Gazprom and Europe: Mutually assured dependency

There was a point to Europe’s long freezing winter after all. It was to make Gazprom that little bit richer. Russia’s gas export monopoly exported 6 percent more gas to Europe and elsewhere from January to March than in the same period in 2012, at an average price 3 percent higher, first-quarter numbers showed on September 4th. Something similar will happen this year (weather aside) as gas demand reflects a stronger European economy. But this is not a good thing – it entrenches Europe’s and Gazprom’s mutual dependency.

Europe’s gas supply conundrum is as intractable as ever. Despite repeated vows to ease its dependence on Russia and Gazprom – which is the source of a quarter of Europe’s gas supply – events conspire against that aim. Faltering domestic supply from the likes of Norway, the UK and the Netherlands (usually because of maintenance) is one intermittent reason. Another is instability in north Africa, which interrupts supplies from there. So Europe will continue to rely on Gazprom and its bottomless supply.

That ought to mean that Gazprom is sitting pretty. To a degree, it is: as long as demand from Europe stays strong, it can rake in the cash and resist efforts inside Russia to erode its monopoly. Investors are catching up with this scenario. Gazprom’s US dollar-denominated shares fell two-thirds between April 2011 and June of this year. But the fall under $6.50 appears to be one of those moments that leads to a tentative re-rating – the shares have climbed to $7.80, valuing Gazprom at $92bn. If demand remains in its favour, Gazprom may enjoy a brief re-rating. Its structural challenges – a huge, inefficient capital spending programme, the threat to its export and domestic market position and the shale revolution – will remain. Gazprom will only become more investor-friendly when it reforms its unsustainable business model.

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