Gazprom (OTCPK:OGZPY), Russia's largest company and the world's largest natural gas producer, has released projections for future expected production of natural gas until 2030 on its website, which overall show moderately growing production and comfortable maintenance of gas export capacity.
Gazprom's projections stand in contrast to doubts raised by several analysts (the reports of whom will be discussed below) as to whether or not Gazprom can maintain production at current levels. Criticism of Gazprom's future production has been mainly directed toward potential decline rates at current producing fields and the perceived lack of initiative by Gazprom to bring new fields online.
The questions concerning decline rates and new fields have led to a significant segment of the media questioning Gazprom's ability to increase future gas production. Newsweek, as an example, published an article in 12/07 titled: "Russia's Big Secret" which states as a subheadline: "Russia Can Barely Meet its Own Demand," implying heavily (although not outright stating) that Russia's future gas production will decline while domestic consumption continues to rise.
This article will analyze Gazprom's ability to meet its future projections, and address Gazprom's response to criticism. All in all, a review of Gazprom's evidence shows that Gazprom makes a strong case against key criticisms -- and it is more likely than not that Gazprom's future natural gas production will increase through 2030.
The question of future production at Gazprom holds significant importance to interested investors. Is Gazprom a firm in decline or ascension?
Key points will be discussed below.
Gazprom is currently the world's largest natural gas producer, producing approximately 20% of the world's natural gas by volume. Gazprom is Russia's largest company -- the newly elected President Medvedev currently serves as Gazprom's chairman of the board, although a replacement is expected soon. Gazprom's currently ranks as the world's third largest publicly held firm by market capitalization at approximately $US330Bn, and has a trailing p/e ratio of approximately 14x. Gazprom is also a major oil producer through the acquisition of the Russian oil firm Sibneft in 2005, and is the fifth largest oil producer in Russia, behind TNK-BP.
How should a firm the size of Gazprom be analyzed? The main approach taken in this article -- and incidentally in criticisms of the company -- is by analyzing first and foremost the main producing natural gas fields of the firm, that is, its Exploration and Production segment. Although Gazprom does not break out revenues and earnings by division in its Annual Report or on its website, it is likely that Gazprom's internal structure is like most integrated majors in that its Exploration and Production segment comprises the majority of overall firm profits.
Overview of Gazprom's Exploration and Production Activities
Gazprom produces currently a majority (over 70%) of its Gas from four main fields -- three of which (Yamburg, Urengoy, Medvezhye) are over a decade old and are in decline -- although at what degree of decline is a key question -- and one field (Zapolyarnoye) which was brought online in 2001. (an interesting fact is that the unusual names of the fields are due to the fact that Gazprom has named them after words in local native tribal languages -- Urengoy, for example, can mean "an island in a former riverbed" in the northern Siberian Khanty language). Historical production from these fields can be seen in Figure 1 below -- note that this chart is cited most often by critics of the company -- what's important in the chart below is the historical production -- future production is in question, as will be discussed below.
Criticisms of Gazprom's Future Natural Gas Production
A summary of the criticism leveled at Gazprom can be found at the consultancy Stratfor
titled: "Gazprom's New Field and Enduring Supply Problems." Much of the data -- including the chart below -- is taken from data presented by Jonathon Stern of the Oxford Institute for Energy Studies in his book titled: The Future of Russian Gas and Gazprom (published 2005). Chart 1 has also been published by the EIA. The criticism are summarized in Chart 1 below, which shows high rates of decline at existing fields, only one new, major field brought online in 2001 (Zapolyarnoye), and in many versions (as the one below) the forecast does not list new potential fields.
Chart 1: Critical View of Gazprom's Future Natural Gas Production
(Historical until 2004, Projected 2005 Onward)
As can be seen in Chart 1, there are two main sources of controversy over future natural gas production: 1) the rate of decline of the three decade old fields -- critics point to high rates of depletion without stabilization or expansions of the 3 decade old fields, and 2) the potential to bring online new fields -- critics state at the most extreme that no new fields of giant size from the Yamal Peninsula will come online going forward, due to economic issues, difficult terrain, and/or lack of project management expertise at Gazprom -- but more commonly state that new giant fields will come online but be delayed past the planned 2011 start date.
Note that the above chart sometimes is presented as forecasting new giant fields in future years by drawing a higher line going forward but with a "?" or something to this effect (implying significant doubt as to whether the fields will be brought online).
Gazprom's View of Its Future Natural Gas Production
Gazprom -- not unexpectedly -- takes a more optimistic view of its future natural gas production, which is summarized in Chart 2 below.
