Market Participants and Their Strategies

Strategy of OJSC Gazprom and Position of Mezhregiongaz LLC

OJSC Gazprom has no unified strategy

As a joint-stock company, OJSC Gazprom has to earn profits for its shareholders. As a successor of the Ministry of Gas Industry of the Russian Federation, OJSC Gazprom is obliged to ensure stable gas supply to the country. As an instrument of the ruling political power, OJSC Gazprom is compelled to implement political decisions irrespective of their economic feasibility. As the workplace of a large number of managers with a wide spread of incomes, OJSC Gazprom is a source of numerous flows of money with a wide range of transparency, size and purposes.

Contradiction between these functions and purposes results in the permanent pluralism of opinions about any question or issue in the gas monopoly. Despite the fact that crucial decisions are regularly made in OJSC Gazprom, there a numerous theories on the process of their formation and preparation. The inconsistence of these decisions lends credence to a number of these theories and corroborates the fact that there are several centers of management in the company.

OJSC Gazprom bears responsibility for gas supply in Russia

The promulgated idea behind the activities of OJSC Gazprom is guaranteed supply of gas to consumers in Russia. This image helps the company attain a high level of lobbying its interests both in the internal and external policies.

In spite of the fact that the limits for volumes of gas supplied at regulated prices are set by OJSC Gazprom itself, the company insists on having a status of national endowment and is openly proud of being known as the last hope and resort. Thus, artful and dexterous advertising jugglery converts ordinary and mundane commercial obligations (not always fulfilled or even feasible, by the way) into a tremendous administrative resource.

OJSC Gazprom would like to evade this responsibility

The scheme described above worked well in conditions of positive balance based on gas surplus, high level of export revenues, and sufficient transportation capacities. The growing shortage of gas for consumers is gradually changing the attitude to OJSC Gazprom as the warrantor. According to its performance results of the fall-winter period of 2006-2007, OJSC Gazprom started a campaign for formalization and commercialization of «warranting commitments.»

However, the management of the holding is still reluctant and not ready to part with its exclusive right to distribute gas volumes in exchange for signing long-term supply contracts similar to contracts on the European market.

OJSC Gazprom strives to centralize the industry structure into a vertically integrated holding

Both the state and OJSC Gazprom feel very comfortable with the monopoly of the company in the gas industry owing to the considerable controllability of this scheme. For this reason, OJSC Gazprom is actively promoting this scheme at all levels of the gas industry. Under the auspices of the state, the company is building a vertically integrated industrial holding, which is swallowing all independent players in the industry.

In this regard, the internal market policy of the company is a jackboot policy of the monopoly that imposes an untoward unified standard of services to consumers and ultimatum-style dictation of process and volumes.

OJSC Gazprom subsidiaries go farther along the added value line

Mezhregiongaz LLC, a sales company of the holding, follows the concept of vertical integration even outside the industry. Apart from centralization of sales and gas distribution, Mezhregiongaz LLC is actively entering the business of local heat and electric power generation, heat supply networks, and housing maintenance and utilities.

Endeavors are underway for a long time for gathering assets in production of mineral fertilizers. The group of companies SIBUR is building up a full cycle of chemical production, whereas Gazprombank is actively buying shares of reformed electric power generation companies.

OJSC Gazprom solves gas balance problems by limiting the access of independent producers to the gas transportation system

One of the strategies of OJSC Gazprom is non-admission of producers to the market instead of free-market competition for consumers. Holding a monopoly over the sources of gas, OJSC Gazprom forces consumers to accept its gas sales terms.

The strategy also serves for achieving yet another goal — covering the gas balance deficit. Purchasing gas at he well may be a mutually beneficial practice for both OJSC Gazprom and oil companies. For this purpose, the terms of gas purchase must be open and fair. Thus, the gas market may be formed not only at the outlet of the gas transportation system, but also at its inlet. Nevertheless, as for any other market, the issues of market rules, access to the market, and publicity of key information remain open and urgent.

Mezhregiongaz LLC tends to restrict contacts with independent producers considering them as sources of unregulated gas

The sales companies of OJSC Gazprom in regions (often called Regiongazes) are put by the head company of the holding into severe conditions of limited volume of resources. In conditions of gas shortage, these sales companies are tempted to organize schemes of additional supplies of gas at special higher prices.

