Randy Kirk

Largest Companies in the World

It's interesting to not see Citigroup and Bank of America listed among the top firms by market capitalization - when they are listed in the top 10 of the 2007 Forbes Global 2000 -- goes to show the effects of the current financial crisis. Interesting to see HSBC and the Chinese Banks not affected to nearly the degree as BofA and Citi.

Also interesting to see that almost all the firms are down year to date except Wal-Mart and J&J. (would expect to see a higher percentage of larger firms, which are expected to be more "safe" than smaller firms, holding their own in a down market).

Mechel Trouble Spells Buying Opportunity for Gazprom

Good article -- Gazprom is still absolutely in favor by the Russian government, as the former Chairman of Gazprom, Dmitry Medvedev, is now president of Russia! Also note, it is very likely that Gazprom will report significantly higher income through 2011, due to the fact that Russia is raising domestic gas prices by over 20% per year, in order to bring Russian natural gas prices to international levels by 2011 (right now Gazprom earns the majority of its net income from International (non-Russian) sales). Reference: www.redorbit.com/news/.../

""Domestic prices are currently state-regulated and, accordingly, lag prices abroad. The domestic price is barely 20% the price abroad. But that difference will diminish steadily. The government has approved an increase of about 25% a year, but with the understanding that netback parity will be achieved from January 1, 2011," he said."

The main concern with investment into Gazprom is the achievability of its next generation of natural gas supply, mainly Gazprom's projects on the Yamal Peninsula. These are likely to be expensive and technically difficult although there is little doubt that, geologically, massive reserves exist in the gas fields of Yamal.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Note: Correction in the comments section above: Gazprom's President and CEO's name is "Alexei Miller" not "Andre Miller," and Viktor Zubkov, current head of the cabinet, is widely expected to be elected Chairman of Gazprom in June, allowing Miller to concentrate on his role as President. see: www.reuters.com/articl...

Can Gazprom Realistically Meet Its Natural Gas Projections?

George2000, thanks for that comment. The Shtokman gas field is very large with an estimated 3.8 tcm of reserves -- equivalent to approximately 24 billion barrels of oil equivalent -- note however that the Shtokman field is not the largest known offshore gas field in the world (as has been reported in some circles) as the South Pars Natural Gas field split geographically between Iran and Qatar is significantly larger, at an estimated 51 tcm of natural gas reserves.
Shtokman therefore appears to be in the same range in terms of reserves as Gazprom's existing four producing fields.

Further, as a background, Shtokman should also be placed in perspective in terms of its potential for the Barents Sea: there is a map of potential gas and oil fields here in the Barents and Kara Seas: www.environmenttimes.n...
Gazprom officials have stated that there will be "significantly more" natural gas reserves in the Kara Sea, to the East of the Barents Sea. There is also likely to be more discoveries in the Russian and Scandinavian territories of the Barents Sea, in addition to Shtokman.

Shtokman appears to be moving forward currently - there has been serious criticism of Gazprom that it will not be able to develop Shtokman on time (with the first phase slated for 2013-2014), some of this criticism stemming from Gazprom's announcement that it would develop Shtokman alone in mid 2006. However, several observers, including the Russian Investment bank UralSib and the Jamestown Foundation, stated that this announcement was more a bargaining move to extract better terms from international partners (see: www.jamestown.org/edm/...). Gazprom has announced the signing of Total at 25% and StatoilHydro at 24% ownership of Phase 1 of Shtokman at the beginning of this year.

Shtokman is intended to be developed in 4 phases, with the first phase planned to be completed by 2014, and between 20-30 bcm of natural gas produced during phase 1. Costs for phase 1 are estimated between $15B and $20B -- but could go higher. It is noted that StatoilHydro developed the only other offshore Barents Sea gas field Snohvit, significantly closer to land and significantly smaller at approx. 200 bcm of reserves was completed for a final price tag of approx $10Bn. see for information on Snohvit: (note that StatoilHydro developed Snohvit, gaining expertise that will be valuable in producing Shtokman): www.offshore-technolog.../

After phase 1, current agreements are for Gazprom to buy out both Total and StatoilHydro from the project. Each phase is planned to add approximately 23.7 bcm of natural gas production per year -- 23.7 bcm is approximately equal to 410,000 barrels of oil equivalent per day. (see www.barentsobserver.co...
for reference)

Most likely, the project will be somewhat delayed due to the fact that the field lies in very difficult conditions, 650 km away from the mainland -- so it is theorized that a refueling station for helicopters will have to be built, and the underwater terrain is reported to be uneven. The Russian newspaper Kommersant reported on May 6, 2008 that StatoilHydro "doubts" that Shtokman will start up as planned in 2013. How much delay past 2013 is not known at this time.

