General Outline of the Gas Market

07.07.2008
Источник: Группа ЭРТА
Дата публикации: 10.12.06
ERTA Group

Salient Features of the Russian Gas Market

Gas is a special type of fuel in Russia

Natural gas dominates in the structure of fuel and energy consumption in Russia. In 2005, consumption of gas on the internal market amounted to 44.3 billion cubic meters. 389.4 billion cubic meters were supplied to consumers in Russia.

Structure of consumption of fuel and energy resources in Russia, %

Source: Ministry of Industry and Energy of the Russian Federation

This is no exception in the world practice, however.

However, this is not an exclusive phenomenon in the world practice. Most resource-producing countries successfully use their natural advantages.

Structure of the balance of prime energy resources in different resource-producing countries, %

Source: BP Statistical Review of World Energy

Gas is produced in Russia not only by OJSC Gazprom

Apart from the producing enterprises of OJSC Gazprom, gas in Russia is also produced by independent producers, most of which are vertically integrated oil companied.

Gas production in 2005

Producing company

Natural and associated gas, billion cubic meters

Share, %

Gazprom

547.9

85.48

Novatek

25.4

3.96

Surgutneftegaz

14.4

2.25

Rosneft

13.0

2.03

TNK-BP

8.7

1.36

Lukoil

5.8

0.90

Sibneft

2.0

0.31

YUKOS

2.0

0.31

Slavneft

1.0

0.16

Russneft

1.0

0.16

Tatneft

0.7

0.10

Bashneft

0.4

0.06

Other

18.7

2.92

Total

641

100

Source: Ministry of Industry and Energy of the Russian Federation

Gas demand in Russia grows in current conditions

In current conditions, the demand for gas in Russia is growing steadily. The largest consumers of gas are the Moscow Region, Sverdlovsk Region, Chelyabinsk Region, Republic of Bashkortostan, Republic of Tatarstan, and Perm Krai.

Dynamics of natural gas consumption, billion cubic meters

Source: Ministry of Industry and Energy of the Russian Federation

The largest consumer of gas is the electric power industry

The largest consumer of gas in Russia is the electric power industry, which accounts for more than 38% of the consumer demand for natural gas. In 2005, 152.8 billion cubic meters of gas was supplied to enterprises of RAO Unified Energy System of Russia.

Shares of prime energy resources in the electric power generation structure in different countries, %

Source: International Energy Agency

The gas industry itself is a large consumer of gas. In 2005, 52.9 billion cubic meters of gas was used for its own gas pipeline process needs.

Combined functions of OJSC Gazprom is the key problem of the gas market

The main problem on the way of development of a competitive market of natural gas in Russia is that the functions of gas production, transportation and sales are all combined in OJSC Gazprom, which owns the national gas transportation system. This structure of OJSC Gazprom allows the company to control the gas flows of independent producers and force independent producers to conduct their business transactions only after coordination with the interests of OJSC Gazprom.

There is a formal solution, …

Formally, this problem is resolved with the state regulation instruments. The Federal Tariff Service sets tariffs for transportation of natural gas from independent producers through the gas transportation system of OJSC Gazprom. The Federal Antimonopoly Service prevents abuse of the dominant position of infrastructure monopolies.

… but it does not work for gas transportation …

In actual practice, however, the development of state regulation instruments lags behind the dynamic development of economic and administrative relations among players in the sphere of natural gas production, transportation and sales. In particular, the currently effective regulatory framework is incapable of fully ensuring the right of independent producers to have fair access to facilities of the national gas transportation system in everyday practice. The practice of setting tariffs for transportation of natural gas from independent producers based on the cost-plus principle fails to pay due attention to the wholesale prices of natural gas produced by OJSC Gazprom, which actually shape the regional markets.

…and gas sales

OJSC Gazprom sells gas in regions at lower state-regulated prices owing to the fact that the state subsidizes the company from the profits derived from export of natural gas. This scheme of price dumping allows the regional sales companies of OJSC Gazprom to control the internal gas markets by selling subsidized gas at lower prices than those independent producers can afford and thus winning the competition. The absence of special regulation, the sole control of the transportation infrastructure, and the dominating access to gas reserves allows the regional companies of OJSC Gazprom to offer the specific service of additional supplies, which breeds gas larceny and corruption.

OJSC Gazprom dominates the industry

OJSC Gazprom accounts for 85.5% of gas production in Russia and a fifth of the world gas production. In 2005, OJSC Gazprom supplied 286.9 billion cubic meters of gas to consumers in Russia. OJSC Gazprom produced 547.9 billion cubic meters of gas in 2005, which is 2.8 billion cubic meters more than in 2004.

Production of natural gas by OJSC Gazprom, billion cubic meters

Source: OJSC Gazprom

The situation will remain the same in the nearest future

OJSC Gazprom is planning to increase gas production up to 550-560 billion cubic meters by 2010, to 580-590 billion cubic meters by 2020, and to 610-630 billion cubic meters by 2030.

Structure of natural gas production, %

Source: Energy Strategy of the Russian Federation

The level of gas production planned for 2010 will be maintained by development of existing and new fields of the Nadym-Pur-Taz region, in particular, the South-Russian field, the Lower Cretaceous deposits of the Zapolyarnoe and Pestsovoe fields, and the Achim deposits of the Urengoi field. Development of fields in this region is economically expedient owing to its proximity to the existing gas transportation infrastructure.

Decline of gas production in the main fields of OJSC Gazprom, billion cubic meters

Source: estimates of ERTA-Consult

New production involves development of remote and difficult fields

After 2010, the forecasted level of gas product will be maintained by development of fields on the Yamal Peninsula, the shelf of arctic seas, in the offshore areas of the Gulf of Ob and the Taz Bay, in East Siberia, and Far East. The Yamal Peninsula is a strategically crucial region of gas production for the company. This is one of the most promising oil and gas bearing regions in East Siberia. Twenty six fields have been discovered on the Yamal Peninsula, whose explored reserves of gas amount to 10.4 trillion cubic meters, recoverable reserves of gas condensate to 250.5 million tons, and recoverable reserves of oil to 291.8 million tons.

OJSC Gazprom is preparing for development of Yamal fields

In 2002, OJSC Gazprom, in cooperation with the Administration of the Yamalo-Nenets Autonomous Area, worked out the «Program of Comprehensive Industrial Development of Fields of the Yamal Peninsula and Adjacent Offshore Areas,» which now is under consideration of the Russian Federation Government.

Currently, OJSC Gazprom is preparing for construction of facilities and infrastructure in Yamal fields. The company holds licenses for development of the Bovanenkov, Kharasavei, and Novoport fields, whose  total reserves are estimated at 5.8 trillion cubic meters of gas.

The cost of new gas will be higher

The cost of gas production on the Yamal Peninsula will be considerably higher than in existing fields. For this reason, according to OJSC Gazprom, development of the mineral resources of the Yamal Peninsula requires target support of the state.

Forecasted production of gas by independent producers, billion cubic meters

Source: Energy Policy Institute

OJSC Gazprom is going to go to the East

The Energy Strategy of the Russian Federation until 2020 implies development of the oil and gas complex of East Siberia and the Republic of Sakha (Yakutia). Calculations show that oil and gas reserves have to be developed concurrently. Emphasis should be made on development of gas fields in order to satisfy the gas demand of Far East and supply gas to Asia-Pacific countries.

OJSC Gazprom is preparing consumers for higher prices

According to OJSC Gazprom, the conditions in the industrial sector of the Russian economy are ripe for expansion of gas sales at free prices. For this reason, in 2006 the company proposed using market-based prices of gas supplied to industrial consumers and regulated prices for gas supplied for household maintenance and utility needs and to the population and industrial consumers on the state budget.

Resources and consumption structure — which comes first?

Gas is the most inexpensive fuel in Russia. One of the consequences of this is changed structure of energy consumption in the country. The use of coal, residual oil, and other types of alternative fuel has decreased and reduced the necessity of growing their production and developing the corresponding industries. According to OJSC Gazprom, this situation is not good as it causes distortion in the adequate evaluation of the economic efficiency of different types of fuel.

At the same time, it seems natural that a country with huge reserves of inexpensive and high-quality fuel is developing its national economy by making a maximum use of this fuel in all sphere of production. In this aspect, comparison of fuel consumption structures in different countries cannot be used a reason for deliberately changing them.

According to the Energy Strategy of Russia, gas prices will increase, first of all for industrial consumers, 2.5  times by 2010 compared to the prices of 2003.

There is a formal procedure for distribution of subsidized gas, …

In planning gas supplies to consumers, OJSC Gazprom follows the document «Procedure for Distribution of Gas Resources by OJSC Gazprom with Due Regard to Gas Export and Production of Gas by Independent Companies.»

According to this document, once in every quarter Mezhregiongaz LLC provides dedicated departments of OJSC Gazprom with information on the actual supplies of gas to consumers in the previous quarter. Apart from that, Mezhregiongaz collects consumers’ gas supply requests for the following year. Gas is distributed according to the obtained data.

… and this procedure is carried out without participation of the state.

Distribution of gas is also based on the fulfillment of obligations by consumers in the previous years. When necessary, OJSC Gazprom supplies additional volumes of gas to solvent consumers according to the technical possibilities of the Unified Gas Supply System and the obligations under signed gas export contracts and internal gas supply contracts.

Apart from that, gas is also supplied to new consumers. A consumer company has to file a request and present detailed reports on its heat and fuel requirements and a conclusion of transport organizations on the technical possibilities of gas supply. Permissions for use of gas are issued with due regard to the availability of gas resources in Russian regions, optimal load on the gas distribution systems, and economic expediency of using gas as fuel.

The housing maintenance and utilities sector is a large consumer of gas in Russia.

In Russia, gas is supplied to

·       77.1 % of houses and residential buildings in towns and urban-type settlements and

·       42.3 % of houses and residential buildings in the countryside

The dynamics of gas consumption by the population is controlled by OJSC Gazprom.

Beginning from 2002, OJSC Gazprom approves region gasification programs.

Selection of the regions where OJSC Gazprom is planning to start gasification works is based on the following factors:

·       level of gasification of the region;

·       capacity of the region to defray a part of gasification expenses;

·       arrears in the payment of current gas supplies; and

·       absence of cases uncoordinated with OJSC Gazprom when gas consumption exceeded the established limits.

OJSC Gazprom controls the actions of constituent entities of the Russian Federation

In August 23, 2003, the Management of OJSC Gazprom approved a new version of concept of participation of OJSC Gazprom in gasification of regions of the Russian Federation. The new document prescribes a mechanism of interaction of OJSC Gazprom with the administrations of regions at the preparatory stage of gasification comprising the following:

— Conclusion of an agreement of cooperation between OJSC Gazprom and the administration of the constituent entity of the Russian Federation;

— Conclusion of a gasification agreement;

— Conclusion of an agreement for development of an investment project;

— Collection of proposals from the administrations of the regions subject to gasification for development of an investment project;

— Development of an investment project with its master scheme of gasification, technical and economic substantiation (feasibility study), and business plan;

— Development and approval of a stage-wise program of gasification of the constituent entity of the Russian Federation based on the investment project;

— Approval of the objects and facilities subject to gasification based on the technical and economic substantiation (feasibility study);

— Determination of the forms of participation of OJSC Gazprom in gasification of objects and facilities and sources and forms of financing.