One of the sources of such additional supplies of gas for the sales companies of OJSC Gazprom are independent producers that want to sell their gas in the regions of responsibility of the sales companies of OJSC Gazprom. This gas is very attractive for sales companies as it is not subject to state regulation and may be sold at any price acceptable for consumers.

OJSC Gazprom is not interested in open trade of gas

Gas production and consumption are rather conservative, which means that the gas flows connecting them are also conservative. Apart from that, gas flows are conservative because of the configuration of the gas transportation system.

Having a total control of OJSC Gazprom over the gas price at the inlet and outlet of the gas transportation system, irrespective of the contractual direction of gas sales, the monopoly get the income both ways. The issues of organization of physical gas flows remain under the exclusive jurisdiction of the Central Gas Flow Dispatching Department of OJSC Gazprom as issues of technological and systemic reliability.

Thus, OJSC Gazprom is not interested, first, in tangible changes of physical flows, which may increase the number of technological problem, and, second, in emergence of additional sellers, which may decrease its overall income. In conditions of conservative flows, more profitable proposals of independent producers may force contractual gas of OJSC Gazprom out of the market.

Mezhregiongaz LLC launches a trading site

Mezhregiongaz LLC, as the sales company of OJSC Gazprom on the internal market, is interested in raising the price of gas in Russia. Managers of Mezhregiongaz LLC realize that organization of a trading site in conditions of gas shortage will raise market prices of gas, which will serve as an indicator for other transactions on the market.

It seems unlikely that other transactions will be free-market transactions. OJSC Gazprom is not going to renounce and yield up its monopoly in the gas industry. However, according to the organizers, market prices will replace state-regulated prices. In this case, we have yet another conflict of terms (meanings). The trading site of Mezhregiongaz LLC is by no means a prototype of a free gas market, as it is declared by the Government and hoped for by certain participants of the market. It is just a special instrument for setting regulated prices, this time regulated by the sales division of OJSC Gazprom rather than by the state.

The conflict between Mezhregiongaz LLC and Central Gas Flow Dispatching Department of OJSC Gazprom is a conflict of functions

For organization of «open trade,» Mezhregiongaz LLC has to create some formal attributes of open trade, such as rules for access of participants to sales, rules for access of participants to the gas transportation system, gas supply guarantees, payment guarantees, etc. These innovations violate and erode the existing procedures and regulations of the gas transportation system and the service system that is not intended for many customers (thousands of market contracts against dozens of transportation permissions) and frequent provision of services (daily commercial dispatching of supplies against an annual contract for transportation of gas of an independent producer with stringent requirements at the inlet and outlet of the gas transportation system).

The ensuing result is a serious functional conflict between divisions of OJSC Gazprom, which thus far was used to be solved at the level of top management of the company.

Independent Gas Producers

Independent producers sell their gas in several ways described below:

1. Two-sided short-term contracts. Independent producers find customers and have to obtain approval of the deal from OJSC Gazprom, which they not always obtain. Gas prices in such deals sometimes covered in the press seldom exceed regulated prices. The reason for this is that the contract is signed for one year only. Gas sold under shorter-term contracts is somewhat more expensive. Nonetheless, there is a tendency towards signing longer-term contracts. For example, the five-year contract between OJSC NOVATEK and Samaraemergo implies supply of 1.1 billion cubic meters of gas a year (provided that NOVATEK gets access to the gas transportation system from OJSC Gazprom every year).

2. Supplies at prices pegged to regulated prices. Regulated prices now are fairly high for independent supplies. This is especially important for regions remote from production areas. ITERA sells a part of gas supplied to the Sverdlovsk Region at prices that do not exceed the regulated price, and OJSC NOVATEK supplies gas to Tyumen, Kurgan, and the Arkhangelsk Region at prices pegged to the level of regulated prices.

3. Sales at the well. OJSC Gazprom buys gas from independent producers immediately at the well although this is not very profitable as the prices offered are usually considerably lower than regulated prices. According to OJSC Gazprom, only 400 million cubic meters of gas was sold according to this scheme (by OJSC NOVATEK) in Q1-Q2 2003. Other sources report greater volumes (7.5 billion cubic meters of gas a year). The best known deal of this type is the contract signed by OJSC LUKOIL for buying 8.75 billion cubic meters of gas in 2005-2006.

