The fall in oil prices since 2014 negatively impacted the financial condition of not only the oil companies but also the gas producers in the same way. Both are hungry for profitability and cash — profitability to satisfy the shareholders’ returns and cash to invest and increase profits. Both are in desperate need for cash in this regard.
Today, the biggest gas producer in the world, which is the Russian company Gazprom, is in need of cash for completing its investments in order to meet its objectives of supplying gas to China and building gas pipeline to Europe. Otherwise, it will have to delay its project, which is worth more than $55 billion, for the construction of a gas pipeline to China, until the year 2021.
It also has to deliver cash profits to its main shareholder — the Russian government. However, since it lost more than 85 percent of its market value since 2008, its profitability has fallen. Nothing can be done except to borrow cash or expose its balance sheet with more debts and further weaken its ratings within the financial institutions. However, since all its energy peers are exposed, why should Gazprom be an exception?
The Gulf States are in the same position without any exception. Last week, Qatar announced that it is seeking a loan of $5 billion in the region to meet its commitments. Borrowing money from international banks is not a problem as long as there is proof of gas or oil under the ground for many years to come. The real challenge will be the manpower aspect and whether we are prepared to reduce the numbers if required.
This also applies to Gazprom if it will not be able to reduce its large investments for building gas pipelines to China and Europe at a cost of more than $55 billion for delivering gas by the end of the year 2022. This is why calls are being made locally to divide the company into several specialized companies for the production, pipeline construction and gas distribution activities.
So far, the government is not interested in this despite the loss of huge tax income and dividends, which have been in the decline for the last three years, and the lack of any hope of improvement this year or the next. The government, after seeing that all oil and gas producing companies are suffering and short of cash, perhaps believes that doing nothing is the best option until the prices correct themselves. The only challenge to this option is that the American shale gas industry is growing so fast that it is eating into the market of the Russian gas company in Europe, Japan and now China with competitive prices. This is forcing Gazprom to compete by facing the challenge and offering some flexibility unlike the previous years.
Nevertheless, after the export of shale gas outside United States of America begins, all gas customers will be looking forward to the latest supplier with open arms, as they will finally find another seller that can be more flexible and understanding to the consumers’ needs.
Therefore, Gazprom should start looking around and be able of meeting the American challenge in its own field. The shale gas newcomer knows only one language which is to reduce costs and cut down the number of employees.
Will the national oil companies be able to meet such a challenge? It is not about producing the cheapest oil or gas but about meeting their budget deficits.
This is a hard question to answer, if we can!
By Kamel Al-Harami
Independent Oil Analyst