Analytical Report Outline

General Outline of the Gas Market

Gas is a special type of fuel in Russia. Combined functions of OJSC Gazprom is the key problem of the gas market. There is a formal solution, but it does not work for both gas transportation and gas sales. OJSC Gazprom dominates the industry. The situation will remain the same in the nearest future. New production requires development of remote and difficult fields. The cost of new gas will be higher. OJSC Gazprom is going to go to the East. OJSC Gazprom is preparing consumers for higher prices. The housing maintenance and utilities sector is a large consumer of gas in Russia. The dynamics of gas consumption by the population is controlled by OJSC Gazprom. The scale of gasification is large. Gasification is accompanied by structural changes in OJSC Gazprom.

The Energy Strategy of the Russian Federation is the only official document outlining the prospects of gas industry development. The Energy Strategy of the Russian Federation sets a tendency to rising gas prices and priorities of new field development. OJSC Gazprom predicts gas demand growth. OJSC Gazprom does not plan to increase gas supplies to electric power plants. Natural gas consumption forecasts. Import is considered as a source of additional gas demand satisfaction. New field development is considered as a source of additional gas demand satisfaction. OJSC Gazprom admits an increase of the share of independent producers. Structure of natural gas production.

The structure of gas industry regulation is imperfect. The legal framework of the industry is the result of the balance of forces. The conservative position of OJSC Gazprom prevails in the current balance of forces. The industry regulation system is highly eclectic.

The level of gas prices is annually set by the Federal Tariff Service for each individual region. Consumption of natural gas in Russia is highly non-uniform in seasons. The state has no formal gas distribution powers. Permission for access to the gas transportation system is the key stage in a gas supply contract. The access granting procedure is not transparent. Consumers prefer gas from independent suppliers.

Prices and Tariffs

Planning and budgetary regulation of prices are still there in the legislation. Transition is planned from regulation of wholesale prices to regulation of the unified transportation tariff. A procedure for setting fair tariffs for independent producers is the first step towards the unified tariff. Theoretically, internal gas prices must grow. According to decision of the Russian Federation Government, gas prices will increase sharply only after 2008. Price growth will be proportional to territories. Price growth will no be uniform for different consumers. Gas transportation tariffs may become a price raising instrument. Tariff growth will change the geographic curve. Logics of estimates. Sources of information. Recommendations for information collection.

The current price of gas strongly depends on transportation costs. Changes of production regions will considerably raise the cost of both production and transportation. A serious increase of gas distribution costs is predicted.

The state regulation of prices and tariffs guarantees profitability of OJSC Gazprom. Revenues from the external and internal markets are the only source of financing the costs. Growth of export revenues helps the Russian Federation Government check the internal prices. The administrative weight of marketing subsidiaries of OJSC Gazprom helps them lobby the growth of prices on the internal market. Export is a protected article in the gas balance of the Russian Federation. Import buildup is one of the ways to eliminate deficit on the gas market.

Central Infrastructure of the Gas Industry:
Trunk Pipelines and Underground Storages

The Unified Gas Supply System consists of soviet assets whose amortization is completed. The Unified Gas Supply System requires modernization: transition to gas, de-bottlenecking, and increase of its efficiency. The Unified Gas Supply System: key corridors, throughput capacities, and development prospects. Underground gas storages as an instrument of seasonal gas balancing. Underground gas storages: key storages and their characteristics. Underground gas storages: gas balancing problems.

Key limitations of the throughput capacity of pipelines. Load of pipelines. Key characteristics of underground gas storages. Prospects of infrastructure development according to the investment program of OJSC Gazprom.

State Regulation of Natural Gas Transportation and Sales

Outline of the legal framework of the industry. Outline of price formation and taxation on the natural gas market.

Market Participants and Their Strategies

OJSC Gazprom has no unified strategy. OJSC Gazprom bears responsibility for gas supply in Russia. OJSC Gazprom would like to evade this responsibility. OJSC Gazprom strives to centralize the industry structure into a vertically integrated holding. Mezhregiongaz LLC goes farther along the added value line. OJSC Gazprom solves gas balance problems by limiting the access of independent producers to the gas transportation system. Mezhregiongaz LLC tends to restrict contacts with independent producers considering them as sources of unregulated gas. OJSC Gazprom is not interested in open trade of gas. Mezhregiongaz LLC launches a trading site. The conflict between Mezhregiongaz LLC and Central Gas Flow Dispatching Department of OJSC Gazprom is a conflict of functions.

NOVATEK — a dependent independent. ITERA — local project of a balance of interests. LUKOIL — top level diplomacy. Rosneft — political opponent. SIBUR — instrument of access to the infrastructure. Problems of incomplete process cycle have a serious impact on the gas market. Industrial gas processing: problems of technology and economy. Relation-shippers: a way to fix access problems. Traders: business on contacts with OJSC Gazprom structures. Gas distribution organization: regional monopoly. gas distribution organization as a gas seller on the local market. gas distribution organization as a contact with local authorities and business. Structure of Mezhregiongaz LLC: regional gas companies.

