Gazprom 1H profit halved on sinking demand

Russia's Gazprom saw its earnings halved in the first six months of the year due to lower natural gas prices and sinking demand in Europe, while overall debt jumped nearly a third, the company reported Monday.

The world's largest producer of natural gas said net profit amounted to 305.8 billion rubles ($10.6 billion) for the period, down from 609.3 billion rubles a year ago, according to financial results calculated to international standards.

Six-month sales only fell 7 percent to 1.6 trillion rubles from 1.7 trillion rubles in the same period last year as foreign currencies appreciated against the ruble. Sales to Europe fell 24 percent year-on-year.

Gazprom's outstanding debt increased 31 percent to 1.3 trillion rubles as the company borrowed heavily to finance an option to purchase a 20 percent stake in Gazprom Neft, an oil producing subsidiary, from Italian oil and gas company Eni SpA.

Many analysts criticized state-controlled Gazprom's management for the deal, since the company paid 40 percent more for the stake than its market value at the time. There was speculation the purchase was Moscow's way of getting Italy to approve the South Stream gas pipeline project - which, if completed, would connect Russia with southeastern Europe and deal a blow to Nabucco, a competing U.S.-backed pipeline.

Alexander Nazarov, an analyst at the Metropol investment group, said the third quarter would also be tough for Russia's largest corporation, but then the outlook would improve. "Prices are growing, and demand for gas is growing, so the fourth quarter will be good for the company," he said.

Analysts say, however, that over the long term Gazprom might be forced to rewrite gas purchase contracts with its European customers, who are not satisfied with the current system that pegs the price of gas to the price of oil and compels clients to purchase certain amounts of gas even if they don't use it.

"We're seeing is a change in relations between Gazprom and the companies that buy its gas," said Simon Pirani, a senior research fellow at the Oxford Institute for Energy Studies. "The most dramatic consequence of this change could be how prices are set."

Gazprom accounts for one-third of Western Europe's gas imports, according to the company.