The scale of gasification is large

In 2005 OJSC Gazprom constructed, at its own expense, 2,500 km of medium-pressure and low-pressure gas pipelines in 40 regions of the Russian Federation. Gazprom started implementation of the large-scale program for gasification of regions in the Russian Federation in 2005-2007. According to this program of gasification, within three years Gazprom will lay more than 12,000 km of gas distribution pipelines and invest 35 billion rubles, of which 5.2 billion rubles will be invested in 2005, 17.6 billion rubles in 2006, and 12.2 billion rubles in 2007.

Implementation of this program with raise the level of gasification with natural gas up to 60% on average in Russia, 66% in urban areas, and 42% in rural areas. The program implies construction of more than 12,000 km of gas pipelines, which will increase the load of existing gas distribution pipeline branches 1.5 times on average.

Construction of gas distribution networks, km

Source: Draft Strategy of Development of the Gas Industry until 2030

Gasification is accompanied with structural changes in OJSC Gazprom

For ensuring efficiency of its capital investments into development of the gas distribution infrastructure, Gazprom consolidates its gas distribution assets. Assets are transferred to OJSC Gazpromregiongaz incorporated in the Gazprom Group. Consolidation of these assets creates requisite conditions for implementation of a unified tariff policy and creation of financing sources for maintaining the region gas distribution networks in working conditions.

Investments required for construction of gas distribution networks, million rubles

Source: Draft Strategy of Development of the Gas Industry until 2030

Prospects of Development of the Gas Industry in Russia

The Energy Strategy of the Russian Federation is the only official document outlining the prospects of gas industry development

Long-term milestones for development of the gas industry in Russia are outlined in the Energy Strategy of the Russian Federation until 2020, hereinafter referred to as the Energy Strategy of the Russian Federation, approved by Resolution No.1234-r of August 28, 2003 of the Russian Federation Government. With all its known shortcomings, this document provides the only official long-term forecast for development of the gas industry in Russia.

For several years now, OJSC Gazprom has been developing the Strategy of Development of the Gas Industry in Russia, whose constituent part is the Program of Development of Production, Transportation and Sales of Natural Gas in East Siberia and Far East. However, the Russian Federation Government still has not received the final version of this document for approval. The principal reasons for this are as follows:

·       absence of consensus in OJSC Gazprom on development of the gas industry;

·       reluctance of the gas monopoly to officially register additional requirements of the state;

·       and unsettled problems in the relations between OJSC Gazprom and other gas companies.

The Energy Strategy of the Russian Federation implies a tendency to rising gas prices

The Energy Strategy of the Russian Federation has documented the wishes of OJSC Gazprom related to the dynamics of internal gas price growth and approved by the Russian Federation Government. For 2003, it was a rather revolutionary document that officially justified the necessity of regular increase of the regulated price of gas on the internal market.

Range of wholesale gas prices on the internal market, $/1000 cubic meters

Source: Energy Strategy of the Russian Federation until 2020

The Energy Strategy of the Russian Federation sets priorities of new field development

Even in 2003 it was clear that the decline of gas production in traditional fields can positively be compensated only by development of new very large fields. The Energy Strategy of the Russian Federation provides a strategic vector of gas production expansion from the fields of the Nadym-Pur-Taz region to European Russia, East Siberia, and Far East.

The Energy Strategy of the Russian Federation implies considerable growth of gas production in East Siberia, including development of the Kovykta gas condensate field in the Irkutsk Region, the Chayanda oil and gas condensate field in the Republic of Sakha (Yakutia), hydrocarbon fields in the Krasnoyarsk Krai, and fields on the Sakhalin Island shelf.

Dynamics of gas production in new regions, billion cubic meters

 Source: Energy Strategy of the Russian Federation until 2020

Forecast of gas production in Russia, billion cubic meters

Source: Energy Strategy of the Russian Federation

OJSC Gazprom predicts gas demand growth

According to the forecast of OJSC Gazprom, the level of gas consumption in Russia will grow from 383.9 billion cubic meters in 2004 up to 436.3 billion cubic meters by 2030 in the intensive version and up to 410.8 billion cubic meters in the moderate version.

According to the forecast, gas consumption growth is expected in all sectors of the market. The most dynamic growth of gas consumption, according to the adopted priorities, is predicted in the domestic household sector, where gasification of rural populated areas will continue. The level of household gasification in the countryside will be increased from 34.7% in 2003 up to 40% by 2030. This corresponds to the growth of domestic household gas consumption in rural areas by 11.6 billion cubic meters by 2030 compared to the level of 2003. In urban areas, towns and urban-type settlements, the gas demand of domestic household consumers is also expected to grow.

The intensive version predicts growth of gas consumption in the industrial sector mainly due to gas supplies to high-technology industries with highly efficient and rational use of gas, socially-oriented industries, and industrial facilities in the regions with new gas distribution  infrastructures. In the moderate version, gas consumption in the industrial sector will slightly increase by 2015 and then decrease to the level of 2006.

OJSC Gazprom did not plan to increase gas supplies to electric power plants

The forecast implies limited growth of gas consumption by electric power plants mainly associated with gas supplies to electric power plants in the regions with new gas distribution infrastructures. The share of gas in the fuel balance of electric power stations will decrease to 58% by 2020 and 55% by 2030. Presumably, gas will be supplied to electric power plants, used in advanced technologies, and replaced by coal where it is technically feasible and economically expedient. In view of the predicted dynamics of gas prices, construction of new electric power plants using gas is not implied. In the period until 2030, Russia and its Unified Gas Supply System will be characterized by a significant decrease in the relative share of the energy industry and steady growth of other market sectors.

November 30, 2006 meeting of the Russian Federation Government

At its meeting held on November 30, 2006, the Russian Federation Government decided to supply 162.9 billion cubic meters of gas to power generation facilities in 2007, 166.9 billion cubic meters in 2008, 174.8 billion cubic meters in 2009, and 186 billion cubic meters in 2010 divided into the corresponding monthly supply volumes and recommended conclusion of long-term five-year contracts for transportation of gas from independent producers in the volumes prescribed by the long-terms gas supply contracts.

Forecasted consumption of natural gas, billion cubic meters

 Source: Draft Strategy of Development of the Gas Industry until 2030

Information on the forecasted demand and supply of gas in the two versions is presented in the Attachments.

Import is considered as a source of additional gas demand satisfaction

The sources of satisfaction of the internal and external demand are production of gas and import of gas. In the period until 2030, three possible versions of gas import are considered: 57 billion cubic meters, 70 billion cubic meters, and 105 billion cubic meters of imported gas. Gas will be imported from Turkmenistan, Uzbekistan, and Kazakhstan.

New field development is considered as a source of additional gas demand satisfaction

The resource base of the eastern regions of Russia (the zone that is currently not covered by the Unified Gas Supply System) and its prospective development ensures satisfaction of the internal gas demand of these regions, export of gas to countries of the Asia-Pacific region, and possible supply of 35 billion cubic meters of gas a year to the Unified Gas Supply System.

For analysis of the considered scenarios, OJSC Gazprom identified new gas resources in the regions covered by the Unified Gas Supply System. These gas resources include the following fields:

·       fields of the Yamal Peninsula (250 billion cubic meters of gas a year from onshore fields and up to 90 billion cubic meters of gas a year from offshore fields by 2030);

·       fields in the Gulf of Ob and the Tax Bay (82 billion cubic meters of gas a year);

·       Shtokman field (69 billion cubic meters of gas a year);

·       fields on the Caspian Sea shelf (12 billion cubic meters of gas a year); and

·       virgin fields of the Nadym-Pur-Taz region (up to 80 billion cubic meters of gas a year by 2010 with a maximum of 135 billion cubic meters a year).

OJSC Gazprom admits an increase of the share of independent producers

The strategy of development of the gas industry implies an increase of the share of independent producers on the gas market. This forecast of OJSC Gazprom is based in the Energy Strategy of the Russian Federation until 2020.

The share of independent producers of gas on the internal market will increase as it will in gas production and gas sales. Presumably, all gas produced by independent producers will be sold on the internal market.

The share of independent producers in gas production will grow from 14% to 20% by 2020, and their share in supplies of natural gas from 20% to 35% by 2020.

Structure of natural gas production, %

Source: Draft Strategy of Development of the Gas Industry until 2030

Structure of natural gas supplies, %

Source: Draft Strategy of Development of the Gas Industry until 2030

State Regulation in the Gas Industry

The structure of gas industry regulation is imperfect

The current structure of gas industry regulation is far from being harmonious. The basic mechanisms of regulation were created for the former Ministry of Gas Industry, which in fact was OJSC Gazprom. The subsequent considerable changes in the gas industry were not always followed by corresponding changes in the goals, instruments, and legal framework of regulation.

The legal framework of the industry is the result of the balance of forces

Changes in the legal framework of the industry were rather spontaneous and reflected the stages of interaction of the state and OJSC Gazprom. Some legal changes were initiated by OJSC Gazprom. These changes were hailed by the Russian Federation Government and approved with minimum corrections. Other legal changes were initiated by different liberal groups in the Russian Federation Government and obstructed by OJSC Gazprom in every possible way. Eventually, most of these initiatives were not adopted. Nevertheless, the most important regulatory documents of the gas industry reflected the acceptable compromise of the conflicting parties at the moment of their adoption.

Regulation structure and draft laws

Disputes are still underway on possible approaches the structure of the gas industry legislation. For example, development and adoption of an industry-wide law «On Oil and Gas» is being discussed for several consecutive years now. This law could cover all the main aspects in regulation of production, transportation, storage, and export of hydrocarbons and operation of the market of hydrocarbons. Apart from that, back in 1999, the State Duma (Parliament) of the Russian Federation adopted the draft law «On Pipeline Transport» in its first reading, which was intended for legislative resolution of issued related to construction and operation of trunk pipelines. Despite the high importance of the issued addressed by this draft law, its outcome is still unclear. In recent years, the issue of revising certain provisions of the law «On Gas Supply in Russian Federation» is being raised more and more often as its existing version is outdated and cannot adequately regulated contemporary processes in the industry.

The conservative position of OJSC Gazprom prevails in the current balance of forces

In conditions of rapid changes in the Russian economy, the entire legal framework of the industry is very outmoded and inadequate. Only a small number of regulatory documents related to operation of the industry were adopted recently. Certain regulatory documents critical for proper development of the gas market in the Russian Federation, such as the «Rules of Access to Trunk Pipelines of OJSC Gazprom» approved by Resolution No.858 of July 14, 1998 of the Russian Federation Government and the «Rules of Gas Supply» approved by Resolution No.162 of February 8, 1998 of the Russian Federation Government, are outdated beyond hope.

One of the latest positive news is adoption of the «Procedure for Calculating Tariffs for Gas Transportation in Trunk  Gas Pipelines» approved by Resolution No.338-e/1 of August 23, 2005 of the Federal Tariff Service of the Russian Federation. However, all this is very far from being sufficient, especially in view of the fact that discussions on reforming the legal framework of the gas industry are underway for a long time now.

