‘Gazprom and the Reasons behind Its Struggles to Stay Dominant and Sustainable in the Industry’
Table of Contents
- 1.0 Introduction
- 1.1Terms of Reference
- 2.0 Procedure
- 3.0 Findings
- 3.1 Socio-Political Issues faced by Gazprom
- 3.2 European Gas Market
- 3.3 Performance of Gazprom
- 3.4 Business Strategic Crisis in Gazprom
- 3.5 Sustainable Strategy Issues
- 3.6 SWOT Analysis of Gazprom
- 3.6.1 Strengths
- 3.6.2 Weaknesses
- 3.6.3 Opportunities
- 3.6.4 Threats
- 4.0 Recommendations
- 5.0 Conclusion
- 6.0 References
Gazprom is regarded as one of the biggest gas production organisations globally. The core functions of the organisation comprise exploration, production, shipping, processing and marketing of natural gas along with purifying crude oil. Gazprom primarily operates the business in Europe, having headquarters in Moscow in Russia. The corporation was formed up as a joint stock firm in the year 1993. By 2002, the government owned nearly 38.37 percent of Gazprom’s share. The organisation accounts for nearly 20% of foreign gas supply worldwide. In Russia, the company manages over 60% of gas supplies and produces about half of the country’s energy. Gazprom is responsible for funding a large proportion of Russia’s gross domestic product (GDP) and delivers around 20% of its income to the national government (Thomas, 2006). At present, however, Gazprom’s supremacy is at risk and the company is also posing difficulties in order to remain competitive in market.
1.1 Terms of Reference
Focusing on this point, the study is focused on Gazprom’s review. The goal of the study is to resolve the socio-political problem facing Gazprom in the oil and gas industry. The study also undertakes a SWOT review of the organization, in accordance with the problems faced by Gazprom.
In order to analyse the strategies incorporated by Gazprom, information has been collected from several secondary sources such as journals, articles, books and news. The rationale for selecting secondary sources is that they help in gaining information about the subject matter in low cost, time and effort.
3.1 Socio-Political Issues Faced by Gazprom
Gazprom has had to contend with a variety of socio-political problems that have harmed the company’s long-term profitability. A conflict occurred between Russia and Ukraine in 2006, which contributed to the termination of supplies of natural gas from Russia to Ukraine. Since the majority of Russia’s gas for Western Europe passes through Ukraine, the conflict between the two countries resulted in substantial reductions in Gazprom sales to Western Europe, particularly during times of high demand, such as during the winter. Other socio-political issues have contributed to a decline in the availability of natural gas to America, Georgia and Moldova during the same period, contributing to severe problems in satisfying consumer demand and rising profitability (Perovic & et. al., 2006).
Gazprom is a remarkable organization given that it started as a department and has then developed into a business. In addition, recognizing the extent at which Gazprom serves the needs of the government and industry is often particularly contentious. The mainstream sector of Gazprom is natural gas exports that have declined due to over-pricing practices. The company’s subsidiaries are being slashed and allocated to more competitive rivals at higher rates. The rapid improvement of American gas supply firms, Gazprom’s inability to invest in research and development operations, and denial of the oil and gas industry’s transition have both led to the company’s drastic revenue decline. Gazprom’s issues are likely to intensify the challenge of long-term survival, as the government has struggled to adapt to current market conditions (Englund & Lally, 2012).
3.2 European Gas Market
Because of high costs, Europe’s gas demand has been static. As a result, Gazprom’s natural gas has lost its attraction and is now struggling with coal. European nations also appear to postpone the plan of replacing coal based power generation with gas based power generation. The following figure demonstrates the changes in demand of gas in different European nations from 2011 to 2012.
Source: (Ovchinnikov & Palfi, 2012)
From the above figure, it can be observed that in several nations such as Italy, Denmark and France among others, the gas consumption has reduced to a certain extent. Substitute product coal arrives at 50% cheaper as compared to gas. Furthermore, low carbon costs have also worsened the problem of gas consumption in Europe (Ovchinnikov & Palfi, 2012).