4. Sales to wholesale resellers. There are a number of wholesale resellers working on the Russian market, the best known of which is Transneft, whose activities were extensively covered in relation to the crisis of gas supplies to Belarus in 2004. The main task of such companies is getting access to the gas transportation system and finding end users.

5. Local supplies of gas to isolated territories. In regions unrelated to the gas supply system of OJSC Gazprom,. Such as Norilsk, Yakutia, and Sakhalin, gas is supplied by producers independent from OJSC Gazprom directly to consumers. However, the prices in such deals are regulated by the state.

The terms of gas supply contracts offered by independent producers of gas are much more profitable than the current contracts of the sales companies of OJSC Gazprom (Regiongazes). A large share of gas sold by independent producers is supplied at prices no exceeding the regulated prices of OJSC Gazprom. Apart from that, contracts of independent producers allow considerable flexibility in supplies, payment, supply guarantees, and possibilities of concluding long-term contracts (for up to 10 years).

NOVATEK — a dependent independent

The strategy of OJSC NOVATEK as one of the largest independent producers of gas was built until recently on balancing the interests of different divisions of OJSC Gazprom. The company used to get access to the gas transportation system by exploiting the idea of connecting new consumers — new companies that cannot receive gas from OJSC Gazprom because formally OJSC Gazprom has no required gas resources in production. NOVATEK used to enter regional markets through contracts with the sales companies of OJSC Gazprom (Regiongazes), to which NOVATEK used to sell about a half of its gas sold in the respective region. A considerable part of its profits the company used to earn outside the sphere of OJSC Gazprom’s interests — on the market of liquid hydrocarbons.

However, the role of OJSC NOVATEK in the gas industry kept growing, and it became impossible for the company not have its own standpoint. A direct conflict with OJSC Gazprom would have destroyed the entire business of the company. Clear understanding of this thesis by both parties led to a deal in which OJSC Gazprom got a blocking stake in OJSC NOVATEK for «coordination of its marketing policy in natural gas supplies.»

ITERA — local project of a balance of interests

The main gas consumer of the ITERA LLC is the Sverdlovsk Region. ITERA LLC provides this region with gas via CJSC Uralsevergaz. ITERA has an agreement with the Administration of the Sverdlovsk Region on supplies of gas through 2008.

The gas resources of the company are provided by OJSC Gazprom (60%) and OJSC NOVATEK (40%). Gas is supplied to consumers at graduated prices: at prices equal to the regulated prices for the population and the housing maintenance and utilities sector, and ar prices exceeding the regulated prices by 20% for other consumers.

LUKOIL — top level diplomacy

In 2005, LUKOIL declared that it wanted to become the second largest gas company in Russia. The company places its main stake on fields in the Yamalo-Nenets Autonomous Area and the shelf of the Caspian Sea.

In October 2003, OJSC Gazprom and LUKOIL signed an agreement according to which LUKOIL will supply gas from the Nakhodka field at a certain price formula. According to the statements of company managers, the price shall not fall lower than $22 per 1000 cubic meters. However, after connection of the company to the gas transportation system, OJSC Gazprom agreed to buy LUKOIL’s gas at no more than $11 per 1000 cubic meters. The terms of agreement did not stipulate OJSC Gazprom’s refusal to accept gas. As a result, the Nakhodka field was remained idle in 2004.

Another step to cooperation was successive attempts to conclude strategic agreements with OJSC Gazprom. In March 2005, OJSC Gazprom and LUKOIL signed an agreement of strategic cooperation till 2014, which implied joint implementation of oil projects in the Nenets Autonomous Area, Yamalo-Nenets Autonomous Area, and the Russian sector of the Caspian Sea. The role of OJSC Gazprom was related to utilization of associated gas.

LUKOIL and OJSC Gazprom are going to sign another agreement on organization of a joint venture in 2006. OJSC Gazprom will have 51% in the joint venture, and LUKOIL 49%. The draft agreement specifies a number of concrete fields in the Yamalo-Nenets Autonomous Area and the Republic of Komi for joint development and production.

