exports shrunk by about 40% 1H09.

    ¶9. (U) As Gazprom and many analysts point out, however, 2H09
    should be much better for Gazprom exports as many European
    customers restrained purchases in 1H09, knowing that prices
    -- which are tied to oil prices with a six to nine month lag
    -- would drop dramatically in 3Q09. Furthermore, export
    volumes in 2H08 were already dropping rapidly due to the
    economic crisis and high gas prices that were reaching their
    peak in 4Q08. Results for 1H09 were also significantly
    affected by the 21 day gas cutoff to Ukraine and 10 day
    cutoff to Europe in January. That said, 2009 will still be a
    dismal year for Gazprom export volumes.

    ---------------
    forced cutbacks
    ---------------

    ¶10. (C) Facing financial realities, Gazprom recently cut its
    capital expenditure budget by $7.5 billion, or about 25%,
    including cuts to Shtokman and Yamal development. However,
    Gazprom and GOR leadership continue to take the tack that
    "everything is fine" (ref B). One attendee at the recent
    gathering of the "Valdai" group of international Russia
    experts told us that Gazprom CEO Alexey Miller told the group
    that the company's plans for the Nord Stream and South Stream
    gas pipelines, and for the development of the Shtokman and
    Yamal gas fields are "all on track."

    ¶11. (C)xxxxxxxxxxxx told us recently that
    Miller's and other GOR leaders' public statements on Gazprom
    should be ignored. xxxxxxxxxxxx said these leaders understand well
    that Gazprom is in trouble but they just don't know what to
    do about it.

    ¶12. (C) According to xxxxxxxxxxxx, Gazprom simply doesn't have the
    money to move forward on all its so-called "priorities," and
    it will need to choose which are most important, while facing
    insatiable political demands on its revenue streams. xxxxxxxxxxxx, told us
    recently that he believes Gazprom has "a heck of a lot of
    cost-cutting capacity" still available, but that the company
    has too many political constraints preventing it from taking
    the most necessary and painful measures. Furthermore, he
    figures the company needs to spend about $5 to $8 billion a
    year just to maintain its aging system and that these costs
    will rise in the future. xxxxxxxxxxxx is thus also very
    skeptical of Gazprom's other major commitments such as South
    Stream and Shtokman.

    -------
    comment
    -------

    ¶13. (C) Gazprom's capital expenditure cuts reflect an
    understanding that, public rhetoric aside, the company can't
    spend money it doesn't have. However, Gazprom's longer-run
    problems are largely beyond its control and require
    fundamental reforms that will be difficult to achieve. In
    part two of this report, we examine the constraints to
    Gazprom's return to dominance.
    Beyrle

`