The industry regulation system is highly eclectic

We inherited the planning and distribution mechanism of state regulation in the gas industry from the soviet period. In particular, OJSC Gazprom performs the functions of the state and decides who will receive gas at the prices regulated by the Russian Federation Government and how much.

The attempts of the Russian Federation Government to follow the changes in industrial relations only added new instruments of microeconomic restrictions and limitations. The adopted procedures for limiting the tariff-based revenues of OJSC Gazprom are based on the principles of covering the «economically justified expenditures.» For this reason, the Russian Federation Government regularly estimated the economic necessity and soundness of the investment programs of OJSC Gazprom.

The danger of losing control over assets and the efficiency of their use compelled the Russian Federation Government to introduce numerous apparent and concealed restrictions and limitations. The overt prohibition of selling the right of field development conceals the disguised prohibition of construction of transportation infrastructure and storage systems. Stringent restrictions are imposed on the right to use gas as fuel.

The liberal attempts of the Russian Federation Government to clear up the industry economy and make it more transparent were transformed into instruments for raising gas prices and complicating the rules for entering the market. In particular, extra dues in addition to gas prices were introduced in the form of payments for supply and distribution services. The procedure of determining the rate of supply and distribution services by the Russian Federation Government has in fact become a procedure of licensing sales companies on the market of natural gas.

So far, all discussions of OJSC Gazprom and the Russian Federation Government on the adequacy of the state revenues (taxes, customs receipts, etc.) ended up in favor of the industry, which is associated, first of all, with the large size and relatively easy management of this flow of money (in contrast to the flow of money in the oil industry which is equally large but smeared over numerous oil companies).

Typical Gas Supply Terms

The level of gas prices is annually set by the Federal Tariff Service for each individual region

The wholesale gas selling price of OJSC Gazprom on the territory of the Russian Federation is regulated by the state and set according to the territorial zones. In 2006, the wholesale gas price for consumers (except the population) ranged from 677 rubles for zone I (Yamalo-Nenets Autonomous Area) to 1,455 rubles for zone X (Kaliningrad Region) for a thousand cubic meters of gas not including VAT. For the population, the wholesale gas prices varied from 677 rubles for zone I (Yamalo-Nenets Autonomous Area) to 1,040 rubles for zone X (Kaliningrad Region) for a thousand cubic meters of gas not including VAT.

Price zones of the Russian Federation

Source: Federal Tariff Service of the Russian Federation

Consumption of natural gas in Russia is highly non-uniform in seasons

According to the information of the Ministry of Industry and Energy of the Russian Federation, the seasonal non-uniformity of gas supplies to consumers in Russia may be represented by the following diagram (billion cubic meters):

Typical structure of natural gas supplies to consumers in Russia

Source: Ministry of Industry and Energy of the Russian Federation

The state has no formal gas distribution powers

Coordination of gas supplies is regulated by the internal document of OJSC Gazprom «Procedure for Distribution of OJSC Gazprom Gas Resources with Due Regard to Gas Export and Gas Production by Independent Producers» developed in pursuance of Resolution No.100 of October 14, 2002 of OJSC Gazprom.

Outline of the procedure

Every year, the Central Production Control Department of OJSC Gazprom works out a gas balance in the Unified Gas Supply System by no later than October 1, for which purpose it collects data from Mezhregiongaz LLC and independent producers of gas. The gas balance defines the total volume of gas supplies.

Mezhregiongaz LLC collects requests from consumers authorized to use gas[1] and by November 1 sends to the Department of Marketing and Gas and Liquid Hydrocarbon Processing of OJSC Gazprom, hereinafter referred to as the Department of Marketing, an estimate of requirements for sales of gas to consumer divided into the zones of activities of the subsidiary companies.

By November 15, the Department of Marketing distributes the required volumes of gas (in fact, corrects and approves the proposals of Mezhregiongaz LLC). Based on this distribution of gas volumes, the Department of Economy of OJSC Gazprom works out an annual plan of gas transportation.

Based on the approved plan of gas volume distribution, Mezhregiongaz LLC concludes contracts of gas supply with consumers through its regional companies by the end of the year.

Based on the concluded contracts, Mezhregiongaz LLC presents quarterly data on the contracted volumes of gas supply to consumers to the Department of Marketing in the form of return input sheets. Based on these input sheets, the Central Production Control Department forms consolidated volumes of gas supply to consumers.

Within 45 days prior to the planned quarter, Mezhregiongaz LLC and independent suppliers, having an approved access to the gas transportation system and contracts for transportation and supply of gas to consumers, distribute the quarterly gas supply volumes on a monthly basis.

Additional volumes of gas may be allocated by the Department of Marketing.

Permission for access to the gas transportation system is the key stage in a gas supply contract

There are be long-term gas supply contracts. Currently, there are no long-term gas transportation contracts with independent companies. Gas sales contracts are concluded under a condition of getting access to the gas transportation system. Signing a gas transport contract requires obtaining a decision of the Gazprom commission on access to transport. Mezhregiongaz LLC does not have to lodge requests for access as it gets access automatically.

For approval of access to the gas transportation system, independent gas sellers have to present a set of documents to OJSC Gazprom in accordance with the established form and procedure.

Gas transportation request (set of documents)

Name and bank details of the independent company

Sources of gas (name and location of the field and gas pipeline) and their characteristics (reserves by categories, production volume, total capacity, etc.)

Gas supply start and end dates

Gas supply volumes (by months during the entire gas supply period)

Composition and quality characteristics and parameters of gas

Coordination of technical possibilities of connecting gas feed pipelines with OJSC Gazprom

Location and scheme of connection of the gas feed pipeline to the gas transportation system

Location and scheme of gas delivery to the customer

Confirmation of the gas transportation organization not incorporated in the system of OJSC Gazprom, gas distribution organization, and customer that they are ready to receive the declared gas volume during the supply period

Documents certifying the ownership of gas or contractual obligations to buy (or sell) gas (license, contract)

Information on the availability of pipelines for gas feed from the suppliers and pipelines for gas delivery to the customers with gas metering stations with their types and characteristics by the time of implied supply of gas to the customers

The access granting procedure is not transparent

Documents are coordinated, endorsed and approved in more than 10 departments of the gas monopoly. Until recently, the chairman of the access commission was Alexander Ryazanov, Deputy Chairman of the Management of OJSC Gazprom. However, the access-related authorities of Kirill Seleznev, Head of the Department of Marketing, and Alexander Ryazanov were identical as formally the Department of Marketing prepares the final version of protocols of the access commission.

Dynamics of decisions on access to the gas transportation system

1999

2000

2001

2002

2003

2004

Number of companies granted access to the gas transportation system

10

20

24

33

31

35

Volume of transported gas not belonging to OJSC Gazprom, billion cubic meters

83.7

106.2

92.4

103.6

95.4

110.4

Source: Federal Tariff Service of the Russian Federation

It should be mentioned that in statistical reports the volumes of transported gas not belonging to OJSC Gazprom include gas from Central Asia and Kazakhstan (50.2 billion cubic meters in 2004).

Consumers prefer gas from independent suppliers

Supplies of gas from independent suppliers are more reliable and transparent. Regional gas marketing subsidiaries of OJSC Gazprom often fail to fulfill their contractual obligations to consumers. OJSC Gazprom fails to fulfill its gas transportation obligations in 20% of cases. Contracts of independent suppliers and resellers are usually written in the spirit of partnership and even in customer’s favor.

Summary

1.     The share of natural gas in the fuel balance of Russia is significant and continues to grow. Most of natural gas in Russia  is produced by OJSC Gazprom. Main consumers of natural gas in Russia are electric power plants, the population, and the domestic household sector. OJSC Gazprom itself is a large consumer of natural gas. The Provolzhsky Federal District is the leader in natural gas consumption.

2.     The gas supply business includes production of gas , transportation of gas through trunk gas pipelines (including storage of gas), transportation of gas through low-pressure gas pipelines, and supplies of gas (commercial purchase and sale relations). For execution of a gas supply contract, the seller has to get access to the gas transportation system and sign gas transportation contracts.

3.     Gas supplies vary in seasons. The volumes of gas supplies, including supplies of gas from independent producers through the gas transportation system of OJSC Gazprom, are determined every year by OJSC Gazprom. The shortage of gas and difficulty of meeting the requirements of OJSC Gazprom result in organization of semi-legal schemes of gas supply.

4.     The main problem for development of a competitive market of natural gas in Russia is combination of the functions of production, transportation and sales of natural gas in OJSC Gazprom, which owns the national gas transportation system. This structure of the company allows it to control the gas flows of independent producers and force them to conduct their business only after coordination with the interests of OJSC Gazprom.

5.     In actual practice, the existing legal framework does not allow independent producers to exercise their legitimate right to get fair access to the national gas transportation system.

6.     The dominating position of OJSC Gazprom on the market makes it possible for the sales companies of this holding to impose their stringent contract terms on consumers. Consumers prefer to deal with independent suppliers of gas, but the regional sales companies of OJSC Gazprom reluctantly give up their markets and resort to a wide range of competitive weapons.

7.     OJSC Gazprom sells gas in regions at lower state-regulated prices owing to the fact that the state subsidizes the company from the profits derived from export of natural gas. This scheme of price dumping allows the regional sales companies of OJSC Gazprom to control the internal gas markets by selling subsidized gas at lower prices than those independent producers can afford and thus winning the competition.

8.     Gas transportation accounts for a considerable part in the wholesale price of gas. The rules of gas supply allow consumers to buy gas at the well and transport it to the site of its utilization.

9.     Official prospects of development of the gas industry are associated, first of all, with gas production in new regions and increase of gas prices. No reforms in the legal framework of the industry is implied yet.

Prices and Tariffs

History and Prospects

Planning and budgetary regulation of prices are still there in the legislation

The soviet economy of the gas industry was regulated by schedules of prices and rates, which set tariffs for every operation and cost of products at every stage. Centralized planning implied regular recalculations of these characteristics according to the results of plan implementation in the previous periods and volumes of products in the planned period.

Currently, the Russian Federation Government regulates the wholesale price of natural gas supplied by OJSC Gazprom on the internal market without regulating the volume of supplied gas and the structure of its distribution.

Average gas selling price of OJSC Gazprom on the internal market, rubles per 1000 cu. m not including VAT

Source: OJSC Gazprom

When independent producers came to the market, the Russian Federation Government has to introduce regulation of transportation tariffs, which, however, did not change the structure of the planning and budgetary regulation system of relations in the industry.

Strategic goals: transition from regulation of wholesale prices to regulation of the unified transportation tariff

State regulation of prices and tariffs in the gas industry is based on the cost plus principle. Thus, every revision of economic parameters implies deep disclosure of industrial information and substantiation of changes. Until recently, the complex procedure of such substantiation was substituted by a political decision on raising the previous prices and tariffs up to a socially coordinated level.

Adoption of the «Procedure for Determining the Tariff of Transportation of Natural Gas from Independent Producers Through Trunk Gas Pipelines» by the Russian Federation Government made it necessary to start analyzing the economic factors and the structure of loading the transportation system with products.