Chart 2: Gazprom's Projections
Source: Gazprom's Website
Gazprom's official projections of Gas production by area in Chart 2 presents several items that differ from Chart 1. First, Gazprom projects production will be heavily dependent on the onshore Yamal Peninsula -- as distinct from the offshore Yamal (Shtokman gas field) with production starting in 2011 and then comprising about 50% of Gazprom's production by 2030. Gazprom's core current producing areas -- represented by the light blue area above and dependent on Gazrpom's current four major gas fields (Urengoy, Yamburg, Medvezhye and Zapolyarnoye) will decline gradually going forward, but still make up a large (approximately 60%) of total company production in 2020, and comprised approximately 350 bcm of annual production in that year. Note that in contrast, in the projections presented in Chart 1, the three decade old fields, only make up approximately 30% of total Gazprom production, and only produce approximately 100 bcm of gas in 2020. Gazprom as a whole is projected to produce approximately 300 bcm of gas in 2020 in Chart 1 -- as compared with approximately 580 bcm in Chart 2 -- a difference of 93% between the two forecasts in 2020.
Gazprom's Proposed Stabilizing Measures at Existing Fields
Gazprom's additions to these core fields -- to the approximately two decades old Urengoy, Yamburg and Medvedyze fields -- is projected by Gazprom to make up a significant contribution to total Company production. These additions are represented by the yellow area above -- estimated at 5% of total production in 2010 at approximately 50 bcm of annual production, and also by a lower decline rate in the light blue area in Chart 2. Certain critics (to the author's knowledge, having read the EIA, Oxford Institute for Energy Studies's presentations and material) do not address Gazprom's stabilizing measures at its Urengoy, Yamburg and Medvedyze fields. According to Gazprom, a key strategy of the firm is to stabilize production at its core fields -- production at the three core decade old fields can be stabilized by exploiting new areas of these existing fields. According to Gazprom's website:
A production decline in 2006 was mainly offset via production growth in the Pestsovaya area of the Urengoyskoye field, Zapolyarnoye field, Aneryakhinskaya area of the Yamburgskoye field, Komsomolskoye field.
Up to 2010, scheduled gas production rates will be maintained through the development of existing and new fields in the Nadym-Pur-Taz region: Yuzhno-Russkoye field, Neocomian deposits in the Zapolyarnoye and Pestsovoye fields, Kharvutinskaya area in the Yamburgskoye field, Achimov deposits in the Urengoyskoye field.
Recent production data points to more evidence for Gazprom's stabilization of existing fields: the rapid decline rates for Urengoy did not occur in 2006, (the last date for which production data is available). Urengoy produced approximately 138 bcm according to Gazprom's "Facts and Figures" Datasheet compared to the projections in Chart 1 which projected Urengoy to produce approximately 110 bcm -- a difference of 25% in only two years (chart 1 was completed with data historical data from 2004).
Russian petroleum geologists V. I. Marinin and V. A. Isotomin presented two papers in 2006 at the 23 World Gas Conference addressing expansion of the Urengoy gas field: Prospects of Resource Increase of Urengoy Complex and New Technologies of Gas Production at the Urengoy Gas-Condensate Complex which both argue that new areas of the Urengoy gas field can be developed, which will stabilize overall production. The papers present data that the Urengoy gas field is a multi-layer, complex and geographically large (the Urengoy gas deposit is over 120 km long) with several undeveloped segments.
Gazprom's Proposed New Fields: The Yamal Peninsula
According to Gazprom's website, production is projected by Gazrpom to hold steady through about 2013 without the contribution of the Yamal Peninsula, which is forecasted to come online in 2011 -- giving Gazprom a significant cushion in which to bring online Yamal before production declines. The Yamal Peninsula has three major fields, the largest of which is the giant Bovanenkovskoye gas field with reserves at an estimated 4.4 tcm (equivalent to approximately 23 bn barrels of oil equivalent) (Reference see page 26 of Gazprom's stats and figures 2002-2006 data sheet here). The Bovanenkovskoye field is approximately the same size as Urengoy and Yamberg according to Gazprom -- reserves of these fields are estimated at 5.3 tcm and 3.8 tcm, respectively. Production is estimated to come online at 2011 and produce 115 bcm per year by 2019.
Gazprom has budgeted approximately $4Bn to Bovanenkovskoye in 2008 out of a total capital budget of $25Bn, and has budgeted approximately half the Company's exploration and production budget on other areas associated with the Yamal Peninsula in 2008.
Can Gazprom Bring Yamal Peninsula Production Online?
There is less debate as to whether or not the natural gas exists in meaningful quantities in the Yamal Peninsula -- the US Geological Survey has consistently rated Gazprom as having the largest reserves of natural gas in the world, with only a fraction developed -- more debated by critics is whether or not Gazprom has the project management expertise and/or initiative to bring these new fields online. 2008 the first year that Gazprom has dedicated significant funds towards developing infrastructure and field development in the Yamal Peninsula. There were earlier reports that the Bovanenkovskoye field would be developed as early as 2000, however, Gazprom has not included Yamal-based projects as a major expenditure in its budget as the firm as been more busy doing acquisitions (which has subjected the firm to criticism apart from the decline rates and "lack of prospects" as described above).
