Global corporation

March 1, 2018

Published in corporate Gazprom Magazine Issues 1 & 2, written by Sergey Pravosudov

Gazprom celebrates 25th anniversary

On February 17, 1993, Gazprom State Gas Concern was restructured into a joint stock company pursuant to the Russian Government’s Resolution in furtherance of the relevant Presidential Decree. In the course of continuous development, Gazprom transformed from the USSR Gas Industry Ministry into a prosperous international corporation.

If one word could describe Gazprom’s evolution over the past 25 years, it would be efficiency. It was operational efficiency that numerous managerial decisions have meant to improve. Initially, Gazprom’s activities were confined to gas productiontransportation and marketing. However, even gas sales within the country were not handled very well. For that reason, gas supplies in Russia during the 1990s went largely unpaid. To strengthen the gas payment discipline, Mezhregiongaz (currently Gazprom Mezhregiongaz) was set up in 1997.

Low-pressure networks carrying gas across the country were privately owned and divided among more than 300 companies in the 1990s. The majority of the new owners immediately gave up on upgrading their networks. Moreover, they collected gas payments from consumers but chose not to transfer those funds to the gas supplier, Gazprom. Mezhregiongaz started to sign direct contracts with consumers. Over time, most of regional and municipal gas companies decided to exit this troublesome business and sold their assets to Gazprom.

Consolidation of low- and medium-pressure networks under the control of Gazprom Gazoraspredeleniye made it possible to put the system in order and to initiate a large-scale program to bring gas to Russian regions. As a result, the national gas penetration level went from about 50 per cent in 2005 to over 68 per cent in 2018

Consolidation of low- and medium-pressure networks under the control of Gazprom Gazoraspredeleniye made it possible to put the system in order and to initiate a large-scale program to bring gas to Russian regions. As a result, the national gas penetration level went from about 50 per cent in 2005 to over 68 per cent in 2018.

Gazprom’s gas production and transmission companies improved their performance by withdrawing from non-core activities. The unbundled assets were handed over to specialized companies: Gazprom PererabotkaGazprom UGSGazprom TsentrremontGazprom Geologorazvedka, Gazprom Gazenergoset, Gazpromtrans, etc.

Gazprom’s gas production and transmission companies improved their performance by withdrawing from non-core activities. The unbundled assets were handed over to specialized companies

Exports

Gazprom Export is in charge of gas exports. Export supplies to the countries beyond the former Soviet Union are steadily increasing. The volume of gas exports has grown from 133 billion cubic meters in 2003 to 194.4 billion cubic meters in 2017. New gas pipelines, such as Yamal – EuropeBlue Stream, and Nord Stream, have been built to deliver gas to consumers. Construction of Nord Stream 2 and TurkStream is in progress. In the early 1990s, over 90 per cent of Russian gas was exported through Ukraine, which allowed this country to constantly demand preferential treatment. By now, that amount has been reduced to some 50 per cent.

Gazprom is increasingly frequently criticized for building new export pipelines. The gas pipelines running across Ukraine are not fully loaded, so why spend money building new capacities when the existing ones are available? First of all, it should be understood that Russian gas exports have been growing at a fast pace, making the Ukrainian capacities insufficient. Besides, Ukraine’s transit capacities were created between the mid-1960s and the mid-1980s. Back then, the expected useful life of pipes was 33 years. Therefore, even the most recently built sections of the Ukrainian gas transmission system (GTS) are past their design lifetime and need to be replaced. The problem is even more acute with gas compressor units (GCUs), the bulk of which is obsolete and nearing the breaking point. The Ukrainian GTS needs an extensive upgrade. However, Ukraine has no budget for this. For example, Mott MacDonald – an international consulting company headquartered in the UK – estimated that Ukraine needed to invest USD 4.8 billion in “the pipes” over seven years (about USD 686 million per year). The actual investments are several times lower. The attempts by the Ukrainian authorities to attract foreign investment have yet to find success. Investors are understandably reluctant, as there are no long-term guarantees that Ukraine’s transit pipelines will be loaded. The effective contract for Russian gas transit expires in late 2019.

Export supplies to the countries beyond the former Soviet Union are steadily increasing. The volume of gas exports has grown from 133 billion cubic meters in 2003 to 194.4 billion cubic meters in 2017

Gazprom has repeatedly offered Ukraine its assistance in upgrading the GTS. Yet the Ukrainian authorities have proudly rejected those offers, viewing the transmission system as the foundation of the country’s independence. As a consequence, the Ukrainian GTS is gradually becoming dilapidated.

