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Gazprom may be a hegemon in retreat, but it's far from a spent force. Competition from Norway, liquefied natural gas and cheap U.S. coal has weakened the Russian gas giant's pricing power in Europe. Now upstart Russian producers are agitating for an end to its export monopoly. But Gazprom still commands a quarter of the European gas market. Its recent decision to hand a $7-billion (U.S.) bill to Ukraine for allegedly unpaid supplies is a reminder of its still-formidable heft.
Clearly, momentum is working against Gazprom. Exports to its most important market fell 7 per cent last year as Europe's weak economy and competition hit volumes. The gas exporter made billions of dollars of price concessions on long-term oil-linked contracts with some customers – a response to Norway's aggressive embrace of cheaper spot prices.
Still, Gazprom isn't facing an existential crisis as much as a slow, manageable decline. It can try to defend existing oil-linked contracts by offering customers rebates while crude prices are high. New contracts will probably contain a spot component, but there is no guarantee spot gas prices will stay lower than oil-linked prices forever.
If Gazprom decides to become more competitive after being caught offside by the U.S. shale boom and the globalization of the gas market, it has the resources to do so. Despite its many challenges, including an anticipated dip in gas production, analysts at Sberbank expect Gazprom's operating cash flow to rise to just over $47-billion by 2015 from just under $44-billion last year.
A lowly market rating – just 2.9 times forward EV/EBITDA, or about half the average of global peers – suggests investors doubt Gazprom's funds will be invested wisely. After years of capex blowouts, not all of them easily explained by the heavy investment required to keep aging Soviet gas fields producing, it's hard to blame them.
Continuing pressure from Norway and domestic rivals such as Rosneft and Novatek could eventually prove salutary for Gazprom if it forces the lumbering giant to step up its game. Until then, the brewing spat with Ukraine, with its echoes of previous conflicts that disrupted European supplies in 2006 and 2009, is a reminder that gas-dependent Europe shouldn't get complacent, no matter how much Gazprom's customers relish its waning market power.