However, this strategy did not yield any breakthrough of the company to the gas industry. Currently LUKOIL is actively looking for buyers of 8-10 billion cubic meters of gas whose production is scheduled for 2007. The company acknowledges, in particular, that it is ready to follow the steps of ITERA and bear the responsibility of supplying gas to a certain region. In the sphere of industrial consumption, LUKOIL decided to follow the path of retail sales mainly to small and medium-size enterprises that do not have enough of Gazprom’s gas. The company is interested in consumer enterprises in the sphere of electric power generation, petrochemical production, gas chemistry, and oil refining.

Currently, LUKOIL is already supplying its gas to power plants though it is associated gas produced together with oil. After treatment at a gas processing plant, gas is supplied to power plants in West Siberia, the Perm Region, Volgograd Region, and Republic of Komi. LUKOIL is going to purchase energy-related assets and construct its own power generation facilities.

Rosneft — political opponent

The relations between OJSC Gazprom and Rosneft cannot be called cloudless.

So far, despite the control of the state over both of these holdings, OJSC Gazprom, whose Board of Directors is headed by the First Deputy Prime Minister D. Medvedev, and Rosneft, whose Board of Directors is headed by I. Sechin, Deputy Chief of Staff of the Presidential Executive Office, were in fierce competition with each other. In 2004, President of the Russian Federation V. Putin declared their merging, but Rosneft managed to defend its independence, After that, these two state-controlled companies became rivals. OJSC Gazprom was going to buy Yuganskneftegaz, but it eventually went to Rosneft. The companies often clash for licenses. Rosneft used to have chronic problems with access to the Unified Gas Supply System.

In November 2006, OJSC Gazprom and Rosneft signed an agreement of strategic cooperation. Owing to this partnership, OJSC Gazprom will solve the problem of its own declining production by purchasing increasing volumes of gas produced in the gas fields of Rosneft. Apart from that, the companies will implement joint projects related to geological exploration and production of hydrocarbons.

The companies agreed that OJSC Gazprom will buy gas in the fields of Rosneft «in actually produced volumes, but not less than the production volume of 2006.» Rosneft is the fourth largest independent gas producer. In 2005, 3.6 billion cubic meters of gas from fields in West Siberia was sold to OJSC Gazprom, 1.1 billion cubic meters of gas to independent traders, and 420 million cubic meters of gas to end users. They say that this year Mezhregiongaz LLC will buy 2-3 billion cubic meters of gas from Rosneft and Rosneft will independently transport approximately 3 billion cubic meters of gas. Presumably, OJSC Gazprom undertook to buy at least 5-6 billion cubic meters of gas in 2007 at the entrance of the gas transportation system.

As to gas produced in the field that are not connected to the gas transportation system yet, there is an agreement that the volumes, terms, and periods of gas sales will be regulated by additional agreements.

Experts’ attitude to this agreement is rather skeptical. S. Belkovsky analyzed the situation from the political point of view and called this agreement a «mere declaration.» According to him, OJSC Gazprom and Rosneft are the financial supports of different political parties. «The mutual hatred of D. Medvedev and I. Sechin is reciprocal and very much alive. The agreement only demonstrates that the two parties publicly shook hands at V. Putin’s request in order to quench the talks and publications insisting that the two companies are at war of extermination. Nevertheless, the war is on.»

Gas Processing

Now, most of associated gas in Russia is burned for nothing, or burned for electric power generation. Associated gas is mostly methane. Heavier fractions of light hydrocarbons are the least expensive and most valuable petrochemical raw material for pyrolysis, rubber production, etc.

LUKOIL and Surgutneftegaz purchased in 2001 from SIBUR two of eight gas processing plants (Lokosovsk and Surgut gas processing plants) and thus partially solved their own problems of associated gas utilization.

Buyers and suppliers on the market of associated petroleum gas

Source: Central Economics and Mathematics Institute (2004)

In November 2006, OJSC SIBUR Holding and TNK-BP declared about establishment of a joint venture for associated petroleum gas processing based on the Nizhnevartovsk and Belozerny gas processing plants. The stake of OJSC SIBUR Holding in the joint venture will be 51%, and that of TNK-BP 49%. The newly established joint venture Yugragazpererabotka LLC will be managed on parity basis.

