Gazprom is facing a cash squeeze

10:31, 11 February 2009
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The world`s largest utility is reviewing its budget

Gazprom is facing a cash squeeze as shrinking demand for energy in Europe forces the world`s largest utility to curb spending, postpone the development of new gasfields and put its domestic customers on a regime of prepayments for fuel.

The Russian company, which cut off supplies to the Ukraine in January in a dispute over unpaid gas bills, said that it was reviewing its budget for 2009 due to an anticipated fall-off in export volumes and revenues.

In a presentation to investors in London yesterday, Gazprom said it was expecting volumes to Western Europe to shrink by 5percent this year while prices would fall by almost a third.

The utility giant reckons exports to former Soviet satellite states will tumble 15percent and Andrey Kruglov, head of finance, said the budget would be revised and financial efficiency would be improved.

“We will be prioritising projects. That will allow us to see which projects will be funded anyway, which will be postponed and which will be funded if the economy improves,” he said.

Mr Kruglov said that it was too early to determine which projects would be postponed. He indicated that major projects such as the Bovanenkovskoye gasfield in the Yamal peninsula, the Shtokman gasfield in the Barents Sea and the Nord Stream pipeline to Germany would not be affected.

Within the company, costs are being cut with a 10percent staff reduction in the parent company and cuts in advertising and sponsorship.

Once known for its colossal waste, corruption and sprawling business interests, Gazprom has become more focused on its job as a supplier of energy to consumers and taxes to the Russian Government.

The Government is allowing it to raise prices to domestic consumers and, after the row over unpaid bills in Ukraine, Gazprom`s domestic consumers will begin to feel the heat from the monopoly supplier.

Mr Kruglov said that Gazprom would introduce an advance-payment system for domestic customers.

The prepayment system is aimed at local communities that typically order excessive quantities of gas under long-term regulated contract to avoid the high cost of purchases on the open market.

In addition, Mr Kruglov said he was not ruling out the possibility of payment problems as the recession affects Russian businesses.

Gazprom had borrowings in June of $48billion (£33billion) and must repay about $10billion in borrowings this year. At the same time the company has important commitments in spending on projects necessary to maintain gas production with $29billion already budgeted for 2009.

The capital budget for this year is a reduction of almost $10billion from spending in 2007 and Mr Kruglov indicated that capital expenditure would be trimmed again but the size of the cut would not be finalised until the end of the first quarter.

Cuts in spending on new gas production are likely to create anxiety among Europe`s gas importers due to concern that Gazprom will be unable to meet increasing demand when economic growth picks up.

Gazprom is committed to several huge projects in the Arctic, including Shtokman, with 3.7trillion cu m of gas reserves. Gazprom has said that it expects gas to begin flowing from Shtokman by 2013.

Times Online

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