The next step in the transformation of the industry had to be transition from state regulation of wholesale prices to regulation of the unified transportation tariff. Maybe, this will happen after completion of organization detachment of a transportation company in the structure of OJSC Gazprom.

Tariffs for transportation services, rubles per 1000 cubic meters not including VAT

Source: Federal Tariff Service of the Russian Federation

Tactical milestones: adoption of a wholesale price determination procedure

The difference in implementation of gas price formation principles by OJSC Gazprom and independent producers leads to a regular misbalance of demand, which has a negative impact on all subjects of the industry. Tariffs and prices are changed at different times and on the basis of uncoordinated information.

Prior to transition to a unified transportation tariff, this problem could have been solved by a procedure of setting wholesale prices developed on the theoretical basis of the adopted tariff determination procedure. Such a procedure is now being discussed by experts of the Federal Tariff Service of the Russian Federation.

Typical Gas Price Structure

OJSC Gazprom’s structure of price formation: internal and external components

Formally, the structure of regulated prices of gas supplied by OJSC Gazprom at the outlet of the gas transportation system consists of the following components:

1.     Wholesale price of gas

2.     Rate of supply and distribution services

3.     Tariffs for gas distribution companies

OJSC Gazprom’s structure of natural gas price formation

Source: Federal Tariff Service of the Russian Federation, OJSC Gazprom, estimates of ERTA-Consult (2005)

In addition, OJSC Gazprom’s structure of  gas price also include the internal prices and tariffs established by OJSC Gazprom for its subsidiaries:

4.     Gas price at the inlet of the gas transportation system

5.     Internal transportation tariff (per 1000 cu. m and 100 km)

In the final analysis, these expenditures determine OJSC Gazprom’s structure of gas price. The Attachment to this review presents the internal process of OJSC Gazprom subsidiaries and the transportation tariffs.

The transportation tariff depends on the cost of gas

Apart from other factors, the transportation tariff depends on the cost of gas and electric power, because a part of gas is used as fuel in the process of transportation. For example, gas supplied from the Krasnodar Krai has the highest price at the inlet to the gas transportation system and, at the same time, the highest transportation tariff.

Wholesale prices as the key instrument of state regulation in the industry

Wholesale prices are approved by the Federal Tariff Service of the Russian Federation once a year with their breakdown for 11 price zone (6 price zones until January 1, 2005). Wholesale prices are approved for two categories of consumers: industrial consumers and the population. The Attachment to this review presents the distribution of strategically important regions in price zones.

In determination of wholesale prices, due attention is paid to the cost of gas production and transportation in every direction and the internal gas selling price of Mezhregiongaz LLC at the outlet of the trunk gas pipeline. Based on these data, OJSC Gazprom forms its proposals for the Federal Tariff service of the Russian Federation for wholesale gas prices in every concrete region.

Rates of  supply and distribution services

The rates of supply and distribution services are approved by the Federal Tariff Service of the Russian Federation usually once a year for the subsidiaries of OJSC Gazprom selling gas in each concrete region.

The rates of supply and distribution services are approved for the following three groups of industrial consumers and the population according to the volume of gas consumption:

·       more than 1000 billion cubic meters a year,

·       between 10 and 100 billion cubic meters a year, and

·       less than 10 billion cubic meters a year.

Seasonal surcharge as the fine for excess consumption of gas

According to Paragraph 17 of the Rules of Gas Supply in the Russian Federation approved by the Resolution No.162 of February 5, 1998 of the Russian Federation Government, for excess consumption of gas without preliminary coordination with the supplier, the customer pays for the additional volume of gas consumed in excess to the volume of gas stipulated in the contract with the following seasonal correction factor applied:

1.1 from April 15 through September 15;

1.5 from September 16 through April 14.

Apart from that, according to the Rules of Gas Supply, the gas price may be corrected for calorific value if the average actual specific calorific value of gas is different from 7,900 kCal per cubic meter.

Forecasted Dynamics of Prices and Tariffs

Theoretically, internal gas prices must grow

The economic theory of market states the necessity of price growth in conditions of stable shortage of products. Estimates and actual requirements of consumers show that the shortage of natural gas is stable in the Russian market and will grow of the existing conditions remain the same.

Gas balance forecast, billion cubic meters

 

2006

2007

2008

2009

2010

2015

Production 638.4 644.9 657.2 678.5 710.1 765.7 Import 60.2 65.2 70.2 69.0 63.0 57.0
Consumers in the Russian Federation 394.1 411.8 424.4 439.4 455.7 484.2
Own needs of OJSC Gazprom 52.6 52.7 52.9 52.9 53.8 56.0
Export 255.2 263.1 275.7 288.2 308.0 342.8
Extra gas demand
ERTA-Consult        3.3        17.5        25.6        33.0        44.4        60.3  
Russian Federation Government         —            4.0        11.0        27.0        28.0        35.0  

Source: OJSC Gazprom, Russian Federation Government, estimates of ERTA-Consult

The Russian Federation Government says that gas prices will increase sharply only after 2008

Still, the Russian Federation Government considers gas prices as one of the key factors regulating the level of industrial growth and the level of welfare safety and social security in the country. On November 30, 2006, Russian Federation Government decided that state control over the gas price growth is necessary.

The decision of the Russian Federation Government sets the following upper boundaries of gas price growth:

15% from January 2007,

25% from January 2008,

13% from January 2008,

13% from July 2009,

13% from January 2010,

13% from July 2010, and

level «ensuring equal profits» from January 2007.

Upper boundary of gas price growth on the internal market, rubles per 1000 cubic meters

Date

Price

Boundary

Jan 2000

336

 

Jan 2001

407

 

Jan 2002

520

 

Jan 2003

689

 

Jan 2004

826

 

Jan 2005

1,014

 

Jan 2006

1,320

 

Jan 2007

1,518

15%

Jan 2008

1,898

25%

Jan 2009

2,144

13%

Jul 2009

2,423

13%

Jan 2010

2,738

13%

Jul 2010

3,094

13%

Jan 2011

4,320

Source: Russian Federation Government

Price growth will not be uniform for different territories

The price growth approved by the decision of the Russian Federation Government implies general growth of gas prices in the country. However, the structure of regional differentiation of wholesale prices with change with the growing level of prices. The final goal of these changes in ensuring equal profits on the internal and external markets. In case of uniform growth of prices, the regions remote from the traditional production locations would have achieved this goal much earlier than 2011 and further growth of prices there would have been impossible.

Price growth will non be uniform for different consumers

The Russian Federation Government is going to continue checking the growth of prices for energy resources for the population. This means that gas prices for industrial consumers will grow much faster than declared because gas prices for the population and electric and heat power generation will be subsidized at the expense of industrial consumers.

OJSC Gazprom actively pushes forward the idea of sharing the burden. According to GGO, higher price burden should be taken by industries with higher rates of returns and profit margins, such as export-oriented producers of mineral fertilizers, the metallurgy industry, etc.

The tariffs of OJSC Gazprom mat become a price raising instrument

Introduction of a unified transportation tariff with the same existing procedure of rate calculation may become a convenient mechanism concealed price escalation through redistribution of interregional cross-subsidies.

The necessity of introducing tariffs for system balancing and tariffs for storage services and other services for ensuring system reliability will lead to inclusion of additional expenses earlier ignored in wholesale prices into the expenses of OJSC Gazprom.

Tariff growth will change the geographic curve

The procedure for calculation of gas transportation tariffs implies regular updates of correction factors that compensate the nonlinear growth of tariffs with distance. Growth of tariffs will aggravate this non-linearity, which may result in considerable changes in the market forces of certain players in different regions.

It is worthwhile to construct a detailed model of situation development for working out strategies for reduction of risks associated with the regulatory activities of the Government.

Logics of Estimates

The owner of the gas transportation system will determine the industrial production strategy

Forecasts of natural gas production should be based in the draft Strategy of the Gas Industry, the latest document of OJSC Gazprom related to gas production strategy. Gas production will be limited, first of all, by the throughput capacity of the gas transportation system and access to it. Thus, in spite of considerable changes in the structure of gas production, the owner of the gas transportation system will determine the industrial production strategy.

Forecasted gas production in the Russian Federation, billion cubic meters

Production structure

2006

2007

2008

2009

2010

2015

OJSC Gazprom

85%

85%

85%

84%

83%

77%

Independent producers

15%

15%

15%

16%

17%

23%

Source: Energy Strategy of the Russian Federation, Ministry of Industry and Energy of the Russian Federation, estimates of ERTA-Consult

Moderate consumption forecast

Forecasts of gas consumption dynamics should be based on the moderate version relying on conservative estimates of gas demand growth in the electric power industry, the estimates of the Russian Federation Government for industrial gas consumption growth, and the optimistic forecast of gas consumption by the population and the domestic household sector, which is associated with implementation of large-scale gasification plans.

Forecasted internal gas demand, billion cubic meters

Gas consumption in Russia

2006

2007

2008

2009

2010

2015

 Moderate version     394.1       411.8       424.4       439.4       455.7      484.2  
Electric power industry 154.5 158.9 163.0 170.8 178.1 179.5
Industry 159.8 170.5 177.1 182.3 189.2 206.3
Domestic household sector 31.7 32.7 33.7 34.7 35.7 40.7
Population 48.1 49.7 50.6 51.7 52.7 57.7

Source: Energy Strategy of the Russian Federation, Ministry of Industry and Energy of the Russian Federation, estimates of ERTA-Consult

Role of Gas Export and Import in Internal Price and Tariff Formation

State regulation of prices and tariffs guarantees profitability of OJSC Gazprom

The cost plus principle put in the basis of the antitrust legislation provides OJSC Gazprom with state guarantees of profitability as long as prices and tariffs are regulated by the state, In search for a balance of interests between the gas monopoly and consumers, the Russian Federation Government has no right to endorse prices and tariffs that are lower that the economically justified level.

Revenues from the external and internal markets are the only source of financing

Until recently, revenues from gas sales on external markets were included into consolidated reports of OJSC Gazprom and taken into consideration in most governmental decisions, including governmental approvals of investment programs of the gas monopoly.

Growth of export revenues helps the Russian Federation Government check internal prices

The considerable growth of gas export prices helped the Russian Federation Government postpone reforms in the gas industry, including liberalization of internal gas prices, by more than five years. During this period, the growth of internal gas prices was limited by political decisions of the Government based on the negotiated compromise of the key concerned parties (different groups in the Russian Federation Government, industrial lobbies, representatives of the gas industry) rather than the balance of demand and supply.

The administrative weight of marketing subsidiaries of OJSC Gazprom helps them lobby the growth of prices on the internal market

Being subject to state regulation, formally OJSC Gazprom cannot exceed the established rate of returns from its activities. In this aspect, the growth of prices on the internal does not have any significant impact on the economy of the gas monopoly. However, the profits of certain subsidiaries of the holding and, consequently, their budgetary processes (investments, wages, emoluments, bonuses, and other financial flows) strongly depend on the relations between internal and external prices. Thus, growing internal prices raise the status Mezhregiongaz LLC, the main marketing subsidiary of the gas monopoly.