Consumers. Economic and Regional Segmentation

Problems of information collection and use. Prices of imported gas keep growing steadily. OJSC Gazprom does everything to increase gas import. The tendency to diversification of suppliers will make OJSC Gazprom actively fight for traditional markets. The struggle for markets will diversify export directions.

Social functions of gasification clash with the economy of projects. The scale of financing of gasification projects grows for political reasons. Gasification as a factor of growth of internal gas consumption. The economic efficiency of gasification strongly depends in the wholesale price of gas. The tariffs of gas distribution organizations grow as major consumers go away.

Overview of the consumption structure in the regional of Russia. Diagrams and conclusions. Logics of estimates. Sources of information. Recommendations for information collection. Analysis of the dynamics and prospects of consumption of key consumers.

Key Problems of the Market

OJSC Gazprom’s version: the share of gas is large out of proportion. Independent producers’ version: natural advantages should be employed. Coal as a real rival of gas in the long-term perspective. Growth of the customs duty for fuel oil as an instrument for changing the structure of fuel and energy balance. Diagram of geographical distribution of prices and tariffs. Diagram of historical dynamics of prices and tariffs. Inverse dependence: the tariff setting procedure is linked to price setting results. Export prices and export tariffs. Comparison will soon be not in favor of Russia.

Granting access clashes with OJSC Gazprom’s interests. Solution of the problem is organizational detachment of the gas transportation system of Russia. Political decision made: there will be no detachment. Versions of access: unified buyer, investment-based access, antimonopoly persecution, and proportional access. Problems with organization of centralized trade. Access to the infrastructure. Guarantees of delivery. Independent and representative trade. Access to trade.

Risks and Limitations

The main risk is the unpredictable state policy of OJSC Gazprom regulation. Strategies should be stimulated, developed and promoted at different levels: from procedures to global country programs. External price variations have a strong impact on the internal economy of OJSC Gazprom. Expenses rise with growing earnings, but do not recede with falling earnings. Independent regulation of prices and tariffs is fraught with the risk of squeezing independent gas from the market. Differentiation of consumers will bring about risks of gray and black markets of gas. Transparency of rules and forecasts as a strategy of publicity. Departure from the residential market as an insurance against price fluctuations on this market. Long-term contracts as a risk hedging mechanism.

Market Development Prospects

The reform of OJSC Gazprom is going on. The reform will ineluctably lead to commercialization and transparency. Internal conflicts stimulate market development. Changes will take 5-7 years. Procedure of setting wholesale prices. Rules of supply. Rules of trading on an organized market. Law of gas supply. It is necessary to have proposals and encourage their discussion when possible. Prospects of trading site formation. There are rules of trading, but no rules of market. OJSC Gazprom does not need open trade and, therefore, has no future. Open trade as a subject of political bargain. Way forward — formalization of informal obligations, rights and demands. Directions of legal framework development in view of potential prospects of open trade.

Abbreviations

APG — associated petroleum gas

APR — countries of the Asia-Pacific region

BFLH — broad fraction of light hydrocarbons

CDA — Central Dispatching Agency of the Ministry of Industry and Energy

CGDD — Central Gas Flow Dispatching Department of OJSC Gazprom

CS — compressor station

Energy Strategy — Energy Strategy of Russia Till 2020

FAS — Federal Antimonopoly Service of the Russian Federation

FEB — fuel and energy balance

FTS — Federal Tariff Service of the Russian Federation

GDO — gas distribution organization

GDS — gas distribution stations

GPP — gas processing plant

GTS — gas transportation system of Russia

HMU — housing maintenance and utilities

JV — joint venture

LNG — liquefied natural gas

MET — mineral extraction tax

MIC — Main Interregional Center for Processing and Distribution of Statistical Information of the Federal State Statistic Service

MIE — Ministry of Industry and Energy of the Russian Federation

MRG — Mezhregiongas LLC, sales company of OJSC Gazprom

NGV RCS — natural gas vehicle refueling compressor station

NM — natural monopolies

PCP — petrochemical plant

RC — residential consumers

Regiongaz — sales company of OJSC Gazprom in the region, subsidiary of Mezhregiongaz LLC

SDSP — supply and distribution service payment

TC — Tax Code of the Russian Federation

TS — trading site of Mezhregiongaz LLC

UGS — underground gas storage

UGSS — Unified Gas Supply System of Russia

Other Links:

Report Outline
General Outline of the Gas Market
Prices and Tariffs
Infrastructure of the Gas Industry
State Regulation of Natural Gas Transportation and Sales
Market Participants and Their Strategies
Consumers. Economic and Regional Segmentation
Key Problems of the Market
Risks and Limitations
Market Development Prospects
Conclusions

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Russian Version:

Оглавление и сокращения
Краткое содержание отчета
Цены и тарифы
Центральная отраслевая инфраструктура
Государственное регулирование
Участники рынка
Сегментация потребителей
Проблемы рынка
Риски и ограничения
Перспективы рынка
Выводы

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