European Exports Help Gazprom Profits Soar By 30%

Gazprom has produced record quarterly figures on the back of a 72% increase in the value of exports to Europe but the heavily indebted Russian group warned that the credit crunch could hit its cashflow.

The world's largest gas producer earned $18.5bn (£11.4bn) from European sales in the first quarter, triggering more harsh criticism in the west about its decision to establish a gas cartel with Iran and Qatar that could drive up prices further.

Domestic sales at Gazprom grew by only 2% and are now worth less than half its European ones, while sales to former members of the Soviet Union slumped by 20%. Pre-tax profits rose by 30% to more than $14bn but the company, which has a monopoly on exports from Russia, admitted that the global liquidity squeeze would make life harder.

"Such circumstances could affect the ability of the group to obtain new borrowings and refinance its existing borrowings at terms and conditions similar to those applied to earlier transactions," Gazprom said in a statement.

"Deteriorating operating conditions for borrowers may also have an impact on management's cashflow forecasts and assessment of the impairment of financial and non-financial assets."

Gazprom's chief executive, Alexei Miller, said this month that he saw no short-term risks from the global financial crisis as his company was enjoying record gas prices and had no urgent need to borrow. Analysts also said the company's debts of $40bn were still relatively small, given the profits generated and the scale of its business.

But Artyom Konchin, an analyst at Aton Capital in Moscow, said Gazprom's share price had slumped 70%, valuing the group at $100bn, in part because it had failed to convince investors that the scale of investments it wanted to make could be justified at a time when demand could be hit by the global economic slowdown. "Minority investors in particular want to know where the value is coming from," he added.

Gazprom, which supplies a quarter of Europe's gas, announced on Monday that it was establishing a "big gas troika" with Iran and Qatar. It was described by the Iranian oil minister Gholamhossein Nozari as a "gas Opec".

David Clark, a former special adviser to the Foreign Office and a chairman of the UK-based Russia Foundation, said he was alarmed by the move. "It is a clear attempt by Russia and other countries to increase their leverage and use energy as a geopolitical weapon. It is time the European Union ensured that Russia was bound by a rules-based relationship that it had signed up to with the energy charter treaty."

Clark said it was ominous that the three countries involved in the potential cartel specifically talked about liquefied natural gas (LNG). "They clearly realize that LNG offers gas-importing countries different supply options and is an area they want to control," he added.

The European commission said it would expect to be notified of any move to create such an arrangement, which could prompt the EU to revise its energy policy.

"In principle, the commission is against cartels for the sale and marketing of products, and hydrocarbons are no exception to that," the commission's energy spokesman, Ferrán Tarradellas Espuny, said. "We believe the best conditions for the sale of a product such as gas are a free and transparent market."

Two of Europe's biggest gas distributors, GDF Suez and E.ON, said the troika could be useful.

Gérard Mestrallet, chief executive of GDF Suez, France's biggest gas utility, said: "We have the feeling that the forum project is not necessarily a cartel - if it was we would condemn it - but that it is a place for dialog and we would be prepared to regard it favorably."

Bernhard Reutersberg, E.ON Ruhr gas chairman, said he was not "really" concerned as his company was shielded by long-term supply contracts.