Production of dry stripped gas in Russia in 2005

Source: Ministry of Industry and Energy of the Russian Federation

Neither of these gas processing plants of SIBUR is connected to a trunk gas pipeline. They discharge associated petroleum gas into practically isolated Parabel-Kuzbass gas pipeline. This means that gas will be sold only to consumers of this gas pipeline. The largest consumers among them are Azot in Kemerovo (approximately 1.5 billion cubic meters a year), Nizhnevartovsk state district power plant (up to 3 billion cubic meters a year), and Tomskneftekhim (0.5 billion cubic meters a year).

SIBUR is going to use its experience in establishment of joint ventures to reach similar agreements with other oil companies, such as the state-controlled Gazpromneft and Rosneft. In the respective joint ventures, the oil and gas holding wants to share Yuzhno-Balyk gas processing plant with Rosneft and construct a new gas processing plant together with Gazpromneft.

As of today, one of the painful points of SIBUR is its inadequately arranged transportation infrastructure, which is incapable of handling potentially large volumes of gas and broad fraction of light hydrocarbons produced by the gas processing plants. For this reason, the gas processing plants are not operated at their full capacity.

The Yuzhno-Balyk gas processing plant has no access to trunk gas pipelines at all. Dried gas is supplied only to the Surgut state district power plant. In winter, when the power plant is operated at its full capacity, the gas processing plant can also work continuously. In summer, however, when there is no demand for gas and the power plant is closed for preventive maintenance, the gas processing plant has to sharply decrease the gas processing volume, whereas its suppliers have to burn associated petroleum gas in flares. SIBUR is not the only supplier of the Surgut state district power plant, whose largest supplier of gas is Surgutgazprom.

Layout of gas processing facilities

Source: SIBURSimilar problems are created for SIBUR by the oil product pipeline transporting broad fraction of light hydrocarbons from the Belozerny and Nizhnevartovsk gas processing plants along the pipeline route running from the Belozerny gas processing plant to the Tobolsk petrochemical plant.

The Gubkino and Krasnoleninsk gas processing plants have neither infrastructure for export of broad fraction of light hydrocarbons nor equipment for its production and are operated in the compression mode for drying associated petroleum gas and production of casing head gasoline in summer. These gas processing plants have only separation, compression and drying cycles, and gas produced by them, characterized by a high content of C3+ counter to the standards of gas access to trunk gas pipeline, is supplied to trunk gas pipelines in small amounts and mixed with the main flow of natural gas. The resulting ga smixture meets the standard of trunk gas pipelines.

Gas processing facilities are available in two regions of this report: in the Samara Region and Perm Krai.

CJSC Otradnoe Gas Processing Plant (Samara Region, Otradnoe)

CJSC Otradnoe Gas Processing Plant is incorporated in OJSC NK YUKOS. The main activities of the gas processing plant are utilization and processing of associated petroleum gas supplied from the oil production enterprises of Samaraneftegaz and TNK-Orenburg. Gas is processed according to the scheme of low-temperature condensation. The gas processing plant was commissioned and put into operation in 1962.

The rated crude gas processing capacity of the gas processing plant is 1,100 million cubic meters a year.

The commercial products of the gas processing plant are:

· natural combustible gases transported through trunk gas pipelines;

· ethane fraction;

· technical solid sulfur in lumps; and

· broad fraction of light hydrocarbons.

CJSC Neftegorsk Gas Processing Plant (Samara Region, Neftegorsk)

CJSC Neftegorsk Gas Processing Plant is incorporated in OJSC NK YUKOS. The main activities of the gas processing plant are utilization and processing of associated petroleum gas supplied from the oil production enterprises of Samaraneftegaz and TNK-Orenburg. Gas is processed according to the scheme of low-temperature condensation. The gas processing plant was commissioned and put into operation in 1969.

The rated crude gas processing capacity of the gas processing plant is 730 million cubic meters a year.

The commercial products of the gas processing plant are:

· natural combustible gases transported through trunk gas pipelines;

· ethane fraction;

· technical solid sulfur in lumps;

· broad fraction of light hydrocarbons; and

· stable casing head gasoline.

OJSC Perm Gas Processing Plant

OJSC Perm Gas Processing Plant is incorporated in AK SIBUR. The Perm Gas Processing Plant was constructed in two stages in 1969 and 1976. The gas processing plant is used for processing of associated petroleum gas and production of stripped gas and propane, butane, pentane, and hexane fractions.

