Page 10 - FSUOGM Week 47 2022

FSUOGM INVESTMENT FSUOGM

Gazprom plans big capital spend in 2023

RUSSIA GAZPROM is ramping up investment next also factors in that the pipeline linking the Kovy-
year to RUB2.3 trillion ($35bn) as it prepares to ktinskoye field with the Power of Siberia system
The increase took embark on major capital-intensive projects, the was completed in recent weeks.
analysts by surprise. company announced this week. “However, the need to ramp production at
It marks a 15% year/year boost in the Rus- the Kovykta field in the next 3 years, and perhaps
sian state-owned gas supplier’s investment year a requirement to install additional compressors
on year, and was nearly 25% above the expec- on the pipeline as that happens, may be serving
tation of BCS Global Markets (BCS GM), the to keep investment in that project temporarily
Moscow-based brokerage said in a research note. elevated,” BCS GM said. “Additionally, we think
“This unexpectedly large budget could reflect that investments at the Ust Luga gas processing
a larger-than-expected slate of inflexible projects project (also called the Baltic LNG project) may
(Power of Siberia 1, regional gasification, Baltic be accelerating faster than we had anticipated,
LNG etc., which could be somewhat negative,” and that the regional gasification program,
BCS GM said. “However, it could also represent a which has become a high-priority activity in
much more optimistic management assessment the last couple of years, may be absorbing more
of the outlook for the European market – and money, as well.”
this cash flows – than we are allowing for, which However, BCS GM cautions that Gazprom’s
could be a neutral to positive signal.” investment budget could imply an optimistic
Power of Siberia 1 is already pumping gas to outlook on 2023 earnings.
China, but further investments are underway to “Gazprom’s traditional approach to invest-
link up the Kovyktinskoye gas field in the Irkutsk ment forecasting in most years has been to set
region to the pipeline, in order to ramp up sup- the initial budget no higher than a projection of
plies to an eventual 38 bcm per year. The $13bn available cash flows based on deliberately con-
Baltic LNG project is due on stream within a servative forecasts of volumes and pricing,” BCS
few years, following a final investment decision GM said. “Therefore, one interpretation of this
taken in 2019. The complex in Ust-Luga – a joint budget is that management is substantially more
venture between Gazprom and Rusgazdobycha optimistic than we are regarding the state of the
– will handle 45 bcm per year of gas in total, pro- company’s European gas export franchise.”
ducing, in addition to LNG and 19 bcm of gas BCS GM assumes that Gazprom will export
ready for pipeline transport to Europe, although a mere 65 bcm of gas to Europe and Turkey next
this part of the plan has likely been shelved. It year, compared with an estimated 85 bcm in
will also produce 3.6mn tpy of ethane and 2.2mn 2022 and 175 bcm in 2021. The brokerage pro-
tpy of LPG. Some of these liquids will be used as jects that Gazprom will sell its gas in Europe on
feedstock at a nearby petrochemicals plant that average at $1,035 per 1,000 cubic metres, includ-
Rusgazdobycha is developing on its own. The ing $300-350 per 1,000 cubic metres under oil
company has also been instructed by the Russian price-linked contracts and a forecast $1,500 per
government to accelerate the national gasifica- 1,000 cubic metres according to gas hub-based
tion programme, to bring more pipeline gas sup- pricing.
plies to households, businesses and industries. “We could be conservative on either or both,
The brokerage notes that given Gazprom’s resulting in significantly higher revenues and
hard dividend policy of 50% of adjusted net available cash for investments,” BCS GM said.
income, the capital expenditure should have no “If that is the case, and if management is right
implications for shareholder rewards. in this optimism, then the implication is that
This represents Gazprom’s biggest capital our dividend forecasts on 2023e results are also
spend since 2014. excessively low." ™
“We had included an assumed decline to
RUB1.85 trillion ($26bn) in our 2023e forecast,
so this budget represents a material increase,
both year-on-year and relative to our own
assumptions,” BCS GM said. “The last time
that Gazprom’s investments were higher was in
the 2010-2014 period, when outlays averaged
$51bn/yr as the company completed a number of
large pipeline projects and launched infrastruc-
ture and new fields on the Yamal Peninsula.”
The brokerage assumed a drop in investment
next year in light of a substantial increase in
the tax burden placed on Gazprom, which the
Russian government recently approved to help
shore up budget revenues, which have suffered as
a result of Moscow’s war in Ukraine and Russia’s
subsequent economic isolation by the West. It

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