Gazprom’s UK travails threaten businesses in Britain and beyond

Security guards were out in force this week after protests against the war in Ukraine outside Gazprom Marketing & Trading, the Russian group’s global trading wing headquartered a stone’s throw from London’s Regents Park.

But demonstrations are the least of the business’s worries. Customers and suppliers are seeking to cut ties with any part of the Kremlin-controlled energy giant, and its landlord is trying to throw it out.

Now UK officials are drawing up rescue plans for both GM&T and its UK market-leading retail division Gazprom Energy amid fears one or both could collapse.

GM&T is a major trader of gas, liquefied natural gas and power, buying from sources including Norway and the North Sea and selling worldwide. It also buys the gas for Gazprom Energy, which supplies about a fifth of all non-household gas in the UK to roughly 30,000 commercial customers.

Gazprom Energy’s customers include shops, pubs, NHS trusts and local authorities, along with two-thirds of the UK’s heavy energy users — crucial industries that produce goods from glass and ceramics to fertilisers, paper and steel.

Business leaders and analysts warn that collapse would cause chaos in European gas markets as well as unsustainable price rises for British customers, many of which have bought gas in advance at cheaper rates several years ago and would face a 10-fold spike in their bills.

Gazprom’s travails have raised questions as to how UK business became so dependent on a Russian-owned gas provider.

But Jonathan Stern, distinguished research fellow at Oxford Institute for Energy Studies, sees it as a logical consequence of decisions to privatise and liberalise energy markets 40 years ago, first in the UK then in Europe.

“We created this market model with as many companies as possible competing to supply gas and it couldn’t be too surprising that Gazprom is one of the winners,” he said.

Gazprom Energy grew to become the largest UK provider of gas to industry following its 2006 acquisition of Pennine Natural Gas. The company still has an office in Manchester as well as in London, with a total workforce of about 350 people.

Although a small part of Gazprom’s global operation, GM&T has proved a lucrative business for the Russian state-owned energy giant in the past. It paid out nearly £1.3bn in dividends to its immediate parent entity, Gazprom Germania, between 2016 and 2020, according to its annual reports.

GM&T settled its trading positions with buyers and sellers last month but there are concerns over whether it will meet next month’s payment deadline, according to people close to the business.

The UK government has not imposed sanctions on Gazprom’s gas trading activities and Germany is arguing against restrictions in Europe, where nearly 40 per cent of supplies come from Russia.

But the tally of measures against the Russian group increases by the day. The UK on Thursday banned Gazprom Bank, a payment channel for the country’s oil and gas.

Any formal sanctions against GM&T or Gazprom Energy could topple the business overnight, the people close to the company say.

GM&T already risks a liquidity crisis because of counterparties not wanting to trade with the business and slower processing of payments by banks, which is constraining cash flows, the people said.

Energy companies including Britain’s Centrica, Germany’s Eon and Norway’s Statkraft have all said they intend to cease trading with GM&T.

In the UK, Gazprom Energy’s customers are struggling to find alternative gas suppliers. Rivals are reluctant to take on new customers at a time when prices are still at historic highs. If businesses want to cancel their contracts with Gazprom early, many will have to pay penalty clauses.

Stern said the “reality for customers is that until the contracts run out the impact is likely to be severely negative”.

GM&T says it is trying to sell Gazprom Energy but the sharp rise in wholesale gas prices is stretching the balance sheets of many potential buyers. GM&T also owns all the hedges for Gazprom Energy and any buyer may have to take them on.

Some rivals are already leaving the business market. Last week ScottishPower, owned by Spanish utility giant Iberdrola, said it would stop supplying industrial and commercial customers.

“I’m not sure how anyone can pay for it,” said one person approached by Gazprom Energy.

That is also a concern for the UK government, which is on standby to put Gazprom Energy into “special administration”, a de facto nationalisation, where it would be kept as a going concern with taxpayer support, the cost of which could run into billions of pounds.

Treasury policy dictates that nationalised companies cannot buy supplies in advance or take part in hedging. That already threatens to push up costs to the taxpayer for supporting Bulb, the household supplier put into special administration last year.

“Although it may help customers to feel better if the government takes over Gazprom Energy, it would still be buying from GM&T or it would need to buy from someone else and that is hard and expensive in the current market,” Stern warned.

A government spokesperson said it was still examining options. GM&T declined to comment.

But one person close to the company said it was unlikely any collapse of Gazprom Energy or even GM&T would have a detrimental effect on Russian President Vladimir Putin’s war machine.

“I bet there’s some people close to Putin who are hoping the sanctions will happen and factories and businesses will close across Europe.”

Additional reporting by Jim Pickard

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