There is much rhetoric these days that the Nord Stream gas pipeline was designed solely to bypass Ukraine. However, Gazprom started planning that project in the late 1990s, when Ukraine was a friendly country and there was no political conflict. It was simply a shorter route for delivering natural gas from the Yamal Peninsula to Europe. The length of the central gas corridor that stretches to Ukraine is about 6,000 kilometers, while the northern corridor is 4,000 kilometers long. Besides, the northern gas corridor was built using cutting-edge technologies. The working pressure in the Bovanenkovo – Ukhta gas pipeline is maintained at 120 atm and is later reduced to 90 atm. Meanwhile, the central corridor has the working pressure of 75 atm in Russian territory, and some of its segments in Ukraine operate at 55 atm. The lower the pressure in the pipe, the more gas is burned to ensure transmission. The average distance between compressor stations is 240 kilometers in the northern corridor and 120 kilometers in the central one. The efficiency of the GCUs in the northern corridor is twice as high, as the units have the capacity of 32 MW and 25 MW. As a result, the stations occupy much less space. Supplying gas via the northern corridor is thus considerably cheaper than via the central one. Thanks to new fields going into production and new gas pipelines being built, Russian companies are now able to manufacture state-of-the-art pipes and equipment. This has given a tremendous boost to the development of our country.

New gas pipelines, such as Yamal – Europe, Blue Stream, and Nord Stream, have been built to deliver gas to consumers. Construction of Nord Stream 2, TurkStream, and the Power of Siberia gas transmission system is in progress

The obvious question is: why was it decided to construct a longer export route in Soviet times? As a matter of fact, transit export capacities were built simultaneously with the extensive development of gas infrastructure in the most industrialized regions, one of which was Ukraine. Today, Gazprom is facing the task of upgrading the existing GTS. Naturally, it is preferable to upgrade only those capacities that are necessary for gas distribution in the domestic market and to build a new, shorter route for exports. In parallel, efforts are underway to provide natural gas to the northern parts of our country.

It is no secret that the transmission tariff for Nord Stream is significantly lower than the one for Ukrainian transit. On top of that, the Ukrainian authorities constantly express their wish to further increase the rate for Russian gas transit. No wonder that Gazprom is trying to minimize its transit through this country.

The Company is also active in the Asia-Pacific market. For now, liquefied natural gas is mostly provided by the Sakhalin II offshore project. At the same time, Gazprom is stepping up the development of the Chayandinskoye field in Yakutia and building the Power of Siberia gas trunkline. In late 2019, the new gas transmission system will carry its first gas deliveries to China. Gas supplies will be gradually increased to 38 billion cubic meters per year. Access to natural gas is also becoming available in the Russian regions across Eastern Siberia and the Far East. It should be noted that natural gas from Eastern Siberia contains not only methane but also a lot of ethane, propane, butane, and helium. This is why it will be processed at the Amur Gas Processing Plant and the helium plant.

Construction of Power of Siberia gas pipeline

Construction of Power of Siberia gas pipeline

Production

Aiming to provide Russian and foreign consumers with natural gas, Gazprom is constantly putting onstream new production capacities. Here are some of the fields Gazprom has brought into operation in the space of 25 years: Komsomolskoye in 1993, Zapadno-Tarkosalinskoye in 1996, Gubkinskoye and Myldzhinskoye in 1999, and the enormous Zapolyarnoye field in the fall of 2001. In 2003, Gazprom started producing gas from the Tab-Yakhinsky block of the Urengoyskoye field. The Vyngayakhinskoye field was brought into production in the same year. In September 2004, production was commenced at the Ety-Purovskoye field and later, in October, in the Pestsovaya area of the Urengoyskoye field. In December of the same year, the Aneryakhinskaya area of the Yamburgskoye field came into production.

In 2006, Gazprom started to produce gas in the Kharvutinskaya area of the Yamburgskoye field and tapped the Achimov deposits of the Urengoyskoye field. Lying at the depth of 3,200–4,000 meters, the Achimov deposits are much more challenging than the overlying Cenomanian (1,100–1,700 meters) and Valanginian (1,700–3,200 meters) horizons. In 2003, Urengoygazprom and Germany’s Wintershall set up the Achimgaz joint venture on a parity basis. The JV began to extract gas and condensate in 2008. At the end of 2009, Gazprom began to individually produce gas from the Achimov formations of the Urengoyskoye field (second block).

