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20 | 12Th - 18Th SEpTEmbEr 2014 | UTILITY WEEK Finance & Investment Analysis P rior to the 2008 financial crisis, Rus- sia's vast national energy champion Gazprom was widely touted as a poten- tial bidder for Centrica. For various reasons, including the dreadful state of UK-Russia diplomatic relations, any such idea is no longer a starter. The ongoing Ukraine crisis has only exacerbated matters. Nonetheless, the UK has a deep-seated interest in Gazprom's long-term strat- egy, especially given its large gas import requirements. During the 1980s, the UK was awash with gas as the North Sea was developed. Fields like Morecambe Bay prospered as gas con- sumption rose, driven by a super-confident British Gas. The subsequent "dash for gas" saw a further boom as the electricity supply industry relied on gas-fired plant for virtually all its new baseload stations. Recent figures from BP show that UK gas consumption was 73 billion cubic metres in 2013. Households accounted for c40 per cent of that figure while c25 per cent was attribut- able to electricity generation. Given the lat- ter's profound problems of late – manifest in Centrica's £133 million confirmed CCGT losses in 2013 – this figure may fall. In recent years, UK gas production has fallen sharply. High marginal taxation offers one explanation. However, accord- ing to the recently published Wood Report, around two-thirds of the North Sea's energy resources have already been recovered, much of which was the lower hanging fruit. To address the shortfall the industry focus has moved markedly towards tying up long- term deals with overseas suppliers, such as Centrica's signing of a 20-year contract with Cheniere in the US. Norway is the key foreign supplier. In 2012, it accounted for 55 per cent of UK gas imports, followed (at some distance) by LNG from Qatar at 27 per cent and pipeline gas from the Netherlands with a share of less than 15 per cent. As one might expect, UK companies have long-term supply deals with Norway's Stat- oil, but other big European players will also be seeking large long-term gas volumes – most notably Germany, which has close links with Gazprom. With the end of nuclear power genera- tion in Germany scheduled for 2022, it seems clear that – irrespective of its unbridled com- mitment to renewable generation through the c€1 trillion (by 2040) Energiewende – Germany will need many gas-fired plants for baseload power provision. Other European countries, especially those eschewing nuclear new-build, will also require additional gas over the next two dec- ades. Italy and Poland are obvious examples. Hence, Gazprom looks to be in pole posi- tion, with a seemingly captive European market, massive reserves, modest competi- tion and a rapidly developing energy rela- tionship with China. The basic facts of this energy behemoth, which also owns several power stations, are awesome. With 35.7 trillion cubic metres of reserves, Gazprom owns 72 per cent of the gas in Russia, giving it the world's largest gas portfolio and 17 per cent of global resources. In 2013, Gazprom produced 487 billion cubic metres of gas – well over six times UK gas consumption. Its payroll extends to 460,000 employees. Aside from maintaining its domestic gas supply operations, which require heavy investment, Gazprom has been improving its links with its export markets. Its controversial North Stream project – substantially financed by German under- takings – is pivotal, especially given the troubled history of its Ukrainian pipelines. The 1,224km North Stream gas pipeline links Vyborg in the Karelia region of western Rus- sia with Greifswald in the state of Mecklen- burg-Vorpommern on Germany's eastern border. Gazprom has also been the driving force behind the struggling South Stream gas pipeline project that – like the smaller Blue Stream pipeline to Turkey – is designed to pass under the Black Sea, with a planned European Union entry point just south of the Bulgarian port of Varna. For years, the gas resources of western Siberia have underpinned Russia's gas export requirements. But the longer-term focus has shied to the Yamal Peninsula, which boasts rich gas resources but needs massive invest- ment. This region is set to become the power- house of Russian gas production. Although over 50 per cent of Russia's gas output is sold domestically, Gazprom exports gas to 30 different countries, although the UK's take is currently minimal. However, Russia's de facto acquisition of Crimea, its apparent collusion in stirring up discontent in the eastern part of Ukraine and the shooting down of a civilian Malaysian airliner – for which Ukrainian separatists have been widely blamed – have created a grave international crisis. Russian relations with the EU, notwith- standing the US, are now at rock bottom. Inevitably, this scenario has had an impact on trade issues and even Germany, which has previously adopted a soly-soly approach to Russia, now seeks far stronger sanctions. Perhaps inevitably, given its activities in the Far East Sakhalin area, Gazprom has sought – with some success – to expand its sales to China. It recently concluded From Russia with Gas Gazprom is a behemoth of the utility world and a key supplier of gas to Europe, but its relationship with the west is tarnished by increasing levels of mistrust. Nigel Hawkins reports. Gazprom markEt capitaliSation, 2004-13 2004 66.3 160.3 330.9 US$bn 272.0 144.5 86.0 150.9 122.6 111.6 99.9 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: Gazprom