Overall, Shtokman is an important future project for Gazprom, with a possible 70 bcm of annual production by 2020, compared to a current production of approximately 550 bcm. It should be noted that Shtokman production is not included in the official Gazprom projections presented above, -- Shtokman is distinct from the Ob and Taz Bay regions and the Offshore Yamal Peninsula regions indicated in the projections. I don't know why Gazprom did not include Shtokman in its official projections.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Adamnb -- thanks for the compliment, -- you can contact me at kirkrm (at) yahoo.com -- or follow the link above to my blog which has my email address. Although I'm not always right -- however try to get my reasoning right -- as Robert Rubin says, there's always a probability that the investment won't work out, but over the long haul you'll be do well if you have solid reasoning for your investment decision.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Medvedev has actually been serving as Deputy Prime Minister as well as Chairman of Gazprom prior to his election as President -- although recently Andre Miller -- currently the CEO of Gazprom -- has been named Chairman, replacing Medvedev. There is a debate within Russia on how much power Medvedev actually will have, given that Putin has been sworn in as Prime Minister. However, Medvedev does represent the "pro-Gazprom" faction -- mainly verses Gazprom's main rival firm, Rosneft -- and is expected to influence the government to award many new oil and gas discoveries to Gazprom. This can be seen in the development of Sakhalin Island, which two years ago was more the domain of Rosneft, but last year Gazprom bought a majority share in Sakhalin 2, after environmental and tax authorities levied fines on the existing operators, making it more convenient for them to sell their shares to Gazprom. Currently, Gazprom is maneuvering to buy a majority stake in Sakhalin 1 (as I noted above) and in addition, control distribution of natural gas from Sakhalin -- the governmental support will assist in Gazprom achieving these objectives, most likely.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Thanks Adamnb. My understanding of Sakhalin, is that Rosneft holds a larger position in the overall development although Gazprom wants to overturn this (and has the political will to do so). Gazprom is relatively new in the project having acquired a 50% plus 1 stake last year at Sakhalin 2. Sakhalin is being developed in 4 phases, with Rosneft and Exxon controling Sakhalin 1, which is up and running currently with an estimated 250,000 barrels per day of oil production and also 140 M mcfe a day of natural gas (reference: www.eia.doe.gov/emeu/c...) Gazprom is not currently participating in Sakhalin 1 although wants to buy out Exxon's stake (Exxon at 30%, Rosneft at 20% ownership, of Sakhalin 1).

Gazprom is planning to start shipping LNG from Sakhalin 2 in 2009, at an estimated 9.6M tonnes annual rate, which is approximately equal to 84,000 barrels per day of oil equivalent -- Gazprom will get 50% of the revenues from this so this means it will likely not be a major percentage of overall production (as Gazprom's natural gas production is equivalent to approx. 9.5 M barrels per day oil equivalent). I am not sure if the production levels are expected to increase going forward.

Gazprom is also positioning itself to control all delivery of natural gas from Sakhalin -- whether produced by a Rosneft led consortium or not -- and so, if successful, this would be a boost to Gazprom's downstream segment.

Overall, Sakhalin is a potentially large oil and gas production region as the EIA estimates that there are approximately 12 bn barrels of oil and 90 tcf of natural gas (approximately 15 bn barrels of oil equiv) of reserves -- it is not clear if this is recoverable oil or oil in place, however. What is potentially interesting from an investor's standpoint (in my opinion) is if Gazprom Neft participates in Sakhalin 2 -- currently Gazprom Neft is participating in exploratory work in Sakhalin 4, which is not expected to come online for several years. Gazprom Neft generally produces the majority of Gazprom's oil production, and there should be significant oil production at Sakhalin 2 with an estimated 1 billion barrels of liquids reserves estimated (in addition to the 3 bn barrels of oil equivalent in natural gas reserves (see: www.eia.doe.gov/emeu/c...) - -however the liquids may be "natural gas liquids" in which case Gazprom would likely not bring in Gazprom Neft. Note that Gazprom Neft trades as a separate company -- 75% owned by Gazprom, ticker: GZPFY.

