In late November, the first electronic gas trading session was held in which such producers received the same rights as Russian gas monopoly Gazprom. Many said it was evidence that Russia was beginning to liberalize its gas market.
According to the International Energy Agency, by 2020 worldwide gas consumption will almost double to more than 5 trillion cubic meters a year. By that time, the world's largest gas producer, Gazprom, is expected to produce 590 billion cubic meters of gas annually (it will produce 551 billion cubic meters this year), according to the Russian energy strategy until 2020.
Apart from the gas monopoly, there are also independent gas producers, such as Nortgaz, Novatek, Itera, Rospan, and others, as well as oil producers, such as state-owned oil company Rosneft, LUKoil, Russian-British oil venture TNK-BP, bankrupt oil company Yukos, and Surgutneftegaz, for which the gas business is becoming more and more important.
The government's energy strategy envisions that these companies' aggregate annual gas output will be 100-140 billion cubic meters by 2020. As of October 2006, they produced a sixth of Russian gas output. Since early this year alone they have increased gas production by 14.3% and will sell a total of 87.22 billion cubic meters of gas this year. Moreover, more than 20 billion cubic meters of gas is annually burned off in gas flares.
Today, independent Russian oil and gas producers, not counting Gazprom, could produce a total of up to 100 billion cubic meters a year. There are enough resources for that. The gas reserves controlled by independent companies as of three years ago exceeded 13 trillion cubic meters, which is 60% less than Gazprom's resources.
Paradoxically, independent gas producers deserve most of the credit for their own successes, as until recently the government has not paid any attention to them. Only Gazprom's diminished gas output and a sharp increase in gas consumption by the country's growing economy urged the government to adopt a new attitude to independent gas producers.
Though they are building up Russia's strategic gas reserves, the potential of these independent producers has been underestimated. Some problems they are facing should be settled as soon as possible to make them the government's ally and sheet anchor. Among other things, they should not be discriminated against in terms of access to the national gas transportation system, owned by Gazprom. Two years ago, according to the monopoly itself, some 35% of applications for access to this system from independent gas producers were turned down. A substantial number of those applications were given delayed consideration.
Private gas producers have long been waiting for the permission to export gas, monopoly owned by Gazprom. This year, the price at which independent gas producers had to sell their gas to Gazprom is slightly more than $20 per 1,000 cubic meters (oil company LUKoil sold its gas at $22.5), that is half of the domestic wholesale price. Due to the huge gap between domestic and export prices, it would be senseless for them to increase gas output, invest in gas and oil refining and geological exploration, and seek foreign investors.
Life is also being made more difficult for independent producers by barriers to receiving approval for the development of their deposits, as well as equal tax rates on the production of dry, or Senoman, cheaper gas, which constitutes 90% of Gazprom's output, and wet gas which is extracted from deeper underground layers. However, shallow gas reserves are running out, and independent producers are seeking new technologies for the production of wet gas from gas condensate deposits, which accounts for over 50% of independent producers' gas output. Wet gas makes up two-thirds of Novatek's reserves, for example.
Rising gas transportation tariffs also constrain private companies' output growth. In 1999-2005, the average cost of gas transportation for those companies more than doubled, from $7.8 to $19.4 per 1,000 cubic meters.
The cost of dealing with these problems is high. As soon as they are solved and the gas market is not designed only with Gazprom in mind, the government could receive 200 billion cubic meters of gas a year from independent companies by 2010, which would be more than enough to bridge the gap between domestic demand and Gazprom's potential. According to some estimates, the country may face a shortage of 50 billion cubic meters in five years if the current volumes of gas output and domestic consumption remain the same.
However, something is beginning to be done in the gas sector. In November, the electronic gas exchange mentioned above, which invited all gas producers and consumers, began trading. Independent gas producers and Gazprom were allowed to trade the same amount, 5 billion cubic meters of gas. For the first time the gas monopoly was asked to provide timely reports about its pipeline capacities; otherwise the idea of a gas auction would have been pointless.
Gas prices in the regulated sector of the gas market are gradually rising and in a few years should reach the export gas prices, excluding export duties and transportation costs. The price at which Gazprom buys gas from independent producers will increase next year. In addition, the Russian parliament is now considering a draft law on differentiating taxes for gas producers.
The ice finally seems to have been broken.