Additionally, Gazprom has focused on bringing its massive Zapolyarnoye field online in 2001. According to the Deputy Chairman of Gazprom, Alexander Ryazakov, Gazprom has been confident of the productive capacity of its 3 major fields so Yamal has not been a priority until recently. (Quote by Ryazakov below is from a question and answer session in 2004 which can be found here):
We still see prospects in withdrawing gas at the Yamal Peninsula containing huge reserves. We’re very likely to do it but, in my opinion, the local gas production and marketing home and abroad are not that interesting for us, at present. We’ve endeavored so far to operate on the traditional extraction sites, developing there the existing fields. And some 5, 6, may be 8 years later we’ll move on to the Yamal Peninsula.
Gazprom bought online the massive Zapolyarnoye field in 2001, which is currently producing approximately 100 bcm per year of natural gas -- some critics have alleged that Gazprom has not brought online any fields since 1991 (as in the Newsweek article cited above) but this is incorrect.
Note: Other Projections of Gazprom's Future Gas Production
Jean Laherrere, who has worked for over 30 years as a Petroleum Geologist at Total (biography here) has provided the following Chart of forecasted natural gas production at Gazprom. As seen below, Laherrere has forecasted overall increasing production, driven by the development of new fields -- note that Laherrere's decline rates are faster than Gazprom's projections, but, as a knowledgeable petroleum geologist, he does not discount the extent of production from new fields. It should be noted that other sources have Laherrere projecting declines for Gazprom past 2030 (source here) -- the projections below only go out to 2020.
Chart 3: Laherrere Forecast of Gazprom Natural Gas Production
Source: 321 Energy
Laherrere is a member of the Association for the Study of Peak Oil and Gas, and has projected a near term peak in oil production, so his projections may lie on the conservative side -- it is noted that Laherrere has projected only 60 bcm in final annual production while Gazprom has reported that Zapolyarnoye production reached 100 bcm in 2004 (the projections are a bit dated with historical data beginning in 2001). Even with the conservative projections, Laherrere has projected an increase in Gazprom production through 2020.
Note: Gazprom Does Not Produce from a Single Dominant Field
It should be noted that Urengoy has been labeled by some as "Gazprom's Ghawar" -- Ghawar as the largest oil field in the world, held by Saudi Aramco (Saudi Arabia's national oil company). Saudi Aramco is heavily dependent on its massive Ghawar oil field -- the world's largest oil field -- which produces slightly more than 50% of Saudi Aramco's total oil production. Gazprom, despite certain reports to the contrary, does not hold a single dominant gas field to the same degree as Saudi Aramco, as shown in Chart 1 and 2 above. This distinction is important in that the declines from Urengoy and other Gazprom fields can be more easily replaced going forward verses potential declines from one massive field, without another single, massive field ready to be brought online in the near future.
Further, Urengoy -- or any other Gazprom owned Gas field -- cannot be compared in size to Ghawar. In the natural gas world, only the Pars natural gas field, which is held by both Iran and Qatar, can be compared to Ghawar in terms of reserves (note that the Pars natural gas field is approximately 5 times larger from a reserve basis than Urengoy). Gazprom's Yamal Peninsula and Northern Siberian regions are major gas reserve regions as shown in Chart 4 below, but this region does not contain a single field where the majority of reserves are located:
Chart 4: Reserve Distribution of Gazprom's Gas Assets
Source: Gazprom's website
Note: Dark blue areas represent undeveloped resources of natural gas, and yellow areas represent proven and producing areas of natural gas under the Russian classification system for reserve reporting.
Gazprom has provided projections and supporting evidence that address the extent of production declines at existing fields, and the timing and size of future field production rates. Gazprom has made a persuasive argument that Gazprom's three decade old fields -- Urengoy, Yamburg and Medvezhye are large in terms of territory -- each approximately 100 km in length -- allowing for development of subsections of each field, which, in turn, allows for some stabilization of natural gas production. Gazprom is currently allocating a high percentage of its current budget to the development of the Bovanenkovskoye gas field and the Yamal Peninsula, and has shown ability to bring new projects online as evidenced by the commissioning of Zapolyarnoye in 2001.
Overall, the majority of evidence points to additional natural gas production stabilization and moderate growth for Gazprom. Note that this article did not cover economic costs of developing new fields -- including pay back periods under certain cost and natural gas price assumptions, and did not fully address the timing and risk of delays of production at the Yamal Peninsula.
Disclosure: the author holds a long position in Gazprom