Overall Sakhalin should be placed in perspective to the Yamal Peninsula, as shown in Figure 4 in the article above, Yamal is a much larger reserve area, -- although Sakhalin in that figure only includes Gazprom's 50% ownership of Sakhalin 2, if Gazprom moves into Sakhalin 1 then Figure 4's estimated reserves would increase.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Turkmenistan is an interesting case - Gazprom currently transits approximately 50 bcm per year from Turkmenistan (compared to Gazprom's own production of approximately 550 bcm)(note that certain sources disagree on the total amount transited from Turkmenistan) and collects a good margin on these sales. I'll estimate the amount of profit Gazprom derives from Turkmenistan sales here (as Gazprom does not disclose this): assuming about a 30% margin on natural gas sales from Turkmenistan (30% margin is the price paid to Turkmenistan minus transit costs and tariffs) the calculation is:

50 bcm annual transit* 30% margin, price of $9.00 per mcfe, = approximately $US2.0Bn annual profit to Gazprom from Turkmenistan's production. This would comprise about 8.3% of Gazprom's expected net profit for 2007 of $US24Bn (official Gazprom results will be released May 15, 2008)

Also to put Turkmen production in perspective: Turkmenistan is producing about 63 bcm per year according to the EIA while Gazprom produces 550 bcm annually.

In Chart 1 above, Turkmenistan gas is part of the "gray area" in the projections, -- the other parts of the gray area are non-Gazprom owned natural gas production -- such as Lukoil and Rosneft production of natural gas (which is growing) -- Gazprom estimates that Russian independent production ie Lukoil and Rosneft, etc of natural gas will grow to 82 bcm annually in 2010 from 62 bcm annually in 2006 (reference: eng.gazpromquestions.r...). The gray area in Chart 1 above also includes future natural gas production from other Central Asian countries -- mainly Kazakhstan.

In Chart 2 above, Gazprom's official projections, Turkmenistan gas is not included as the transit profit is included in Gazprom's pipeline segment -- Gazprom believes it can increase production without additional supplies of gas from Turkmenistan.

Turkmenistan and Gazprom signed a 25 year supply agreement in 2003 for approximately 80 bcm per year of natural gas sales, -- however Turkmenistan is only delivering approximately 50 bcm in 2007 according to the Russian i-bank Troika Dialog -- with the price I believe undisclosed. Turkmenistan is also targeting Chinese sales through development of new fields -- estimated at 40 bcm per year with a new agreement with PetroChina beginning in the 2010 time range. Turkmenistan has also targeted India and Iran for future natural gas sales through new projects. Overall Turkmenistan has ambitious growth targets, at over 100 bcm of production by 2010.

I noted Turkmenistan has a UK based geological firm Gaffney Cline currently auditing their reserves of natural gas, which is expected to be completed by the end of 2008 -- by this time, there will be more clarity whether or not Turkmenistan can meet its Russian and Chinese (and Indian and Iranian) prospects. I noted that Chinese petroleum geologists have audited their section of Turkmenistan's gas fields and have found significantly more natural gas (1.6 tcm) than Turkmen specialists (source: Turkmenistan Plays with Europe's Gas Hopes, Asia Pulse, March 13, 2008) -- this gives some initial confidence than Turkmenistan can meet its proposed projects, but again more confidence will either be gained or not at the end of 2008 when Gaffney Cline completes its audit.

Can Gazprom Realistically Meet Its Natural Gas Projections?

Chris Crawford -- thanks for that comment -- Gazprom plans to raise domestic gas prices by over 20% annual over the next few years, bringing them to parity with international levels by 2011 -- reference here: www.iht.com/articles/2... This will of course help overall revenues but also encourage domestic (Russian) conservation of natural gas usage.