Lower gas prices hit Gazprom profits

Gazprom, the Russian state-run gas group, reported a dip in quarterly profit of more than 5 per cent due to lower gas prices and higher capital expenditure. Net income fell to Rbs362bn in the first quarter, down from Rbs382bn a year earlier, the company said on Wednesday. Total sales increased by 5.4 per cent to Rbs1.74tn.

The global oil slump has created uncertainty for Gazprom, which sells much of its gas to Europe at rates linked to the price of oil. Prices on the spot market in Europe, Gazprom’s key source of revenues, have more than halved in the past two years. Many analysts predict that slumping demand in Russia, Ukraine, and China, as well as a potential rise in exports of liquefied natural gas from the US, will push prices down further.

The company said on Wednesday that it did not intend to cut its capital expenditure or turn to debt markets to head off the problem. Gazprom’s budget for 2016 is based on an average price of $199 per thousand cubic meters — which would already be the lowest in a decade — when expected prices are even lower at $167-$171 per thousand cubic meters.

“We can see that the prices on the market today are lower than those we set out in our budget,” Alexander Ivannikov, Gazprom’s finance director, said on a conference call with investors. “But we have half the year still to come and the weather factor is more important.”

Total sales of gas by volume to European countries increased by 49 per cent. But with prices at $187.5 per thousand cubic meters nearly $100 less than a year earlier, the rise only translated into a 22 per cent increase in sales revenues. Sales by volume went down by 16 per cent in the former Soviet Union, mostly driven by Ukraine’s attempt to wean itself off Russian gas since the annexation of Crimea in 2014, and 6 per cent in Russia.

Operating expenses rose 24 per cent, which the company mostly attributed to an asset swap agreed last October with German firm Wintershall.

Gazprom’s falling revenues may affect its plans for several major new investment projects. The company said it still intended to finance Turkish Stream, a new gas pipeline that was put on hold last year after Turkey shot down a Russian Su-24 fighter plane. Turkish president Recep Tayyip Erdogan, in St Petersburg to meet his Russian counterpart Vladimir Putin on Tuesday, said that Ankara intended to finish the project, which entails a pipeline supplying gas to Europe through Greece that remains subject to EU approval.