Once the state-run conglomerate was expected to become the world’s first trillion-dollar company. Now its market value has plummeted. EurasiaNet investigates how this happened

It was not too long ago that Gazprom, Russia’s state-controlled energy conglomerate, was one of the Kremlin’s most powerful weapons. But those days now seem like a distant memory. Today, Gazprom is a financial shadow of its former self.

The speed of Gazprom’s decline is breathtaking. At its peak in May 2008, the company’s market capitalisation reached $367bn (£237bn), making it one of world’s most valuable companies, according to a survey compiled by the Financial Times. Only fellow Exxonmobile and PetroChina were worth more. Gazprom’s deputy chair Alexander Medvedev repeatedly predicted that within a decade the Russian energy giant could be worth $1 trillion.

Gazprom feels the chill as its dominance is weakened Read more

That prediction now seems foolhardy. Since 2008, Gazprom’s value has plummeted. In early August it had a market capitalisation of $51bn – losing more than $300bn. No company among the world’s top 5,000 has suffered a bigger collapse, Bloomberg Business News reported in April 2014, and by the end of the year net income had fallen by an astonishing 86%.

Though share prices have rallied slightly since, indicators suggest Gazprom has further to fall. Lingering uncertainty raises questions about whether it can survive, with production continuing to tumble downward.

So what happened? Why is a company with the world’s largest gas reserves, operating in a country bordering China and the European Union – two of the world’s top energy consumers, performing so badly?



Gas politics

The Kremlin, which holds a controlling stake in Gazprom, tends to blame the sharp drop in oil prices and “warm winters”. However, energy giants ExxonMobil and Petro China, Gazprom’s financial contemporaries back in mid-2008, have remained top performers. Norway boosted its market share and overtook Russia as western Europe’s top gas supplier over the 2014-2015 winter.

Experts say Gazprom’s main problem is that it continues to serve as Putin’s favoured geopolitical weapon. Examples include the company’s purchase of major Russian media outlets that were then turned into Kremlin mouthpieces, bullying or buying the loyalty of neighbouring states and sponsoring the egregiously expensive Olympic Games in Sochi.

Most ominously for the company, the Putin administration still keeps pushing Gazprom to implement new projects that are important for the Kremlin but risky from a financial viewpoint. Two prominent examples concern Ukraine and China. The conflict in eastern Ukraine has cost Gazprom dearly. Exports to Ukraine fell from 36 billion cubic metres in 2010 to 3.7 during the first six months of 2015, before stopping altogether on July 1. Moscow’s efforts to effectively mount an energy blockade against Kiev did not work but cost Gazprom close to $6bn in lost revenue and fines, while pushing European customers to diversity their energy imports.

Facebook Twitter Pinterest A gas flare at one of Gazprom facilities outside the town of Novy Urengoy, 2007. Photograph: Denis Sinyakov/Reuters

New streams

Moscow still wants to stop transit supplies of gas through Ukraine to Europe (or at least cut them by half or more) by 2019. For this reason, Russia is looking to channel gas through Turkey and adding two new lines to the Baltic Nord Stream network, transporting gas over the top of Europe.

The total costs of the projects, without taking into account overruns, will reach about $25.4bn. Beyond the construction expenses, transit costs for North Stream appear to be significantly more expensive than through Ukraine. Experts estimate that in 2014 it cost Gazprom $43 to transport1,000 cubic metres via Nord Stream compared to $33 via Ukrainian. Factored over the tens of billions of cubic metres that Gazprom wants to send through the Baltic pipes, that’s a mighty extra cost just to avoid Ukraine.

The $400bn question

When it comes to Gazprom’s commitments to Chinese exports, the situation may not be much better. Initially, when the deal to supply gas for 30 years was announced in May 2014, it was widely seen as a major victory for Putin – opening up a significant new market for its resources at the same time as the west was ramping up sanctions.



The project is expensive for Russia, however, as Gazprom is reportedly obligated to cover the costs of building the infrastructure necessary to extract, process, store and deliver gas to China. Cost estimates range from $55bn, as mentioned by the Kremlin, to the $100bn or more cited by Gazprom’s specialists.

While it was initially announced that the deal could be worth more than $400bn for Gazprom, Russian officials now estimate it could reap significantly less due to the global fall in energy prices. A benchmark barrel of oil cost roughly $100 at the time the deal was announced; these days the price is hovering around the $50 mark.

With revenue potentially falling and construction costs of $100bn or more, the China deal could turn toxic for Gazprom. Overall, the price tag of the new politically driven pipelines could exceed $125bn – or more than double Gazprom’s current market capitalisation. Given the company’s financial situation, executives have a lot to worry about in the immediate future.

A version of this article originally appeared on EurasiaNet