In 1999, the gas processing plant was split into two enterprises: OJSC Perm Gas Processing Plant and Permneftegazpererabotka LLC.

The raw materials of OJSC Perm Gas Processing Plant are broad fraction of light hydrocarbons and liquefied hydrocarbon gases supplied from West Siberia by OJSC SIBUR-Tyumen, OJSC Gazprom-Surgut West Siberia Company, and OJSC Urengoigazprom.

Permneftegazpererabotka LLC

Permneftegazpererabotka LLC is incorporated in OJSC LUKOIL. Permneftegazpererabotka LLC was separated from the Perm Gas Processing Plant in 1999.

The raw materials of Permneftegazpererabotka LLC are:

· associated petroleum gas yielded by oil production in the Perm Region in the amount of 200,000-300,000 tons a year; and

· wet gas from the crude and vacuum distillation unit, catalytic cracking unit, and coking unit of Lukoil-Permnefteorgsintez LLC in the amount of 125,000 tons a year.

Associated petroleum gas is supplied to the gas processing plant from fields of the Perm Region along the following two directions:

· northern direction: from the Unvinsk and Kamennoe Lozhe fields; and

· southern directionL from the Kylasovo-Kukuisk field.

The total capacities of Permneftegazpererabotka LLC are as follows:

· the crude gas processing capacity is 5 million cubic meters a year; and

· the liquid hydrocarbon (hydrofluorocarbon, HFC) processing capacity is 480,000 tons a year.

Other Players of the Gas Industry

Relation-shippers: a way to fix access problems

The complicated procedure of obtaining permission of access to the gas transportation system gave rise to companies that simplify and palliate this procedure (often called relation-shippers). For remuneration, these companies can find out the reason behind previous access denials, speed up the decision making process, and even obtain the required decision with some violations of the procedure (such as, for example, violation of the term of application).

Traders: business on contacts with OJSC Gazprom structures

In case of serious problems with getting access (such as, for example, a conflict with OJSC Gazprom), relation-shippers may buy gas at the inlet to the gas transportation system and then sell it at the outlet from the gas transportation system. Often, these companies have good contacts and relations with regional sales companies of OJSC Gazprom (Regiongazes) and offer their assistance in gas sales in regions of interest.

The business of relation-shipper is built mainly on trust relations (kinship relations, concealed affiliation, etc.). This business is alive for a long time now and has formed stable resale chains and diversified trading portfolios of key players. Qualified gas consumers willing to receive additional volumes of gas first turn to well-known relation-shippers on the market and only after that start negotiations with independent producers of gas.

Gas distribution organization: regional monopoly

Gas distribution organizations perform the function of gas delivery from the trunk gas pipeline to end users (often called the last mile function). The procedure of getting access to gas distribution networks is based on the same principles as the procedure of getting access to the trunk pipeline transport. Thus, gas distribution organizations use the same schemes, manipulations, and tricks of OJSC Gazprom for deriving all possible benefits and profits from their monopoly in the region (tricks and subterfuges like «absence of technical possibility,» «noncompliance with the term of application,» etc.).

The situation is complicated and entangled by the broad spectrum of owners of regional gas distribution organizations. Typical owners are OJSC Gazprom, local administration, former managers of gas distribution organizations, and local business elite. Despite the efforts of OJSC Gazprom, a considerable part of all gas distribution organizations in Russia are out of control of the gas monopoly. OJSC Gazprom takes part in 196 gas distribution organizations in Russia out of the total 300 existing in the country. These gas distribution organizations use more than 80% of all gas distribution networks with an overall gas transportation volume of over 150 billion cubic meters a year.

OJSC Gazprom will buy gas distribution stations from extraneous organizations (fall 2006)

OJSC Gazprom is going to buy gas distribution stations owned by extraneous organizations, informed Valery Matyushechkin, Head of the Division of Gas Supply and Utilization of OJSC Gazprom. According to him, there are approximately 300 gas distribution stations in Russia, and Gazprom will buy about 25-30 gas distribution stations this year.

