ENCOURAGED by the rising gas prices for industrial consumers in Russia, independent gas producers are looking to the government’s next step: a law that would give them stable access to Gazprom’s transmission pipelines. Combined, the measures would allow the Russian gas industry to meet the soaring demand both at home and abroad. The State Duma is shortly scheduled to consider the crucial second reading of a long-delayed bill that would provide fairer access to trunk pipelines for independents such as Novatek, LUKoil, and TNK-BP. “We have long wanted this,” Viktor Baranov, head of the Independent Gas Producers’ Union (IGPU), said recently. “Everybody welcomes this.”
The bill comes in addition to a government plan, adopted last November, that raises gas prices for industrial consumers to market levels by 2011. That price is expected to reach $125/1,000cum, more than double this year’s $50.60. “Improving returns in the gas sector should lead to accelerated development of natural gas reserves by Russian oil companies and independent gas producers,” MDM Bank said in an overview of the gas industry released in February.
The country’s long-neglected independent gas producers have the potential to help Gazprom plug a burgeoning supplies gap by servicing the growing local market. Many experts are sceptical about whether Gazprom, which holds a gas export monopoly, will be able to meet its domestic and international commitments over the next few years. The firm has repeatedly delayed plans to develop the giant Shtokman and Yamal gasfields, and its production plans beyond 2010 are not yet clear. In the past five years, independent gas producers have increased annual supply from 69bn cum/yr to 95bn cum/yr, the IGPU said in responses to questions, and it expects to further boost production to 180bn cum/yr in 2010.
Eager to co-ordinate the growing domestic gas market, Gazprom bought 19.4% of Novatek, the largest independent gas producer, in September. “No-one has lifted the overall responsibility for gas supply in Russia from Gazprom,” Mr Baranov said. “Gazprom isn’t demonstrating moves to take over, but to influence the commissioning of new facilities, coordinate the marketing policy and develop the gas market.”
The Russian government regulates prices only for Gazprom’s domestic supplies, which currently make up 76% of the market, while independents are free to set their own price. Given Gazprom’s dominance, the going price of independent gas is usually higher only by 10% to 15%. The higher prices and lower outlays, compared with those of Gazprom, allow independents to make a modest profit, Mr Baranov said. “But production is chiefly funded by borrowed money. There’s an understanding that gas prices will increase.”
The independents mostly transport wet gas, which contains condensate and therefore costs nearly twice as much to produce as Gazprom’s gas. But, as they do not sell it far from their fields, they therefore can keep their transportation costs down. By comparison, Gazprom said it lost $420 million on Russian domestic gas sales last year. The regulated price went up by 15% for 2007, but the effect appeared minimal because of an increase in the gas transportation rate, which also went up by 15%. As a proportion of wholesale and spot prices, the gas transportation tariff will slightly decrease over the next three years, MDM Bank’s analysts say. “By 2010, we estimate that transport tariffs will represent 48% of the regulated wholesale gas price, down from 53% in 2006,” according to MDM’s Nadya Kazakova and Andrei Gromadin.
Just as important as the price is the issue of access to Gazprom’s pipeline network. A guarantee of access would allow independents to expand their market share, but Gazprom has sometimes refused to transport gas, citing a lack of spare pipeline capacity. “Northgas and Itera were all but bankrupted by Gazprom’s refusal to provide them pipeline access,” MDM’s Kazakova and Gromadin point out. Under the government’s new bill, Gazprom would have to transport independent gas from producers proportionately to their requests if it does not have the capacity to transport all of the volumes. The bill would also give independents a chance to build trunk pipelines that they need by forming joint ventures in which Gazprom would have majority control. “Independent gas producers will effectively need to repay Gazprom for building new infrastructure by co-financing such projects, or by paying additional transportation tariffs for the use of any new facilities,” if the bill becomes law, the MDM Bank says. It estimates the cost of building additional transportation facilities at $500-$700 million.