By James Marson 

MOSCOW--Russian state-controlled gas giant PAO Gazprom said net profit fell 5% in the first quarter despite higher revenues, as the price in its most-lucrative European contracts dropped and expenses rose.

Net profit was 362 billion rubles ($5.6 billion) as revenues climbed 5% to 1.74 trillion rubles from the same period last year, the company said Wednesday.

Gazprom is suffering from weak prices for its gas in Europe, where its contracts track the price of oil with a time lag of around nine months. That means the price could bottom out in the third quarter, as global crude prices dipped below $30 a barrel in January for the first time in more than a decade.

"Don't hold your breath. We expect it to get worse," said Alexander Kornilov, energy analyst at Aton brokerage in Moscow, adding that capital expenditures are likely to increase following the first quarter, as the company is ramping up spending on a gas field and pipeline that will supply China.

Gazprom boosted sales volumes to Europe in the first quarter by 49% compared with last year, when Europe had plenty of gas in storage and companies were waiting for a cheaper price to snap up supplies. Revenues from those sales were up only 22%, as the average price fell.

The company has ambitious plans to build new pipelines to Europe under the Baltic Sea to Germany and under the Black Sea to Turkey. But some European countries have opposed the plans. Analysts and Western diplomats say Gazprom doesn't need to build the pipelines as it has plenty of export capacity via Ukraine, and that attempts to circumvent its neighbor have a political aim. Gazprom has for years said that Ukraine is an unreliable transit country.

Aton's Mr. Kornilov said competition in Europe is looming from liquefied natural gas from North America and Asia, which could redirect volumes to Europe given small premiums in Asia.

Gazprom is also under pressure in its domestic market because of low demand from Russia's recession-hit economy and competition from other producers. Sales revenues in Russia were up 2% to 292 billion rubles, but sales volumes slipped 6%.

Weak demand from Ukraine meant that revenues from former Soviet countries were down 25% as volumes and prices fell.

Gazprom said that operating expenses for the first quarter were up 24% to 1.45 trillion rubles. The company said the jump was mainly caused by an increase in expenses for gas relating to an asset-swap agreement between Gazprom and Wintershall AG, a unit of German conglomerate BASF SE. Gazprom's bottom line was also hit by a foreign-exchange loss of 25 billion rubles as the ruble weakened from a year earlier.

Write to James Marson at james.marson@wsj.com

(END) Dow Jones Newswires

August 10, 2016 07:23 ET (11:23 GMT)