Gas distribution organization as a gas seller on the local market

Gas distribution organizations have the right to sell gas to end users and often take advantage of this right. First, gas distribution organizations have complete information on regional consumers, including their actual needs, requirements, consumption regimes, installed equipment, etc. Second, gas distribution organizations have sizeable volumes of their own unaccounted gas, which consist of standard losses in gas distribution networks and mostly of the difference in norms and supplies of gas to the population. Third, the infrastructure of gas distribution organizations may used for compensation of peak (daily) variations of gas consumption.

Gas distribution organization as a contact with local authorities and business

Gas distribution organizations belong to the system of housing maintenance and utilities and works immediately with the electorate. Employees of gas distribution organizations live in the region covered by their services. Therefore, despite the fact that gas distribution organizations constitute an integral part of the gas industry, they take the side of the region in conflicts between the regional administration and OJSC Gazprom.

However, the formal dependence of gas distribution organizations on OJSC Gazprom is rather strong. and, procedurally, gas distribution organizations carry out technical measures for limiting gas supplies to consumers under instructions of regional sales companies of OJSC Gazprom.

Structure of Mezhregiongaz LLC: regional gas companies

Mezhregiongaz LLC was established for overcoming the nonpayment crisis, and the functions of this company today are severely curtailed. Nevertheless, Mezhregiongaz LLC is the mediator between OJSC Gazprom and end users. Mezhregiongaz LLC collects gas requirement applications, draws up the expense side of the gas balance of the country, controls maintenance of this balance, and ensures collection of gas payments.

The General Director of Mezhregiongaz LLC is the Head of the Department of Marketing and Processing of Gas and Liquid Hydrocarbons in OJSC Gazprom. The company has a sales subsidiary (Regiongaz) in every region responsible for selling gas of OJSC Gazprom. An associated business of these sales subsidiaries (Regiongazes) is selling gas of independent producers. These regional sales subsidiaries constitute the basis of Mezhregiongaz LLC for implementing the strategy of OJSC Gazprom in regions (standard supply contracts, standard limitations of supplies to consumers, etc.) and, in particular, building a trading site for gas sales.

Summary

1. The gas industry is a tangle of conflicts due to its history, ownership structure, and regulation procedure. Contradictions and clashes abound both between OJSC Gazprom and other players, including the state, and inside OJSC Gazprom.

2. The poor efficiency of OJSC Gazprom management is so far compensated by its high political status and strong administrative resources. OJSC Gazprom is not ready for open competition and is not likely to face it in the nearest future, because all independent companies are being squeezed out of the market or incorporated into the structure of OJSC Gazprom.

3. The proliferation of problems in the gas industry requires sound decisions and efficient solutions. Limited solutions may be bought from outside on an outsourcing basis. Global solutions may only be worked out after radical changes in the structure of management of the gas monopoly.

4. The structure of ownership in the gas industry is undergoing drastic changes. High prices of exported gas allow OJSC Gazprom to accumulate funds and assemble the industrial vertical. The ownership vertical often goes far outside the gas industry framework.

5. Open trade marketing of gas is not relevant in today’s Russia, because the conflict of interests of the market players is not settled or anyhow regulated in the existing version of open market trading rules.

6. Independent producers of gas are contriving different schemes for using the industrial contradictions and discrepancies for direct supplies of their gas to consumers. The higher cost of independent gas is compensated by the flexibility of suppliers and transparency of relations.

7. Processing of associated petroleum gas is a huge unused resource for producing dry stripped gas. The key problem of associated petroleum gas processing is the low technological level of existing gas processing plants. Organization of joint ventures of oil companies and gas processing companies may be an efficient way towards technological upgrade of gas processing facilities.

8. The problems of the gas industry give rise to gray solutions. The fastest way of development is legalization and formalization of the existing informal norms, transparency, and binding force of rights and obligations.

9. The sector of gas distribution in Russia is underestimated both in the financial and managerial aspects. Development of the gas market in Russia will be stimulated by a shortage of gas for consumer rather than by excessive production of gas. Gas distribution organizations act as concentrators of consumer interests and organizational bases for independent sales companies.

10. The sales companies of OJSC Gazprom enjoy an unreasonably high administrative status in regions and are characterized by low efficiency of their business. If the gas market is finally formed, they will have to revise their business approaches or sacrifice a considerable part of their customer base.

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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