3.3 Performance of Gazprom
Over the years, the performance of Gazprom has decreased in terms of production, sales and export. The following figure demonstrates the production of Gazprom from 2006 to 2010:
Source: (Gazprom, 2010)
From the above figure, it can be observed that the gas production of Gazprom was 556 billion cubic meters in the year 2006 which had reduced to about 508.6 billion cubic meters in 2010, signifying degradation of performance (Gazprom, 2010). The export of gas of Gazprom has also reduced considerably in these years. The following figure demonstrates the level of export of Gazprom in Europe:
Source: (Ovchinnikov & Palfi, 2012)
From the above figure, it can be observed that the level of export of Gazprom had deteriorated from 2004 to 2011 and further deterioration of export is expected by 2018, given the present circumstances and unless any affective steps are undertaken (Ovchinnikov & Palfi, 2012).
In the year 2009, the net profit of the organisation had reduced by 11% and the valuation of the organisation had also dipped below US$100 billion. The issue of dependence on Russian gas is also a great political concern for different European nations. Presently, Gazprom is also facing strategic crisis to sustain in the business (Balmforth, 2013).
3.4 Business Strategic Crisis in Gazprom
According to different analysts, Gazprom was slow to react to possibly ground-breaking changes in the energy market, for instance, appearance of shale gas in place of natural gas provided by Gazprom. In the United States, there is an abundance of reserve of shale gas and thus US organisations have become much active than the Russian organisation, i.e. Gazprom in the European market. As a result, it minimises the profit of Gazprom to a considerable extent. Irrespective of changing market circumstances, Gazprom has been found to insist on costly long run gas agreements. Gazprom has only concentrated on the prices of its products and ignored the density of demand related to its products. As a result, most of the European consumers have shifted from Gazprom to other suppliers. It has also been observed that in the year 2012, gas sales of Norway to Europe had increased by 16% in spite of European recession, while the sales of Gazprom had decreased by 8% (Adomanis, 2013).
Gazprom has also faced problem owing to the utilisation of variable pricing policy. European Commission launched an investigation in order to probe whether Gazprom was stymying the divergence of supply by involving in unfair pricing practices and preventing free flow of gas (Zatzman, 2012). The following figure demonstrates the pricing of gas in different nations of Europe:
Source: (Adomanis, 2013)
From the above figure, it can be observed that Gazprom treats diverse nations of Europe differently with respect to prices of its products. For instance, nations which are at far distant position from Russia such in the United Kingdom and France, the prices of natural gas were sharply low than other proximate nations such as Bulgaria. On the other hand, nations such as Germany seem to receive pretty discounted price on natural gas where other nations such as Poland do not get any discount (Adomanis, 2013). It signifies that Gazprom has desired to increase the dependence of natural gas by lowering the prices in certain nations so that it can gain monopoly in the industry.
The issues faced by Gazprom are rooted in the organisation’s dual role as a business entity and as a blunt tool in foreign policy approach by using energy as a way of satisfying friends and punishing rivals. This political role of Gazprom has resulted in diversifying the energy supplies from it to other organisations. Besides, the business and political strategies of Gazprom have also enforced the organisation to expend funds on expensive pipeline plans with doubtful commercial value (Kanter & Kramer, 2013).
3.5 Sustainable Strategy Issues
The foundation of Gazprom is considered as a key problem for endangering its market dominance and industry sustainability. Concerning sustainability, Gazprom had made three key mistakes.
First, Asian market represents considerable business growth opportunities for Gazprom. Still, the organisation did not make any important deal to provide liquefied natural gas in the biggest energy markets such as India and China for meeting its aggressive market demand. Gazprom has not taken any aggressive measures for securing best market opportunities in best possible prices for its products which has resulted in the emergence of sustainability crisis for the organisation (Kuprianov, 2012).
The second mistake with respect to sustainability was the decision of Gazprom to delay additional development of respective business field. Further development in the business field would have benefitted the organisation to enhance the organisational reach to other segments apart from gas and power (Kuprianov, 2012).