Export is a protected item in the gas balance of the Russian Federation

Historically, most gas export contracts were concluded on behalf of or with considerable participation of the Russian Federation Government. Currently, direct obligations of the state under these contracts are minimal as the relations are formalized in the form, of commercial contracts with OJSC Gazprom. On the one hand, this does not hamper the Russian Federation Government to actively use gas supplies as an instrument of its foreign policy and, on the other hand, all this gives OJSC Gazprom a serious argument for defending its commercial interests, even in its dialogs with the state.

The terms of foreign-trade contracts of OJSC Gazprom are still one of the most protected secrets in Russia. This situation helps the company manipulate the volumes and prices of gas sales 9in other words, the gas export revenues) in discussions of trade balance projects or financial statements.

The latest political processes lend credence to the version of active use of the «gas weapon of Russia» and immunity of gas export from state regulation authorities. The gas export legislation only legalized the status quo and added force and guarantees to the tacit treaty between the state and OJSC Gazprom.

Import buildup is one of the ways to eliminate deficit on the gas market

The state pursues its «gas policy,» continues to take part in shaping the terms of gas sales, and actively helps OJSC Gazprom in solution of the strategic problems of the industry. In particular, the Russian Federation Government plays an important role in organization of gas import from Central Asia. This mechanism is considered as one of the key sources of covering the forecasted shortage of gas. Gas import volumes depend on the possibilities of gas suppliers (reserves, production volumes, and technical state of gas pipelines), whereas prices are determined exclusively at the political level between the governments of countries.

The parameters of gas import deals have a serious impact on the mirror export operations and the economy of the entire holding. The actual and forecasted gas import and export operations should be taken into consideration for ensuring adequate understanding of the situation in the internal market.

Summary

1.     The price history of the internal market in Russia is based on the budget distribution principles. Russia has neither experience of using market indicators nor free market agents. However, changes are inevitable and the time is probably ripe for applying the best international practices and experience to the developing gas market in Russia.

2.     Institutional models of decision making taking into account economic factors, social motives, political relations, legal restriction, and regulatory obligations should be used for predicting the situation on the internal market of the Russian Federation.

3.     Internal market prices are still an instrument of macroeconomic regulation rather than indicator of balance between demand and supply. It is unlikely that the situation will change in the nearest future. The key driving force of possible changes is reforms in the electric power industry.

4.     The gas demand will grow in the nearest future irrespective of the growth of internal prices. The population and domestic household sector will be the leaders of gas demand growth. Gas-saving mechanisms will not be activated on their own, and their implementation will require active administrative participation of the state and subjects of the industry.

5.     The Russian Federation Government has no intention to radically change the structure of the industry in the nearest future. This means that «economically justified prices and tariffs» will be based on the partial information disclosed by OJSC Gazprom. Thus, the key driving force for development of the internal gas market should be public disclosure and open expert examination of the information in the industry.

Central Infrastructure of the Gas Industry

Outline of the Unified Gas Supply System of Russia

The Unified Gas Supply System of Russia is a complex of gas production, processing, transportation, storage, and distribution facilities.

The Unified Gas Supply System of Russia includes the following:

·       155,000 km of trunk gas pipelines and their branches;

·       6,100 km of gas condensate pipelines;

·       268 compressor stations with a total capacity of 44.8 million kW;

·       6 gas and condensate processing complexes; and

·       24 underground gas storage facilities.

Unified Gas Supply System consists of soviet assets whose amortization is completed

The Unified Gas Supply System of Russia is the largest gas transportation and distribution system on the world. More than 50% of the Unified Gas Supply System consists of large-diameter (1420 mm and 1220 mm) gas pipelines.

The Unified Gas Supply System has been developed over more than 50 years, for which reason its equipment is characterized by high wear and tear. The age structure of its compressor farm reveals its physical and moral ageing: more than 40% of facilities are in service for over 20 years, and more than 20% of them have outlived their useful service period (of 100,000 hours).

Considerable modernization works are required because of non-uniform commissioning of facilities

The facilities of the Unified Gas Supply System were commissioned and put into operation in very different periods, most of them (with a total capacity of 2.5 million kW a year) in 1979-1988, which makes their upgrading and modernization required today very difficult after 20-25 years of their intensive service. For example, 322 gas compressor units with an overall capacity of 4.94 million kW was modernized and upgraded in 1996-2003 at a rate of approximately 1 million kW a year, which is absolutely insufficient now and in the nearest future.

Age structure of the linear part and compressor stations, %

Source: OJSC Gazprom

Unified Gas Supply System: key corridors, throughput capacities, and development prospects

Подпись: CENTRAL DIRECTION PLOTSПодпись: NORTHERN DIRECTION PLOTSThe Unified Gas Supply System is conventionally divided into three main directions of gas transportation from the main fields.

Подпись: SOUTHERN DIRECTION PLOTSConventional division of the Unified Gas Supply System into gas transportation directions

Подпись:   Source: OJSC Gazprom

The central direction includes the following main gas pipelines: Urengoi-Uzhgorod pipeline, Urengoi-Center pipeline, Progress pipeline, Yamburg-Tula pipeline, Yamburg-Yelets pipeline, Yamburg-Povolzhye pipeline, and North Tyumen Region-Ural pipeline. More than 2/3 of gas supplied from West Siberia to central regions and abroad is transported in this direction. Most gas pipelines of the central direction are in operation for 11-30 years (95%).

The northern direction includes the following main gas pipelines:

·       to the compressor station Punga: Urengoi-Nadym pipeline, Urengoi-Petrovsk pipeline, Urengoi-Novopskov pipeline, Nadym-Punga pipeline, Medvezhye-Nadym pipeline, and North Tyumen Region-Torzhok pipeline;

·       from the compressor station Punga: North Tyumen Region-Torzhok pipeline, Punga-Ukhta-Gryazovets pipeline, Punga-Vuktyl-Ukhta pipeline, Ukhta-Torzhok pipeline, and Gryazovets-Torzhok pipeline.

A large number of gas pipelines of the northern direction are in operation for 21-30 years (47%). Construction of the new North Tyumen Region-Torzhok gas pipeline is currently under construction, certain parts of which are already put into operation.

The gas pipelines of the northern direction are characterized by frequent failures and breakdowns due to stress-corrosion cracking. Maintenance of these gas pipelines in satisfactory technical conditions requires more investments per kilometer than the gas pipelines of the central direction due to a large number of defects.

The southern direction includes the following main gas pipelines: Urengoi-Surgut-Chelyabinsk pipeline and North Tyumen Region-Surgut-Omsk pipeline. Most gas pipelines of the southern direction are in operation for 21-30 years (75.5%).

Designed and actual capacity of the gas transportation system

The designed throughput capacity of the existing gas transportation system transporting gas from the Nadym-Pur-Taz  gas-producing region, the main region of gas production, is 577.8 billion cubic meters a year. The actual throughput capacity of the existing gas pipelines is characterized by their technically possible throughput capacity that is determined by their technical conditions.

In the period 1991-2004, due to ageing and technical degradation of gas transportation facilities, the difference between the designed and technically possible throughput capacity of the gas transportation system (known as the deficit of technically possible throughput capacity) increased from 24 to 55.6 billion cubic meters a year.

Apart from technical deterioration of equipment, one of the main problems of the gas transportation system is the high load of a number of gas pipelines. The Attachment to this review presents a complete list of overloaded and under-loaded segments of the gas transportation system.

Segments of the gas transportation system where the load is over 90%

Source: NP Gas Market Coordinator

The gas transportation system requires modernization: transition to gas, de-bottlenecking, and increase of its efficiency

OJSC Gazprom has developed a program for modernization of facilities of the gas transportation system in the period 2006-2030. This program implies reconstruction of the linear part of the gas transportation system and compressor stations in the following volume (calculations were carried out for 12 versions differing in the time of commissioning of the Shtokman field, period of field development on the Yamal Peninsula and East Siberia, and volumes of gas supplied from Central Asia):

Dynamics of average volumes of gas transportation system reconstruction works

Source: estimates of ERTA-Consult

The capital investments calculated in the framework of this program include investments into reconstruction, development and decommissioning of facilities of the gas transportation system and investments into development of the gas transportation system of East Siberia and Far East. The upper and lower boundaries of capital investments into development of the system of gas transportation on the territory of the Russian Federation in the period 2006-2030 are represented in the following diagram:

Consolidated capital investments ino the gas transportation system, US $ million

Source: estimates of ERTA-Consult

One of the programs for modernization of the gas transportation system is the program for transition of gas compressors from the use of electric power to the use of gas. Large-scale integration of these innovations may tangibly increase gas consumption for the own needs of the gas transportation system.

Underground gas storages as an instrument of seasonal gas balancing

Currently, Russia has a well-developed system of underground gas storage, which includes 24 underground gas storage facilities. All these gas storages have been created in porous media in depleted gas field and water-bearing strata.

Active reserves of gas in underground gas storages are necessary, first of all, for covering the seasonal non-uniformity of gas consumption. Apart from that, gas storages ensure reliability of gas supply in emergency situations and scheduled (or forced) limitation of gas supply. Gas storages provide gas reserves in cases of abnormally cold winters, emergency situations in the gas transportation system, possible delays in commissioning of production facilities, and gas transportation system maintenance works.

Underground gas storages: key storages and their characteristics

The overall active volume of underground gas storages in Russia is 70.7 billion cubic meters according to the design, 98.6 billion cubic meters according to the actual volume of pumped gas, and 570 million cubic meters according to the maximum daily yield. Russian gas is stored in gas storages on the territory of Russia, Ukraine, Latvia, and Germany.

Location of underground gas storages in Russia

Source: SmartMoney

The current ratio between the volume of gas taken from underground gas storages and gas consumption does not exceed 10%. The optimal value of this ratio for the contemporary structure of gas consumption is 12-13%. Apart from that, export supplies of gas make it necessary to maintain additional seasonal reserves of gas equal to 5-7% of these export supplies. Thus, OJSC Gazprom is now facing the task of building the capacity of underground storages of gas up to 17-19% of the annual gas consumption volume.

The capacity of underground gas storage facilities in North Caucasus and the Saratov Region exceed the levels of gas consumption regulation in these regions, which makes it necessary to supply gas to other regions and thus complicate the gas transportation schemes. The capacity of active underground gas storages in Northwest Russia is insufficient, which makes it necessary to supply gas to these underground gas storages from other regions.

Trunk gas pipelines themselves provide certain possibilities for regulating gas consumption peaks.

Characteristics of underground gas storages in Russia, billion cubic meters

Underground gas storage

Volume

Average annual

injection / withdrawal

%

Permtransgaz

0.4

0.5

123%

Bashtransgaz

3.5

2.7

78%

Lentransgaz

1.8

1.3

74%

Kubangazprom

5.7

4.1

72%

Mostransgaz

12.9

8.5

66%

Yugtransgaz

10.5

6.7

64%

Samaratransgaz

0.8

0.5

63%

Orenburggazprom

6.1

3.7

61%

Tyumentransgaz

6.9

2.3

33%

Kavkaztransgaz

50.0

16.5

33%

Total

98.6

46.9

48%

Source: OJSC Gazprom, estimates of ERTA-Consult

Today, OJSC Gazprom is constructing five new underground gas storages and designing five more. By 2010, OJSC Gazprom will increase the volume of active gas up to 82 billion cubic meters. Construction of gas storage facilities costs $130-160 per 1000 cubic meters of stored gas.

