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article imageGazprom profits plunge 10.5% due to poor sales to Ukraine

By Dmitry Zaks (AFP)     Jan 23, 2014 in Business

Russia's natural gas giant Gazprom reported on Thursday a 10.5-percent plunge in third-quarter profits but gains over the first nine months of 2013 thanks booming European sales.

Gazprom -- the world's biggest natural gas firm by both production and reserves -- said its profits between July and September last year came in at 276.07 billion rubles ($8.1 billion, 6.0 billion euros).

The opaque state-owned company did not explain the decline.

But analysts attributed the fall to cutbacks in purchases by Ukraine -- an ex-Soviet nation of 46 million people which had sought closer relations with Europe until abruptly reversing course late last year.

"For former Soviet countries, the results are down as expected. This is linked to the deteriorating situation, from Gazprom's point of view, in Ukraine," said Moscow's Energy and Finances Institute director Alexei Gromov.

Ukraine had planned to slash its purchases from Russia to about 30 billion cubic metres in 2013 from 52 billion cubic metres the year before in order to reduce its dependence on old master Moscow.

Russia's Sberbank Investment Research noted that Ukraine's state-owned energy company had "practically stopped paying Gazprom since August 2013."

But Ukrainian President Viktor Yanukovych abruptly reversed course in November and signed an economic bailout agreement with Russia that also cut the price Kiev had to pay for Gazprom's natural gas by a third.

Yanukovych's decision sparked two months of mass protests which led to the death of five people in Kiev on Wednesday. But economists did not expect the Ukrainian leadership to renounce its new Russian deal.

"This year's deliveries (to Ukraine) will grow, but Gazprom will not see greater profits because they will be made at reduced prices," Gromov said.

The third-quarter result slightly beat analysts' expectations and the stock was up about 0.8 percent in evening trading on the Moscow Exchange.

Sales to Europe booming

Gazprom stressed that its profits over the first nine months of 2013 had in fact jumped by four percent to reach 858.77 billion rubles ($25.2 billion, 18.6 billion euros).

It said sales to Europe had shot up by 15 percent "primarily due to an increase in volumes of gas sold ... that was reinforced by an increase in average prices in ruble terms".

The sharp increase has been driven both by dropping European imports from Norway and a decision by Qatar to divert some of its liquefied natural gas (LNG) to more profitable Asian markets.

"Most analysts did not expect such strong European sales at the start of the year," Gromov observed.

"Norway was stealing away a large chunk of Gazprom's market. But now, its production has peaked."

Yet Gazprom has had much more trouble reaching an elusive agreement with China which could diversify the company's list of clients and make it less dependent on traditional European sales.

China and Russia have been in natural gas negotiations since 2004 without making evident progress until recent months.

Last year, the two sides signed a preliminary 30-year agreement for the China National Petroleum Corporation (CNPC) to purchase up to 38 billion cubic metres of natural gas from Gazprom starting no earlier than 2018.

But they have thus far failed to reach a compromise over pricing and Gazprom chief Alexei Miller was unable to put the finishing touches to a deal during a visit to Beijing this week.

A senior Gazprom officials said on Thursday that the company now hoped to sign a firm contract during a visit by President Vladimir Putin to China in May.

"We understand that we still have to resolve a number of commercial and technical issues. But we intend to meet this deadline," the senior Gazprom official told a conference call.

Moscow's VTB Capital investment bank said it still expected Gazprom to deliver its first supplies to China in 2019.

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