The world's biggest gas producer recently indicated for the first time that it may revise timelines for some of its projects after profits fell by half during the first half of 2009. Falling demand both at home and abroad, weak gas prices, rising debt levels as well as the January dispute with Ukraine were to blame for the slump in profits from $21 billion to $10 billion compared to the same period one year prior.

Gazprom, which supplies over a quarter of the EU's gas needs, has already lowered its production this year by one fifth. The energy giant's profits are expected to face further pressure from the ongoing disputes over long-term take or pay contracts, where European utilities are battling Gazprom over liability for billions of cubic meters of unwanted gas. This, in turn, has contributed to weak prices and an oversupply, as many utilities, suffering from a shortage of demand, have been forced to sell unwanted gas back onto spot exchanges.

The European gas glut, which the International Energy Agency estimates could grow to 200bcm per year by 2015, could not have come at a worse time for Gazprom. Russia's largest corporation plans to shift its interest towards liquefied natural gas (LNG), while diverting more supply from Europe to Asia and the US. Gazprom launched its first LNG terminal in February, on the Pacific island of Sakhalin, and by 2020 aims to achieve a production target of between 80 million and 90 million metric tons a year: about one fifth of global LNG demand. However, the ambitious timelines for this and other projects, which already face numerous technological difficulties, are likely to be delayed as Gazprom turns to saving cash. The company has already cut back its investment projects by 30% in 2009.

Elsewhere, Gazprom has had its eyes on the US market, where by 2018 it plans to ship the majority of production from its Shtokman project. However, the emergence of US shale gas - which has already led to a substantial diversion of LNG to Europe (with many US LNG terminals running at 10% of capacity) - presents yet another potential roadblock to Russia's rise as a dominant player in LNG markets. Should shale indeed prove to be a game changer and the glut in supply continue, Gazprom may be forced to critically rethink some of its long-term investment projects.

A service of YellowBrix, Inc.