The bad news for Gazprom is flowing as freely as the fuel it once pumped to Europe after it was ordered to pay €13bn ($14bn) for failing to fulfill natural gas orders, delivering the latest blow to Vladimir Putin's major revenue generator.
The Russian energy giant is one of the big business losers of Putin's full-scale invasion of Ukraine. It posted its first loss in a quarter of a century while facing a stalled pipeline to China as it struggles to find new markets for its products.
On Wednesday, German energy company Uniper announced it had terminated its long-term gas supply contracts with Gazprom Export, after an arbitration hearing in which Gazprom was accused of disrupting supplies following Putin's invasion.
Two days earlier, Gazprom's annual report had said its natural gas production had been cut from 412.94 billion cubic meters (bcm) in 2022 to 359 billion cubic meters (bcm) in 2023—a decline of 13 percent.
It means that last year's production is nearly a third less than its prewar production of 515 bcm in 2021, with Reuters reporting that this is the lowest since it was set up in 1989 toward the end of the Soviet Union.
In May, Gazprom Group, which includes oil and power businesses, posted a net loss of 629 billion rubles ($7 billion) for 2023, its first annual loss since 1999, according to Reuters, marking its fall from the world's largest publicly listed natural gas company.
Before the war, Gazprom provided around seven percent share of Russia's federal budget in 2021, but in 2023 it was estimated to be only about half that, dealing a blow to Putin's ability to fund the war and his long-term economic plans.
"Gazprom is in a very difficult position," said Henning Gloystein, director of energy, climate and resources at the Eurasia Group, a political risk consultancy. "Europe gas sales used to be by far the biggest source of revenue for Gazprom."
"Russia's invasion of Ukraine and the subsequent pipeline supply cuts deprived Gazprom of those sales, and there's no quick and easy way to replace them," he told Newsweek.
Cutting Off From Europe
Tom O'Donnell, a Berlin-based energy analyst, said the problems stem from a miscalculation by Putin who "had been planning for years before the escalation of the war against Ukraine, to make Europe more dependent on Russian gas."
"This was effected through a partnership with Berlin who was very trusting of Putin," he told Newsweek. "In the months before Putin launched the actual war, he cut off the gas to Europe. He tried to claim force majeure by making excuses like the compressors could not be repaired because of sanctions."
But faced with an unreliable trading partner, Europe found alternative long-term gas sources, with Norway overtaking Russia to become its top pipeline gas supplier. Sea- borne liquefied natural gas (LNG) increased from the United States and elsewhere.
O'Donnell, a fellow at the Wilson Center, said Russia's European market could diminish further when its transit deal signed with Ukraine's Naftogaz in 2019 expires on January 1, 2025. "Ukraine has been honoring that contract by passing on the gas to Europe, but they will not make another contract. It's clear politically that is beyond the pale for them."
Russia is developing production of LNG, which is transported by ship so offers a route for otherwise stranded pipeline gas. But it probably lacks capacity to build enough ice-capable LNG carriers.
"Going into the LNG sector would be expensive and technically challenging," said Gloystein. "Amid the current sanctions environment and a looming oversupply of global LNG, a major entry by Gazprom into this sector doesn't seem viable."
Russia has two main LNG export terminals, Gazprom's Sakhalin-2, on the island in the Far East, and Novatek's Yamal LNG, on the Yamal Peninsula in the Russian Arctic. Gazprom and Novatek also operate medium-size facilities in the Baltic Sea.
In January, Novatek suspended some operations at Ust-Luga Baltic Sea fuel export terminal and processing complex, due to a fire started by a reported Ukrainian drone strike.
"There's other gas fields up in the Arctic that are planned to be connected to LNG but because of American sanctions, a lot of those projects are slowing down or might be canceled," said O'Donnell. "There are Gazprom fields that are huge, but right now are locked in because all the pipes are mainly connected to Europe and are not being used," he added. "It's not practical to try and connect those north to LNG fields."
Trying To Sell to China
After much of the lucrative European market disappeared, the Kremlin had hoped the Power of Siberia 2, 2,700-mile pipeline would pipe 50 bcm a year between the Yamal Peninsula in the Arctic to northwest China, offsetting those losses.
But prices in the Asian nation are much lower than in Europe, and Beijing is reportedly trying to drive a hard bargain, while a deal over its construction has yet to be reached.
The Financial Times reported Beijing only wants a fraction of Siberia 2's planned annual capacity as well as prices close to Russia's subsidized domestic prices. Russia's lack of another overland route for its gas exports means Gazprom would probably have to accept these conditions, the paper said.
Vladimir Milov, former Russian deputy energy minister, told Newsweek that Russia cannot make any profits by exporting pipeline gas to China. Regarding expansion, "exporting gas from eastern Siberian fields, which are much closer to China, is less expensive than to ship pipeline gas from Western Siberia, which will be even higher costs."
In 2024, the export price for the Chinese market is $257 per 1,000 cubic meters compared with $320.30 for the European and Turkish markets, according to Bloomberg.
"I think probably even $500 per 1,000 cubic meters would not be enough to make sure that Western Siberian exports to China are profitable," Milov said.
"China is not ready to give that kind of price, which means that effectively the Western Siberian gas is stranded now," said Milov. "They are looking now for secondary markets like Pakistan or Mongolia, but China is clearly not ready to accept higher prices."
The Financial Times said it had seen a report commissioned by Gazprom leaders which concluded exports to Europe will average 50bn-75bn cubic meters per year by 2035, barely a third of prewar levels. However, it predicted Russia's LNG exports will more than double to 98.8-125.8 bcm in 2035 from 40.8 bcm in 2020 and comprise half total gas exports—increasing the power of Novatek, Russia's largest and most advanced LNG producer.
Gazprom will lose market share to Novatek or be forced to use its LNG infrastructure, according to the report. Western sanctions have cut Russia off from technology such as turbines that help move gas through pipelines and this could impact LNG expansion too.
Meanwhile, Milov noted how Gazprom has also been trying to set up a "gas hub" scheme with Turkey which he describes as a "gas laundering" operation in which Russian gas is mixed with Azerbaijani or Iranian gas and resold to Europe via Turkey. But plans have been stalled due to wrangling between Moscow and Ankara over who would control the hub and trading schemes and how the EU might respond.
"If that hub ever begins to operate, which I doubt, a tracing mechanism will be introduced," he said, which means, "it is almost certain that restoration of gas supplies to Europe is not going to happen." Newsweek contacted Gazprom for comment.
Newsweek