Gazprom Looking to Bust OPEC Bloc

The Company: Gazprom, the world's largest natural gas producer.
The Filing: 2007 Annual Report
The Finding: Alexey Miller, chairman of Gazprom's management committee, told the Financial Times in a recent interview that OPEC doesn't have any real influence on the global oil market nowadays, and that the Russian energy giant will be the most influential energy firm in the world in coming years. Gazprom is years away from reaching peak extraction capacity for its oil and gas reserves; and, production problems and domestic demand could interfere with its ambitious plans for global domination.

The Upshot: Natural gas accounts for more than 50 percent of Russia's fuel and energy balance. Total consumption is about 420 billion cubic meters per year, and Gazprom services about 80 percent of the domestic market. According to the company's current strategy, production capacity of at least 580 to 590 billion cubic meters annually by 2020 will be necessary to meet the needs of the domestic market and to fulfill its existing European contractual obligations. These estimates, however, discount the growing appetite of the domestic industrial sector.

Having the world's largest natural gas reserves, estimated at 29.85 tons of cubic meters, is one thing --extracting these reservoirs is a different story. According to operating data, natural gas production at Gazprom totaled 548.5 bcm in 2007, a 1.3 percent decrease from the prior year. The decrease was blamed on a fall in domestic and European demand due to an abnormally warm winter in 2006/2007, according to the Government of the Russian Federation, Gazprom's largest stakeholder.

Left unsaid was the undeniable fact that major areas of natural gas production -- now and in the coming years -- will come from developing fields in Eastern Siberia and the Far East, forbidden and remote areas with harsh climates and limited infrastructure, including gas transportation and storage facilities.

Cost overruns in developing just the shelf fields off Sakhalin Island recently topped initial estimates by more than $20 billion.

The subplot for developing hydrocarbon fields tells the same story -- a need for significant investment due to the long distance between the oil reservoirs and existing pipeline and storage facilities (and the want for new technologies related to the complicated tasks of drilling and constructing wells in difficult climate conditions).

Oil production is stagnating, too, with 2007 production of 34.0 million tons unchanged from 2006. Yet Gazprom envisages a three-fold increase in annual production to 100 million tons by 2020.

The Question: Given the enviable, low-cost positions enjoyed by Middle East members of OPEC, is Gazprom really in the prized pole position to dictate global oil and gas policies -- or is it running on empty?

David Phillips

David Phillips has more than 25 years' experience on Wall Street, first as a financial consultant and then as an equity analyst for several investment banking firms. He sifts through SEC filings for his blog The 10Q Detective, looking for financial statement soft spots, such as depreciation policies, warranty reserves and restructuring charges. He has been widely quoted in outlets such as BusinessWeek, The International Herald Tribune, Investor's Business Daily, Kiplinger's Personal Finance, and The Wall Street Journal.

More from CBS News