In winter 2006, the gas storage system of OJSC Gazprom worked at its maximum capacity

In January-February:      5.5 billion cubic meters of gas withdrawn from underground gas storages

2.8 billion cubic meters of gas produced in excess of the plan

Total volume of gas in excess of the supply plan = 8.3 billion cubic meters

4 billion cubic meters of gas supplied to Russian consumers in excess of the plan

of which 1.6 billion cubic meters was supplied for electric power generation

Underground gas storages: access of independent companies

The currently effective legislation does not regulate gas storage services. Moreover, despite the fact that only OJSC Gazprom has gas storage facilities, gas storage services, unlike gas transportation services, are not considered as natural monopoly activities and, therefore, are not subject to state regulation.

For internal budget purposes, OJSC Gazprom regularly sets internal tariffs for services of gas storing in underground gas storages rendered by gas transportation organizations.

Internal tariffs of OJSC Gazprom for gas storing services, rubles per 1000 cubic meters

April 2004

July 2005

Orenburggazprom

6.5

9.0

Kubangazprom

17.9

28.4

Tyumentransgaz

6.6

5.6

Mostransgaz

18.3

26.8

Lentransgaz

33.3

52.9

Bashtransgaz

24.8

26.4

Kavkaztransgaz

4.9

6.0

Yugtransgaz

17.5

22.5

Samaratransgaz

30.5

25.4

Permtransgaz

78.8

115.4

Average tariff

43.7

62.2

Source: OJSC Gazprom, estimates of ERTA-Consult

In spite of the fact that the gas storage procedure is non-transparent for external customers, beginning from 2004 OJSC Gazprom sets tariffs for services of storing gas in underground gas storages rendered by gas transportation organizations to independent companies.

Tariffs for gas storage services for independent companies, rubles per 1000 cubic meters

April 2004

July 2005

injection

withdrawal

injection

withdrawal

Orenburggazprom 81.5 13.3 95.0 15.5
Kubangazprom 157.3 25.5 183.4 29.7
Tyumentransgaz 88.9 25.9 103.7 30.3
Mostransgaz 145.5 23.6 169.7 27.5
Lentransgaz 223.4 36.1 260.5 42.1
Bashtransgaz 168.1 27.2 196.1 31.8
Kavkaztransgaz 93.4 15.3 108.9 17.8
Yugtransgaz 197.6 32.0 230.4 37.3
Samaratransgaz 221.8 35.9 258.6 41.8
Permtransgaz 154.1 24.8 179.7 28.9
Average tariff          171.7            28.1          200.2        32.7  

Source: OJSC Gazprom, estimates of ERTA-Consult

Central Infrastructure in the Regions of Strategic Interests

The following information and expert estimates are presented below for the regions of strategic interests:

·       gas transportation organizations;

·       trunk gas pipelines traversing the region;

·       planned load and capacity of the trunk gas pipeline;

·       planned injection into and withdrawal from underground gas storages.

Gas transportation organizations

Perm Krai

Gas transportation organization: Permtransgaz LLC

Trunk gas pipelines

Diameter

Number of lines

North Tyument Region-Ural

1420

1

Yamburg-Povolzhye

1420

1

Yamburg-Tula

1420

2

Yamburg-West border

1420

1

Yamburg-Yelets

1420

2

Urengoi-Novopskov

1420

1

Urengoi-Petrovsk

1420

1

Urengoi-Center

1420

2

Urengoi-Uzhgorod

1420

1

Nizhnyaya Tura-Perm

1220

1

Perm-Gorky

1020

2

Cheboksary-Bereznyaki-Solkamsk

720

2

Omsk Region

Gas transportation organization: Tomsktransgaz LLC

Gas pipelines

Diameter

Number of lines

North Tyument Region-Surgut-Omsk

1020

1

Omsk-Novosibirsk-Kuzbass

1220

1

Novosibirsk Region

Gas transportation organization: Tomsktransgaz LLC

Gas pipelines

Diameter

Number of lines

Omsk-Novosibirsk-Kuzbass

1220

1

Note: there are two lines (720 mm and 1020 mm) running from Novosibirsk: one to Prokokovo (720 mm) and the other to Barnaul (1020 mm).

Samara Region

Gas transportation organization: Samaratransgaz LLC

Gas pipelines

Diameter

Number of lines

Urengoi-Novopskov

1420

1

Urengoi-Petrovsk

1420

1

Chelyabinsk-Petrovsk

1420

1

Pokhvistnevo-Samara

320

1

Starya Binaradka-Dimitrovgrad-Ulyanovsk

820

1

Orenburg-Samara

1020

1

Penza Region

Gas transportation organization: Volgotransgaz LLC and Yugtransgaz LLC

Gas pipelines

Diameter

Number of lines

Central Asia-Center

1220

1020

1

1

Petrovsk-Yelets

1220

2

Saratov-Gorky

820

1

Republic of Mordovia

Gas transportation organization: Volgotransgaz LLC

Gas pipelines

Diameter

Number of lines

Yamburg-West border

1420

1

Yamburg-Yelets

1420

2

Urengoi-Center

1420

2

Urengoi-Uzhgorod

1420

1

Saratov-Gorky

820

1

Kemerovo Region

Gas transportation organization: Tomsktransgaz LLC

Gas pipelines

Diameter

Number of lines

Parabel-Kuzbass

1020

1

Orel Region

Gas transportation organization: Mostransgaz LLC

Gas pipelines

Diameter

Number of lines

Shebelinka-Belgorod-Kursk

1020

720

1

1

Ryazan Region

Gas transportation organization: Mostransgaz LLC

Gas pipelines

Diameter

Number of lines

Central Asia-Center

1220

1020

1

1

Petrovsk-Yelets

1220

1

Yamburg-Tula

1420

1

Gorky-Center

1220

1

Saratov-Moscow

300

1

Expert estimates of gas pipeline loads

Perm Krai, billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

260

263

262

262

259

255

251

247

244

226

189

Gas flow

263

274

276

276

259

255

251

247

244

226

189

Следует отметить высокую загруженность магистральных газопроводов.

Omsk Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

8.6

8.6

8.6

8.6

8.6

8.5

8.5

8.4

8.4

8.0

7.2

Gas flow

5.0

5.2

5.4

5.7

5.7

5.9

6.2

7.0

7.3

8.7

8.9

Novosibirsk Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

8.2

8.2

8.2

8.2

8.2

8.1

8.1

8.0

8.0

7.6

6.9

Gas flow

1.0

0.9

0.8

0.7

0.7

0.6

0.6

0.1

-0.7

-0.8

Negative values of transportation volume means redirection of gas flows to Kemerovo

Samara Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

91

91

91

91

91

90

90

89

89

84

76

Gas flow

70

70

70

70

66

63

63

61

59

56

59

Penza Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

v

27

27

27

27

27

27

27

27

26

25

23

Потоки газа

9

9

9

9

13

16

16

16

28

49

49

Republic of Mordovia

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

176

176

176

176

175

174

173

172

172

163

148

Gas flow

158

169

170

170

166

162

162

159

153

135

138

Kemerovo Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

13

13

13

13

13

13

13

13

13

13

13

Gas flow

4

4

4

4

4

4

4

4

4

5

5

Orel Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

9.6

9.6

9.6

9.6

9.6

9.5

9.5

9.4

9.4

8.9

8.0

Gas flow

5.0

5.1

5.1

5.2

3.3

3.3

3.3

3.3

3.3

5.4

5.4

Ryazan Region

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

2020

2025

Capacity

30.3

30.3

30.3

30.3

30.1

30.0

29.8

29.7

29.6

28.1

25.4

Gas flow

28.4

29.6

28.5

28.4

20.0

20.0

20.0

20.0

15.0

15.0

15.0

Gas storage infrastructure in the regions of strategic interests

Underground gas storages are available in four of the nine regions of strategic interests: the Samara Region, Perm Krai, Penza Region, and Ryazan Region.

Samara Region

There are 4 underground gas storages at the border with the Orenburg Region created in depleted oil and gas fields: Amanakskoe, Dmitrovskoe, Mikhailovskoe, and Kiryushinskoe underground gas storages, also collectively known as the Samara underground gas storages. The active volume of the Samara underground gas storages is 0.5 billion cubic meters. Gas is injected into and withdrawn from these storages by Samaratransgaz LLC.

Injection and withdrawal of gas planned by OJSC Gazprom for the Samara underground gas storages,

billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

Withdrawal

0.5

0.5

0.5

0.5

0.5

0.5

0.5

0.5

0.5

Injection

0.5

0.5

0.5

0.5

0.5

0.5

0.5

0.5

0.5

Ryazan Region

There are 2 underground gas storages in the northwest of the Ryazan Region: Kasimovskoe and Uvyazovskoe underground gas storages. Gas is injected into and withdrawn from these storages by the Kasimovskoe underground Gas Storage Directorate, a branch of Mostransgaz LLC.

The Kasimovskoe underground gas storage is the largest gas storage created in water-bearing formations. The active volume of the Kasimovskoe underground gas storage is 5.5 billion cubic meters. Works are currently underway for increasing its up to 9 billion cubic meters.

Injection and withdrawal of gas planned by OJSC Gazprom for the Kasimovskoe gas storage,

billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

Withdrawal

7.1

7.2

7.4

7.5

8.5

8.6

8.7

8.8

9.0

Injection

7.0

7.1

7.4

7.5

8.3

8.4

8.5

8.6

9.0

The Uvyazovskoe underground gas storage is currently under pilot industrial operation. The active volume of the Uvyazovskoe underground gas storage is 2.5 billion cubic meters.

Injection and withdrawal of gas planned by OJSC Gazprom for the Uvyazovskoe underground gas storage,

billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

Withdrawal

1.6

1.7

1.8

1.9

2.2

2.3

2.4

2.5

2.5

Injection

1.5

1.6

1.7

1.8

2.1

2.2

2.3

2.4

2.5

Penza Region

The Bednodemyanovskoe underground gas storage is being created in water-bearing structures at the border of the Penza region and the Republic of Mordovia. The active volume of the Bednodemyanovskoe underground gas storage is 2 billion cubic meters. The storage will be commissioned and put into operation in 2008.

Injection and withdrawal of gas planned by OJSC Gazprom for the Bednodemyanovskoe underground gas storage, billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

Withdrawal

0

0.12

0.15

0.30

0.60

0.70

0.80

0.90

1.0

Injection

0

0

0

0.2

0.4

0.5

0.6

0.8

0.9

Perm Krai

The Bereznikovskoe underground gas storage is being created in 150 km from the town of Solikamsk in salt-bearing structures (which is untypical for underground gas storages on the territory of Russia). The active volume of the Bereznikovskoe underground gas storage is 0.3 billion cubic meters. The storage will be commissioned and put into operation in 2010.

