Russian energy giant Gazprom, once the country's most profitable company, could face a long period of weaker performance as it struggles to fill the gap of lost European gas sales with its domestic market and Chinese exports.
The company recently announced an annual net loss of $7 billion, its first since 1999, following a steep decline in trade with Europe.
Gazprom's troubles reflect the deep impact the European sanctions have had on Russia's gas industry, as well as the limitations of Moscow's growing partnership with China.
The impact of international sanctions on oil exports has been easier for Moscow to absorb because Russia has been able to redirect sea-borne oil exports to other buyers.
Gazprom relied on Europe as its largest sales market until 2022, when Russia's conflict with Ukraine prompted the EU to cut Gazprom gas imports.
Russia supplied a total of around 63.8 billion cubic meters (bcm) of gas to Europe by various routes in 2022, according to Gazprom data and Reuters calculations. The volume decreased further, by 55.6%, to 28.3 bcm last year.
That's compared to a peak of 200.8 bcm Gazprom pumped in 2018 to the EU and other countries, such as Türkiye.
Mysterious blasts at Nord Stream undersea gas pipelines from Russia to Germany in September 2022 also significantly undermined Russian gas trade with Europe.
Russia has turned to China to boost its pipeline gas sales to 100 bcm a year by 2030. Gazprom started supplying gas pipelines to China via the Power of Siberia at the end of 2019.
It plans to reach the 38 bcm annual capacity of Power of Siberia by the end of this year, while Moscow and Beijing also agreed in 2022 about exports of 10 bcm from the Pacific island of Sakhalin.
Russia's biggest hope is the Power of Siberia 2 pipeline via Mongolia, which is planned to export 50 bcm per year. But that has hit some pitfalls due to the lack of agreement over pricing and other issues.
"While Gazprom will see some additional export revenues when all those pipelines will be up and running, it will never be able to offset completely the business it has lost to Europe," Kateryna Filippenko, a research director on gas and LNG at Wood Mackenzie, said.
Russia has also struggled to establish a gas trading center in Türkiye; an idea first floated by President Vladimir Putin in October 2022. No significant development has been reported since.
Even if Gazprom can get its pipeline supply to China up and running, sales revenues from Europe will be much lower.
According to Moscow-based BCS brokerage, Gazprom's revenue from gas sales to Europe in 2015-2019 averaged $3.3 billion per month thanks to monthly supplies of 15.5 bcm.
Taking into account a price of $286.9 per 1,000 cubic meters, as reported by the Russian Economy Ministry, and Gazprom's gas exports of 22.7 bcm last year, the total value of the company's gas sold to China could have reached $6.5 billion for the whole of 2023.
Gazprom did not reveal its revenue from sales to Europe or China for 2023 separately.
Michal Meidan, head of China Energy Research at Oxford Institute for Energy Studies, said China is unlikely to replace Europe for Russia as a highly profitable gas export market.
"China gives Russia an outlet but at much lower prices and revenue than Europe," she said.
In 2023, Russian pipeline gas was sold at $6.6 per million British thermal units (mmBtu) to China and slightly lower than that in the first quarter of 2024 at $6.4/mmBtu.
That's compared to an average price of Russian gas in Europe of $12.9/mmBtu last year.
According to a document seen by Reuters last month, Russia expects its gas price for China to continue gradually declining in the next four years. A worst-case scenario does not rule out a 45% fall to $156.7 per 1,000 cubic meters (around $4.4 per mmBtu) in 2027 versus 2023.
It didn't say what might drive prices down, but Russia is facing rivalry from other pipeline gas suppliers to China, such as Turkmenistan, as well as sea-borne liquefied natural gas (LNG).
The financials of Gazprom, which also include its oil and power units, showed that the revenue from the natural gas business more than halved last year to just over 3.1 trillion rubles, while oil and gas condensate sales amounted to 4.1 trillion rubles, up 4.3%, according to BCS brokerage.
Alexei Belogoriyev of the Moscow-based Institute for Energy and Finance said it would be impossible for Gazprom to restore profitability by relying solely on its gas business.
He said the strategic shift to the production and export of ammonia, methanol and other gas processing products for Gazprom is possible, but it will not give a quick return.
"At the same time, the prospects for the Power of Siberia 2 remain vague: China most likely won't need so much additional imports in the 2030s due to the likely slowdown in demand growth and high domestic gas production rates," he said.
