Why Now, Gazprom?
Posted October 5, 2009 at 9:41 am 
Filed in: These are tough times for the U.S. natural gas industry. Prices are at lows not seen since early 2002. With a month to go before the start of the winter heating season, underground storage is at a record level of 3.6 trillion cubic feet (tcf). Unemployment is at a 26-year high, a good indicator that industrial gas demand will not be rising anytime soon. While worries of Chinese acquisitions in Africa are buoying oil prices, natural gas producers have had no such luck.
American producers, mostly smaller independents, are laying off workers and cutting costs. They are not pleased to have a 10-ton gorilla enter an already intensely competitive market. The gorilla is Gazprom, the Russian natural gas company and the world’s largest producer and marketer of natural gas. On October 1, Gazprom announced that it was officially entering U.S. trading and marketing through Gazprom Marketing & Trading USA.
In 2006, Gazprom quietly opened an office in Houston and began negotiating long-term gas supply swap deals that have given it access to 350 million cubic feet per day at a number of key gas pipeline hubs. Vitaly Vasiliev, chief executive officer of Gazprom Marketing and Trading in the UK, said, “We have now achieved our goal of bringing the world’s largest gas company into the world’s largest gas market.”
We’ve heard about Gazprom buying European natural gas infrastructure and local companies. Clearly, they’re looking to get a hold on U.S. distribution as well. This is partly because Russian natural gas production is rising rapidly and, just as consuming countries need security of supply, so producing countries need security of demand. In the face of weak global demand, Russian natural gas production rose to 45.5 billion cubic meters in September from 43.5 billion cubic meters in August, getting Russia to close to 20 percent of global output. Meanwhile, Gazprom believes that European demand appears to be stabilizing for the long term.
The United States will remain the world’s largest market for the foreseeable future, and Gazprom – according to the chief of it’s U.S. operations, John Hattenberger – wants a stake in that market for purely commercial reasons. When Gazprom planned to enter U.S. trading and marketing prices were at all-time highs, and thus the company may have been motivated purely by shareholder interest (about half of Gazprom USA is publicly traded). Yet to choose to enter now, when losses will clearly be sustained, suggests government interests at work.
The government’s goal of expanded geographical reach is partly motivated by a need to unload LNG. For a number of months Gazprom has sought to unload LNG from the Sakhalin project off Russia’s eastern coast to the U.S. through a Mexican LNG terminal. Prices, however, have been too low. Gazprom is also intending to export LNG to the U.S. from the massive Shtokman fields in the Arctic. All of this gas will have to have somewhere to go. By gaining a foothold in American distribution, Russia can help ensure it a home.
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