1. The Motives Behind Russia’s Gas Export Strategy: An Economic
Assessment of the Nord Stream Project’s Effect on Gazprom Profit
Roman Kucinskij roman.kucinskij.09@abdn.ac.uk +44 (0) 751-8520-558 www.abdn.ac.uk
MSc (Econ) International Business, Energy and Petroleum , University of Aberdeen, Aberdeen.
Background and Research Motivation
It is difficult to underestimate the influence Russia has over
the European gas market. Serving over 27% of European
natural gas market in 2009, Gazprom enjoys a dominant
position in the European gas supply.
Historically, Russia’s behaviour was difficult to predict,
particularly when energy resources are used as a political
tool. Gas disputes with Ukraine in 2006 and 2009 and
Belorussia in June this year are clear examples of this.
Better understanding of Russia’s and Gazprom’s motives
may lay the foundation for better anticipation of Russia’s
actions in the future.
Since Gazprom is a state monopoly and effectively
represents Kremlin policy, the motives behind Gazprom gas
exports strategies and the potential effect of the Nord
Stream pipeline on these strategies were investigated.
Methodology
Strategic and Capital budgeting analyses were undertaken.
Strategic analysis used a simple static numerical
optimisation model, allowing analysis of the Russian gas
transportation choices through various transit countries
Capital budgeting analysis considered net present cash
flows and cost savings associated with the Nord Stream
Project
Main Results
The Strategic analysis results suggest that:
 Russia is always better off employing the Nord Stream
pipeline. As a result the importance of Ukraine as a transit
country will inevitably decrease.
 Furthermore, current non-cooperative behaviour is more
beneficial for Russia compared to cooperation with transit
intermediates.
 European customers are substantially overpaying
compared to free market prices
 Capital budgeting analysis revealed that the official
Gazprom estimates of the value of Nord Stream differs
significantly from the estimated value calculated based on
the cost savings associated with bringing the project online. Conclusions
Nord Stream will have a positive impact on Russian profit
 The new route will reduce cost of transportation to market
but not increase gas sale volumes.
The overestimation of the project’s value is because the
developers are ignoring the negative impact of Nord Stream
on gas transportation via other pipelines such as Ukraine.
Given the marginal economics of the project from a cost
savings perspective, this demonstrates Gazprom’s intention
to exclude transit intermediates such as Ukraine from its
future transit plans.
Generally, the results obtained are consistent with the
claim that Russia is executing a well planned natural gas
transit diversification strategy, despite Gazprom’s strong
denial of this.
33 33 33 33
27.5
27.5
27.5
133
106
95
78
81
65
33 33 33 33
55
55
55
128
73
93
76
65
49
33 33 33 33
55
55
55
123
68
90
73
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46
0
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UKR+BY UKR+BY+NS Consortium UKR Consortium UKR+BY Consortium UKR+NS Consortium
UKR+BY+NS
Bcm
Yamal Nord Stream Ukrainian Volume
1.0%
7.0%
1.0%
15.0%
10.0%
15.0%
1.0%
8.0%
13.0%
4.0%
30.0%
25.0%
25.0%
5.0%
$- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00
Inflation
Realdiscount Rate
Gas Price Escalation
RussianCorporate Profit Tax
German Corporate Profit Tax
RussianExport Tariff
Opex Cost Escalation
$ Billions
Low
High
Cash Flow method Cost Saving method
NPV ($M) 41,061 -9,068
IRR 32.40% N/A
Profitability index 14.55 -1.99
Payback Period 6.70 N/A
Russia's share ($M) 20,941 -4,625