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Not everybody attending the Iranian natural gas summit last week in Frankfurt was there for the same reason.
While most were gauging the prospects for an opening of major natural gas reserves and liquefied natural gas (LNG) export prospects, others were there for quite different reasons.
Take the three representatives from Russia's gas giant Gazprom (OTCMKTS ADR: OGZPY), for example. They weren't there to scout new investment packages. On the contrary…
They were there to see just how badly their company's position was under siege.
And it's no wonder the Gazprom guys looked concerned. From what I saw at the summit, they have every reason to be.
For energy investors, on the other hand, the news is very good…
Gazprom Is in Dire Straits
Gazprom may still be the largest natural gas company on the face of the Earth, exporting more gas than anybody else and providing revenue that accounts for the biggest single chunk of the Russian central budget…
But it's looking at some difficult times.
For one, extractions are declining at the primary mature fields the company has depended on for decades. To offset that growing problem, Gazprom needs to move into three very expensive new regions – above the Arctic Circle, onto the continental shelf, and into eastern Siberia.
Moscow is hard-pressed to provide the necessary funds for that.
Then there is the need that Gazprom continue to expand aggregate exports. Merely to keep pace with past-year totals is not enough.
New pipelines to China and Europe were touted as solutions to this issue. Yet both projects have been plagued with political, pricing, and contract problems. In the case of the South Stream project – intended to move Russian volume into southeastern Europe – astronomical costs, blockading politics from transit countries, and a rising EU move to diversify energy sourcing, have combined to scuttle the venture.
Additionally, Gazprom has relied on a contract mechanism that is falling under its own pressure…
The Gas Giant's Pricing Structure Does It No Favors
A typical agreement from the Russian behemoth includes three components. First, it's a very long-term deal. Usually such contracts will extend for 20 years. Second, there is a "take or pay" provision. This requires that the end user accept a minimum amount of gas (usually 70% of a monthly allotment) or pay as if they had – regardless of actual demand.
Third, there's the pricing formula itself. It's determined by using a basket of crude oil and oil product prices and adjusted periodically (monthly in some cases, still quarterly in others). It's here that Gazprom has suffered its most appreciable shortfall. As the price of crude oil collapsed starting in November 2014 until the recent OPEC production agreements, Gazprom's pricing formula made sure its export proceeds went south as well.
Several European contract parties have also brought (or threatened to bring) arbitration actions to reduce either prices or volume drawn (or both). Several of these have obliged Gazprom to provide "temporary" co…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.