Injection and withdrawal of gas planned by OJSC Gazprom for the Bereznikovskoe underground gas storage, billion cubic meters

 

2007

2008

2009

2010

2011

2012

2013

2014

2015

Withdrawal

0

0

0

0.05

0.05

0.10

0.15

0.20

0.25

Injection

0

0

0

0

0

0.05

0.08

0.10

0.15

Apart from that, it should be mentioned that a promising location for creating an underground gas storage in a water-bearing formation in West Siberia is the Kolmakovskaya structure situated on the route of the Omsk-Novosibirsk trunk gas pipeline near the town of Barabinsk (in the Novosibirsk Region), where, after completion of geological exploration works, an underground gas storage with an active volume of 1000 million cubic meters may be created. This gas storage will add reliability to the operation of the Omsk-Novosibirsk-Tomsk trunk gas pipeline.

State Regulation of Natural Gas Transportation and Sales

Outline of the Legal Framework of the Industry

Currently, the Federal Tariff service of the Russian Federation regulates the following gas transportation tariffs:

·       tariffs for services of gas transportation through trunk gas pipelines for independent organizations;

·       tariffs for services of gas transportation through gas distribution networks;

·       tariffs for gas supply and distribution services provided to end users by gas suppliers (if gas is supplied at regulated wholesale prices).

The principal regulation in the sphere of gas transportation and sales is Resolution No. 1021 of December 29, 2000 of the Russian Federation Government «On State Regulation of Gas Prices and Tariffs for Services of Gas Transportation on the Territory of the Russian Federation,» which approved the «Main Provisions for Formation and State Regulation of Gas Prices and Tariffs for Services of Gas Transportation on the Territory of the Russian Federation.»

Currently, these tariffs are determined using the following procedures developed and approved by the Federal Tariff Service and the Federal Energy Commission of the Russian Federation:

1. «Guidelines for Regulating Tariffs for Services of Gas Transportation Through Gas Distribution Networks» approved by Resolution No.88-e/1 of October 28, 2003 of the Federal Energy Commission of the Russian Federation (in the version of Resolution No142-e/1 of October 26, 2004 of the Federal Tariff Service of the Russian Federation).

State regulation of gas transportation through gas distribution networks is based on the same legal framework as gas transportation through trunk gas pipelines. One of the salient features of state regulation of gas transportation through gas distribution networks is the legislative rule prescribed by the Federal Law «On Gas Supply» and approved by Resolution No.335 of May 3, 2001 of the Russian Federation Government «On Establishment of Special Surcharges to the Tariffs for gas Transportation by Gas Distribution Organizations for Financing Gasification Programs,» which regulates the procedure of determining special surcharges to tariffs for gas transportation by gas distribution organizations for financing gasification programs. Apart from that, in contrast to gas transportation through trunk gas pipelines regulated by the Federal Tariff Service of the Russian Federation, ample materials have been worked out for gas transportation through gas distribution networks and published as Guidelines[2].

2. «Procedure for Calculation of Tariffs for Services of Gas Transportation Through Trunk Gas Pipelines» approved by Resolution No.338-e/1 of August 23, 2005 of the Federal Tariff Service of the Russian Federation.

Apart from that, regulation of gas transportation through pipelines uses the method of price regulation, the method for identifying consumers with the right of mandatory attendance, and the method for determining the minimum level of their attendance in case the requirements of such consumers for the product produced or sold by the natural monopoly subject cannot be fully satisfied.

Thus, the following regulatory documents are added to the list of regulations for gas transportation and sales:

§  «Regulation on Access of Independent Organizations to the Gas Transportation System of OJSC Gazprom» approved by Resolution No.858 of July 14, 1997 of the Russian Federation Government; and

§  «Regulation on Access to Organizations to Local Gas Distribution Networks» approved by Resolution No.1370 of November 24, 1998 of the Russian Federation Government.

The main points of the access regulations are as follows:

§  access is granted for ensuring supplies to consumers in the Russian Federation (the issues of gas supplies outside the customs territories of the Russian Federation are not considered);

§  access may be granted to any organization (producer, consumer, or supplier of gas);

§  gas transportation contracts are concluded if free gas transportation capacities and technical possibilities of gas supply to the gas transportation system or gas withdrawal from it are available and gas satisfies certain standards[3];

§  free gas transportation capacity is defined as the technical capacity of the gas transportation system to receive and transport the required volume of gas in addition to the volumes of gas transported for organizations of OJSC Gazprom and independent organizations under current gas transportation contracts;

§  disputes and discrepancies are settled by the Commission of the Russian Federation Government for the use of trunk oil and gas pipelines and pipelines of oil products.

It should be mentioned that the availability of free capacities in the gas transportation system is determined by OJSC Gazprom. The liability of OJSC Gazprom, as the owner of the Unified Gas Supply System, for a failure to grant access or failure to grant timely access to the gas transportation system when free capacities are available is not defined. All this makes users of the gas transportation system dependent on the owner of this system, which was confirmed at several meetings of the Commission of the Russian Federation Government for the use of trunk oil and gas pipelines and pipelines of oil products dedicated to the cases when access to the trunk pipelines of OJSC Gazprom was not granted.

Considering the aspects of granting access to the gas transportation system, it is necessary to point out that requirements for connecting facilities (fields, gas processing facilities, etc.) of independent gas producers to the pipeline transport of OJSC Gazprom are set by OJSC Gazprom[4]. OJSC Gazprom coordinates the technical conditions for connecting facilities of independent gas producers. However, coordination of technical conditions for connection by OJSC Gazprom is necessary but not sufficient for getting access to the pipeline transport (as, for example, in the case of the Beregovoe field developed by ITERA).

All this leads us to the conclusion that many important issues of using the gas transportation system are not regulated. To develop mechanisms ensuring truly non-discriminatory access to the gas transportation system and establishing civilized rules regulating access to the gas transportation system, it is necessary to introduce essential changes into the existing «Regulation on Access of Independent Organizations to the Gas Transportation System of OJSC Gazprom» and the law «On Gas Supply.»

Access to local gas distribution networks is regulated by Resolution No.1370 of November 24, 1998 of the Russian Federation Government «Regulation for Access of Organizations to Local Gas Distribution Networks.» The terms and procedure of access to local gas distribution networks prescribed by this document are similar to the terms and procedure of access to the gas transportation system of OJSC Gazprom and have the same shortcomings.

Practical application of this resolution of the Russian Federation Government is explained in the «Regulation for Consideration of Issues Related to Access of Organizations to Local Gas Distribution Networks» approved by Resolution No.6/1 of February 19, 1999 of the Federal Energy Commission of the Russian Federation.

The following prices and rates are currently regulated in the sphere of purchase and sale:

§  wholesale prices of gas (natural gas, associated petroleum gas, and stripped dry gas), except the prices regulated by gas producers that are not affiliated companies of the open joint-stock company Gazprom and the joint-stock companies Yakutgazprom, Norilskgazprom, Kamchatgazprom, and Rosneft-Sakhalinmorneftegaz;

§  rates for supply and distribution services provided by gas suppliers to end users (with regulated wholesale prices of gas); and

§  retail prices of gas sold to the population and the domestic household sector.

The main regulation here is Resolution No.1021 whose provisions are reflected in the following regulatory documents:

§  Procedure for Determining the Rates for Supply and Distribution Services Provided by Gas Suppliers to End Users» approved by Resolution No.8/9 of February 6, 2002 of the Federal Energy Commission of the Russian Federation; and

§  Guidelines for Regulation of Retail Prices of Gas Sold to the Population» approved by Resolution No.194-e/12 of November 23, 2004 of the Federal Tariff Service of the Russian Federation.

The rate for supply and distribution services provided by gas suppliers to end users is added tp the regulated wholesale price of gas. Regulated wholesale prices and rates for supply and distribution services do not apply to gas produced by organizations that are not affiliated companies of the open joint-stock company Gazprom and the joint-stock companies Yakutgazprom, Norilskgazprom, Kamchatgazprom, and Rosneft-Sakhalinmorneftegaz. That means that according to Resolution No.1021 of the Russian Federation Government, regulation of wholesale prices and rates for supply and distribution services does not apply to independent gas producers. This is important, because establishment of the rate for supply and distribution services by the Federal Energy Commission of the Russian Federation resulted in an actual increase of wholesale prices regulated by the state and expanded the geographic scope of economically efficient regions for independent gas producers.

The price of gas for end users at the line separating gas distribution networks from end user networks is based on the regulated wholesale price of gas, tariffs for gas transportation in gas distribution networks, and rates for supply and distribution services. If end user networks are directly connected to the trunk gas pipeline system, the price of gas for end users at the line separating trunk gas pipelines from end user networks is based on the regulated wholesale price of gas and the rate of supply and distribution services. If several organizations take part in gas supplies to end users, the regulated rate for supply and distribution services paid by end users is distributed among these organizations as agreed between them. Apart from that, if a holding structure takes part in gas supplies, the regulated rate for supply and distribution services is set by the companies engaged in immediate gas sales and the parent company[5].

Retail prices of gas are regulated as prescribed by Resolution No.239 of March 7, 1995 of the Russian Federation Government «On Measures for State Regulation of Prices (Tariffs)» adopted in fulfillment of Decree No.221 of February 28, 1995 of the President of the Russian Federation «On Measures for State Regulation of Prices (Tariffs).»

Wholesale prices and rates for supply and distribution services are regulated by the Government and federal executive authorities of the Russian Federation. Prices of natural gas sold to the population and domestic household cooperatives are regulated by executive authorities of constituent entities of the Russian Federation.

Regulation of retail prices of natural gas sold to the population[6] and rates for supply and distribution services[7] provided by gas suppliers to end users is exercised in accordance with the guidelines approved by the Federal Tariff Service of the Russian Federation in coordination with the Ministry of Trade and Economic Development of the Russian Federation.

In the legal framework regulating relations in the gas industry, the main legislative enactment is Federal Law No.69-FZ of March 31, 1999 «On Gas Supply in the Russian Federation.» This law is the only and primary legislative enactment regulating relations in the gas industry and requires detailed analysis.

Despite the continuous arguments about the necessity of development and adoption of a unified industry law «On Oil and Gas» that would take into account all salient features of the oil and gas industry, Russian legislators followed the path of including separate reforms in the oil and gas industry into general legislative enactments and regulations. The main issues in the oil and gas industry that require state regulation are as follows:

§  issues of subsoil use (in particular, definition of fields of federal importance, aspects of license agreements, etc.);

§  issues of taxation and customs regulation (in particular, rental payments);

§  issues of property and ownership;

§  issues of access to the infrastructure;

§  issues of export directions, etc.

A closer look reveals that most of these issues are already reflected in one way or another in the currently effective legislation, or are in the stage of development and adoption (such as, for example, the draft law «On Pipeline Transport»).

The history of development and adoption of the law «On Gas Supply» shows that it is a clearly political law oriented, first of all, to protection of the principles of and approaches to functioning and regulation of the gas industry used by the management of OJSC Gazprom at the moment of its adoption. For example, the law states that separation of the Unified Gas Supply System is impossible and its owner (OJSC Gazprom) may only be liquidated by a special federal law. In addition to the fact that the legislative prohibition of separation of the Unified Gas Supply System makes it difficult to separate the spheres of natural monopoly from potentially competitive spheres, the provision that OJSC Gazprom may only be liquidated by a special federal law contradicts the Civil Code of the Russian Federation that provides a complete list of cases when a legal entity may be liquidated and cannot be expanded, including liquidation of legal entities by adopting a special federal law.