The third mistake had been low development of new pipeline. Gazprom was reluctant to establish a new pipeline which can serve as a long-term interest measure for stakeholders. New pipeline can also enhance the reliability of supply of natural gas to the developing market of Europe. Furthermore, the creation of new pipeline would shield Gazprom from unpredictable fluctuations of oil and gas market (Kuprianov, 2012).
These three issues are best observed as the key examples of Gazprom for ignoring the trap of short run hindrances in favour of establishing long run value for independent shareholders and the Russian government.
3.6 SWOT Analysis of Gazprom
Income: The organisation has strong source of income which has helped it in gaining a strong position in the oil and gas industry.
Operating Margin: The operating margin of Gazprom is quite large because the organisation has large customer base. This high operating margin assists Gazprom to become a recognised organisation in the entire world. The products of Gazprom are admired by many nations internationally.
Internationalisation: The other vital strength of Gazprom is its huge progress of business in the global oil and industry market. The internationalisation of Gazprom has supported development of valuable products for customers (Gazprom, 2010).
Lack of Control: Gazprom has a lack of control on different business activities. The Russian government has put strong control on the assets of Gazprom, leaving the organisation incapable of dealing with any commercial matters on their own (Aslund, 2006).
High Debt: Gazprom has also faced increased debt scenario in recent times which has hindered the production of natural gas and crude oil.
Low Resources: Gazprom has insufficient resources to meet the production demands. As a result, the organisation faces low level of customer satisfaction.
Product Quality: Gazprom is also found to face issues due to low product quality.
Establishment of Pipeline: Establishment of pipeline can assist Gazprom to secure new resources for the organisation. As a result, it can enhance the production and accordingly the business (Cornell & Nilsson, 2008).
Growth in Europe: There is a rapid growth opportunity for Gazprom in European region as there is a high demand of natural gas. Gazprom can exploit this opportunity and increase its business in industrial segment (Cornell & Nilsson, 2008).
International Expansion: Gazprom can grow the business internationally and spread the pipeline system in other nations where it has no business presence (Cornell & Nilsson, 2008).
Brand Image: Gazprom has faced negative brand image due to its lack of responsible market practices. It can have an impact on the sustainability of the organisation (Gazprom, 2013).
Competition: Gazprom has shown less effectiveness to compete against other oil and gas organisations which can hinder the development of the business and to deal with the competition.
There are several recommendations which would be helpful for Gazprom to stay dominant and sustainable in the oil and gas industry.
Development of New Market: Gazprom is required to develop new markets specifically in Asian region. There is a considerable demand of oil and gas products in Asia which can help Gazprom to enhance the customer base.
Diversification of Business: It is essential for Gazprom to diversify the business, for example, it can invest in research and development and exploit it to amplify energy generation not only in the home country, but also in other countries. Besides, Gazprom can also involve in hydrocarbon exploration, production and transmission. It would help to satisfy the increasing demand of power in different nations and bring great possibility of market dominance (Stern, 2005).
Development of Reserves: In order to stay sustainable in the oil and gas industry, Gazprom must secure reliable supplies as well as develop new reserves. Furthermore, it is also advisable that the organisation must develop business relationships with European nations by eliminating unfair trade practices. It will help to enhance the level of export of natural gas.
Russian multinational giant Gazprom has faced several issues in the international market due to ineffective business practices and for attempting to exploit a monopoly position in the gas industry. As a result, it has faced a reduction in sales in its most important market i.e. Europe. Presently, the organisation is striving hard to stay dominant and sustainable in the oil and gas industry with increased competition from other multinationals. Sustainable development of Gazprom in gas industry necessitates harmonised interests of organisation and customers. Thus, Gazprom must pursue harmonisation with its key customers in different European nations by supporting global joint projects, creating multinational production chain and involving in appropriate business operations. Gazprom must make the supplies of natural gas more secure and fill the gap of demand of supply so that customers can share their good experiences related to the organisation in the gas industry, resulting in increased brand reputation.
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