In December 2007, an official commissioning ceremony was held at the Yuzhno-Russkoye field. In 2010, natural gas from the Yareyskaya area of the Yamsoveyskoye field and the Zapadno-Pestsovaya area of the Urengoyskoye field was first delivered into the Unified Gas Supply System. December 2011 saw the commissioning of the Apt-Albian deposits of the Nydinskaya area of the Medvezhye field.

In late 2012, the gigantic Bovanenkovskoye field in the Yamal Peninsula was put into production. In 2013, operations began at the Kirinskoye gas and condensate field located in the Sea of Okhotsk. There, Gazprom deployed a subsea production system for the first time in Russia.

Oil

In the 1990s, Gazprom practically stopped producing liquid hydrocarbons. Nevertheless, oil and gas extraction serve as ancillary businesses for any major company in the industry. In order to support its oil segment, Gazprom acquired Sibneft in 2005. In May 2006, it was renamed Gazprom Neft. To achieve synergies, a number of Gazprom’s oil and gas subdivisions were integrated into the oil subsidiary. The Company took a strategic approach to hydrocarbon production. At the time of the Sibneft purchase, it was expected that the production of “black gold” would grow at an average rate of 4 per cent per year, hydrocarbon production would reach 80 million tons of oil equivalent in 2020 and, upon the commissioning of all Gazprom Neft-owned oil fields, the peak production level of some 55 million tons would be attained in 2010–2012. In reality, that level was surpassed as early as 2011 when hydrocarbon production (including within JV projects) totaled 57.25 million tons. In 2013, Gazprom Neft became the first Russian company to initiate oil production in the Arctic shelf, at the Prirazlomnoye field in the Pechora Sea.

In 2017, Gazprom Neft produced 89.8 million tons of oil equivalent. Meanwhile, other subsidiaries of Gazprom ramped up the extraction of liquid hydrocarbons (primarily gas condensate). Condensate production rose from 10.9 million tons in 2008 to 15.9 million tons in 2017. It should be noted that Gazprom Neft is also engaged in production projects outside of Russia, for example, in Iraq.

Gazprom Neft placed a focus on marketing high-yield refined products. The company embarked on a massive upgrade of its refineries and filling station network, making its filling stations the most profitable in Russia. Gazprom Neft owns filling stations not only in Russia, but also abroad. For instance, the subsidiary holds a controlling stake in Serbia’s NIS.

In late 2007, the company invested heavily in the premium subsidiaries, which were commissioned to undertake such activities as bunkering (Gazpromneft Marine Bunker), marketing of aviation fuels (Gazpromneft-Aero), and production and marketing of oils and lubricants (Gazpromneft-Lubricants). Later on, in 2014, a specialized company was set up to market bituminous materials. At present, each of these companies leads the domestic market in its respective segment, successfully promoting goods and services abroad. For example, 2009 marked the first time that Gazpromneft-Aero began to refuel aircraft outside of Russia. By now, the company operates in 187 airports in 60 countries worldwide.

Power generation

It is common knowledge that natural gas is mainly used to generate heat and electricity. In April 2007, the Gazprom Board of Directors approved the Company’s Power Generation Strategy. In its power business, Gazprom set the strategic goal of achieving higher capitalization by increasing returns on equity, optimizing the domestic fuel mix, and achieving synergies through uniting its natural gas and power generation activities. The Gazprom Group planned to strengthen its electricity-related efforts via, inter alia, acquisition of stakes in generating companies and construction of new capacities. That strategy entailed creating a holding company to consolidate the Group’s power assets.

Central CHPP, St. Petersburg

Central CHPP, St. Petersburg

Between 2007 and 2008, Gazprom purchased additional shares issued by generating companies. In 2009, the Gazprom Energoholding special-purpose company took over the controlling stakes in Mosenergo, TGC-1, OGK-2, and OGK-6 and started to manage those assets in compliance with uniform corporate standards. Thus, Gazprom got hold of the generating assets based in Moscow and St. Petersburg, as well as in some other Russian regions. Gazprom became the largest investor in the national power industry.

In 2011, OGK-2 absorbed OGK-6, which helped bring down expenditures. On August 13, 2013, Gazprom Energoholding was announced the winner of an auction for the Moscow city government’s shares in MOEK (89.9754 per cent). MOEK supplies heat to Moscow and some of its nearest suburban towns.

By renovating the existing generating facilities and constructing new ones, Gazprom managed to boost the performance of its subsidiaries. Today, Gazprom Energoholding is Russia’s largest owner of electric power assets, controlling over 80 power plants, and is among the top ten leading power producers in Europe.

Through all this, Gazprom demonstrates the increasing efficiency of its business operations. The Company is sustainably developing its three segments: natural gas, oil, and electricity.