The essence of the law «On Gas Supply» is that

§  OJSC Gazprom is inseparable;

§  the state must own at least 35% of shares of OJSC Gazprom;

§  nonresidents may own no more than 20% of shares of OJSC Gazprom; and

§  state regulation may take the form of regulation of transportation tariffs or regulation of wholesale prices and transportation tariffs for independent gas producers.

Today, a number of provisions of this law check the development of the gas market in the country. Interestingly, in 2001, a special commission created at the presidential Executive Office at the request of V.V. Putin, President of the Russian Federation, that took inventory of the entire legislation of the Russian Federation, came to a conclusion that the law «On Gas Supply» is meaningless, and proposed to abolish it.

Most provisions of the law «On Gas Supply» do not contain mechanisms of their practical implementation. Many concepts used in it are not explained and have no criteria for their clear definition. Many provisions of this law repeat provisions of other laws or refer to provisions that do not ensure the necessary level of legal regulation.

For example, the law says that state regulation of tariffs for gas transportation services, classified by the Federal Law «On Natural Monopolies» into the sphere of activities of natural monopolies, should be exercised by the federal authority for regulation of natural monopolies, which in fact repeats the corresponding provision of the Federal Law «On Natural Monopolies.»

Law of the Russian Federation No.948-1 of March 22, 1991 «On Competition and Limitation of Monopolistic Activities on Commodity Markets» and Federal Law No.147-FZ of August 17, 1995 «On Natural Monopolies» classify pipeline transportation of gas into the sphere of activities of natural monopolies.

The law «On Gas Supply» applies the antitrust legislation to the problem of access to gas transportation facilities and obliges all organizations conducting business on the territory of the Russian Federation to ensure non-discriminatory access to free capacities of their gas transportation and gas distribution networks in accordance with the procedure prescribed by the Russian Federation Government. The term ‘free capacities» has no legal definition.

The document applying the provisions of the law «On Gas Supply» to regulation of access to gas transportation facilities is Resolution No.858 of July 14, 1998 of the Russian Federation Government «On Ensuring Access of Independent Organizations to the Gas Transportation System of the Open Joint-Stock Company Gazprom,» which approved the «Regulation on Access of Independent Organizations to the Gas Transportation System of OJSC Gazprom.»

As to construction of private gas pipelines, Mikhail Fradkov, Prime Minister of the Russian Federation, said on June 21, 2004 at the briefing in Tallinn that «the issue of private pipeline construction is not on today’s agenda.» Earlier, the Prime Minister of the Russian Federation spoke against the idea of privatization of pipelines: «This is our infrastructure and our competitive edge, and we have to attend to it.» Mr. Fradkov stressed that access to pipelines, as well as to any resources,  should be free.

Acknowledgement of separation of competitive and natural monopoly sectors as the generally accepted strategy of economic development would simplify and facilitate state regulation in the gas industry. In his speech on February 14, 2003 at the meeting dedicated to celebration of the 10th anniversary of OJSC Gazprom, V.V. Putin, president of the Russian Federation, said that «the state, as the largest stakeholder of Gazprom, will insist on cutting costs and raising the performance efficiency of the company but will not support any plans for its separation …» This statement froze the concept of gas market development in the Russian Federation, which implied separation of gas production and gas transportation activities. Nevertheless, the issue of reforming OJSC Gazprom by separation of its different activities is still on the agenda, said A. Sharonov, Deputy Minister of Trade and Economic Development of the Russian Federation, because «natural monopolies should be reformed by separating their competitive and natural monopoly activities.»

Attachments

 

Gas production forecast

Gas production in the Russian Federation

2006

2007

2008

2009

2010

2015

[A] Draft gas industry strategy (intensive)

    638.4

    644.9

    657.2

    678.5

    710.1

   765.7

[A] Draft gas industry strategy (moderate)

    638.4

    644.9

    657.2

    667.4

    683.0

   722.3

[B] Ministry of Industry and Energy of the Russian Federation

    638.4

    656.7

    666.0

    676.3

    684.4

   798.6

[C] Energy Strategy (optimistic)

    638.4

    645.1

    651.7

    658.4

    665.0

   705.0

[C] Energy Strategy (base)

    638.4

    637.6

    636.7

    635.9

    635.0

   660.0

[C] Energy Strategy (critical)

    638.4

    617.6

    596.7

    575.9

    555.0

   580.0

 

 

 

 

 

 

Production structure

 

 

 

 

 

 

[B] OJSC Gazprom

85%

85%

85%

84%

83%

77%

[B] Independent producers

15%

15%

15%

16%

17%

23%

Information sources:
[A] Draft strategy of gas industry development until 2030 (OJSC Gazprom, summer 2006)
[B] Ministry of Industry and Energy of the Russian Federation
[C] Energy Strategy of the Russian Federation for the period until 2020

Gas consumption forecast

Gas consumption in Russia Sources 2006 2007 2008 2009 2010 2015
 Maximum version

 

    436.0       452.1       471.7       488.6       506.0      605.5  
Electric power industry

[1]

194.1 196.9 201.9 204.3 207.8 224.5
Industry

[5]

159.8 168.6 178.2 187.8 197.0 250.7
Domestic household

[6]

34.0 35.9 37.9 40.0 41.9 54.0
Population

[6]

48.1 50.7 53.6 56.5 59.3 76.4

 

 Intensive version

 

    396.4       421.9       439.8       458.1       475.7      571.9  
Electric power industry

[2]

155.7 167.3 173.6 180.0 186.2 216.6
Industry

[5]

159.8 168.6 178.2 187.9 197.1 250.7
Domestic household

[3]

34.0 37.6 38.2 38.9 39.6 44.5
Population

[6]

46.9 48.4 49.8 51.3 52.8 60.1

 

 Moderate version

 

    394.1       411.8       424.4       439.4       455.7      484.2  
Electric power industry

[3]

154.5 158.9 163.0 170.8 178.1 179.5
Industry

[3]

159.8 170.5 177.1 182.3 189.2 206.3
Domestic household

[6]

31.7 32.7 33.7 34.7 35.7 40.7
Population

[3]

48.1 49.7 50.6 51.7 52.7 57.7

 

 Minimum version

 

    376.1       380.4       385.2       388.1       392.2      406.6  
Electric power industry

[4]

149.1 149.5 149.7 150.0 150.0 150.0
Industry

[4]

149.0 151.0 153.7 154.3 156.0 162.2
Domestic household

[6]

31.7 32.7 33.7 34.7 35.7 40.7
Population

[4]

46.3 47.2 48.1 49.1 50.5 53.7
 
Information sources:
[1] Forecasted balance of the electric power industry and RAO Unified Energy System of Russia for 2005-2009 (2005)
[2] RAO Unified Energy System of Russia (fall 2006)
[3] OJSC Gazprom (fall 2006)
[4] Draft strategy of gas industry development until 2030 (OJSC Gazprom, summer 2006)
[5] Expert estimate of ERTA based on the GDP growth planned by the Ministry of Economic Development (Oct 2006)
[6] Expert estimate of ERTA based on analysis of Russian Federation gasification plans (Oct 2006)

Characteristics of trunk gas pipelines in Russia

System Number of lines Route length, km Diameter, mm Pressure. MPa Rated capacity, billion cu. m a year
Urengoi-Nadym I, II 213/118 1420 7.5 30/32.5
Nadym-Punga I, II 575 1220 5.5 14.5
III, IV, V 568 1420 7.5 31
Punga-Vuktyl-Ukhta I 589 1220 5.5 14
II 572 1420 7.5 29
Punga-Ukhta-Gryazovets 1517 1420 7.5 29
Ukhta-Torzhok I 1380 1220 5.5 10
II 1335 1220 5.5 18
III 1340 1420 7.5 29
Gryazovets-Torzhok 392 1220 5.5 14.5
Gryazovets-Saint Petersburg 616 1020 5.5 9.3
Saint Petersburg-Vyborg 162 820 5.5 5
Gryazovets-Moscow Region 508 1220 5.5 15
Urengoi-Petrovsk 3000 1420 7.,5 32
Urengoi-Novopskov 3609 1420 7.5 32
Urengoi-Uzhgorod 4465 1420 7.5 32
Urengoi-Center I 3211 1420 7.5 32.4
II 3035 1420 7.5 32.4
Komsomolsk-Surgut-Chelyabinsk I 1780 1420 7.5 36
Urengoi-Surgut-Chelyabinsk II 2331 1420 7.5 36
Yamburg-Yelets I 3146 1420 7.5 32.5
II 3146 1420 7.5 32
Yamburg-West border 4366 1420 7.5 32
Yamburg-Tula I 2946 1420 7.5 32.5
II 2146 1420 7.5 32.5
Yamburg-Povolzhye 2730 1420 7.5 32.5
Parabel-Kuzbass 1172 1020 5.5 9
Orenburg-Novopskov 1356 1220 5.5 14.5
Orenburg-West border (Soyuz) 2677 1420 7.5 28
North Caucasus -Center 850/1200 1020/820/720 5.5 39.6
Central Asia-Center I 3086 1020 5.5 10.5
II 2592 1220 5.5 14.5
III 2609 1220 5.5 14.3
IV 2644 1420/1220 7.5/5.5 35/29.5



[1] According to Resolution No.832 of October 29, 1992 of the Russian Federation Government «On the Procedure of Determining the Type of Fuel for Enterprises and Installations Using Fuel,» decisions on the use of gas are made by the Ministry of Trade and Economic Development of the Russian Federation and executive authorities of constituent entities of the Russian Federation in coordination with OJSC Gazprom.[2] Resolution No.88-e/1 of October 28, 2003 of the Federal Energy Commission of the Russian Federation «On Approval of Guidelines for Regulation of Tariffs for Services of Gas Transportation Through Gas Distribution Networks»[3] The main requirements of OJSC Gazprom to gas supplied into its gas transportation system are: low humidity of gas and requirements for the content of higher hydrocarbons in gas.

[4] Resolution No.200 of September 3, 2003 of OJSC Gazprom «On Approval of the Procedure of Providing Independent Producers of Gas and Liquid Hydrocarbons with Technical Requirements for Connecting to the Pipeline Transport Systems of OJSC Gazprom»

[5] Resolution no.93-e/13 of December 18, 2002 of the Federal Energy Commission of the Russian Federation established the rate for supply and distribution services of Mezhregiongaz LLC equal to 6.69 rubles per 1000 cubic meters.

[6] Resolution No.42-e/3 of October 29, 2003 of the Federal Energy Commission of the Russian Federation «On Approval of Guidelines for Regulating Retail Prices of Natural Gas Sold to the Population.»

[7] Resolution No.8/9 of February 6, 2002 of the Federal Energy Commission of the Russian Federation «On Approval of a Method of Determining the Rate for Supply and Distribution Services Provided by Gas Suppliers to End Users.»

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