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To: Johnny Canuck who wrote (44760)	4/24/2008 11:25:39 PM
From: Johnny Canuck	Read Replies (1) \| Respond to of 69187

Gazprom's New Focus On Production Oxford Analytica 04.24.08, 6:00 AM ET This article is part of Oxford Analytica's Daily Brief Service. Click here for information about how to subscribe. Russian gas export monopoly Gazprom plans to increase investment in gas production and transportation substantially while cutting spending on acquisitions. This will reassure European customers concerned about its capacity to meet export commitments. However, Gazprom's capacity to deliver will be severely tested as it tackles an array of ambitious projects. Gazprom has been under fire at home and abroad for failing to invest in new production. The company has channeled much of its strong cash flow of recent years to non-core acquisitions, including: --a $13 billion stake in the Sibneft oil company; --European downstream assets; --media interests; and --stakes in several power plants in Russia. In 2007, it paid $10 billion for a 50% stake in the Sakhalin-2 project--at the expense of Shell and its Japanese partners--and an increased stake in Moscow's main power utility, Mosenergo. As a result, it twice reduced its investment program for the year. Investment plan. In a bond prospectus published in late March, the company said it expects its capital investment to rise by nearly 40% in 2009 compared with the present year, with the total amounting to $65 billion in 2009-10. At the same time, planned levels of financial investment (including mergers and acquisitions spending) is to fall significantly compared with recent years. As production from its super-giant fields in West Siberia declines steadily, Gazprom is finally taking serious steps to establish a new core production base on the Yamal peninsula, where 26 fields have been discovered with explored reserves of 10.4 trillion cubic meters. The development of these fields is an enormous project requiring significant new infrastructure. Cost forecasts are in the region of 160 billion dollars. Gazprom will rely on the resulting gas to maintain growth in overall production even as key existing fields decline. Looming concerns. Behind the impressive figures for coming years are a number of unsettling trends for Gazprom: -- Falling production. Output at Gazprom's three super-giant fields in West Siberia is declining at a rate of around 25-30 billion cubic meters (bcm) per annum. Overall levels of production are also stagnating. In 2007, the company produced 548 bcm of natural gas, down 1.3% on the 2006 total. -- Rising demand. Demand is growing in both Gazprom's domestic and export markets. Russian domestic demand is expected to increase by 50 bcm per annum by 2015. As the European Union's own natural gas production declines, net E.U. imports are set to grow by around 100 bcm per annum. Russia will have a strong incentive to increase its exports to E.U. member states and is looking to grow its market share from 26% in 2007 to at least 33% by 2020. -- Cost pressure. Input costs for new projects in the global oil and gas industry--including contractor services, materials and equipment--have grown exponentially in recent years. According to one calculation, Gazprom's planned investments for 2009-10 are 2.7 times higher than in 2002, but with adjustment for inflation the increase is only 22.6%. -- Price change. Imports of Central Asian gas have played a key role in helping to meet export commitments to Europe. However, these are set to become significantly more expensive following an agreement in March under which Gazprom undertook to pay "European prices" for its gas purchases from the region from 2009. -- Capacity questions. Gazprom is embarking on a number of ambitious projects simultaneously. These include new production in the Yamal peninsula, Sakhalin Island and the Shtokman field, and major pipeline construction, including the Nord Stream and South Stream projects, a proposed pipeline to China and extensive gasification projects within Russia. Gazprom also needs to invest in storage facilities and in its aging pipeline network, of which around a third is over 30 years old. To read an extended version of this article, log on to Oxford Analytica's Web site. Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visit oxan.com. To find out how to subscribe to the firm's Daily Brief Service, click here. You may also sign up to The World Next Week, Oxford Analytica's free weekly service providing depth and context to next week's important international issues. Recycled Electronics Mean Big Money