Risks and Limitations

Country Risks

The main risk is the unpredictable state policy of OJSC Gazprom regulation

There are programs approved and adopted by the Russian Federation Government that imply reforms of the gas industry. None of these governmental programs are implemented. OJSC Gazprom is reformed according to the internal scenario of the company, some elements of which become apparent only after their implementation. The Government does not express its opinion officially about the internal corporate transformations in OJSC Gazprom, not supporting them and not impeding them either.

The Russian Federation Government does not have a consistent vision of gas industry development either as a formal document or a theoretical concept. State regulation is developing based on the initiatives and database of OJSC Gazprom. Sometimes, certain groups in the Russian Federation Government start discussions with managers of OJSC Gazprom on certain essential issues of state regulation. In these period, decisions of the Russian Federation Government may be unpredictably revolutionary. There is no conciliation procedure that would take into consideration the opinions of all important players of the gas industry (producers and consumers).

Strategies should be stimulated, developed and promoted at different levels: from procedures to global country programs

The gas industry policy at all levels may be stabilized through formalization and integration of basic principles of development. The gas industry lacks substantive programs substantiating the development goals and sequence of steps to their achievement. Such programs and projects are necessary at the top level of the gas industry and in the framework of rules and regulations for the industry. The direction of such works today may actually define the direction of gas industry development for decades ahead.

Price Risks

External price variations have a strong impact on the internal economy of OJSC Gazprom

In the end of the last century, relatively low prices of gas on external markets and regulated prices of gas on the internal market led to the situation when the earnings of OJSC Gazprom were not sufficient for covering the costs of maintaining current industrial activities (exploration and development of new fields, modernization of gas pipelines, etc.). As a result, the borrowings of OJSC Gazprom grew out of any reasonable proportions.

In the beginning of this century, high prices of gas on external markets and regulated prices on the internal market led to the situation when the interest of OJSC Gazprom to the internal market began to wane away and the shortage of gas for Russian consumers began to grow. The earnings of OJSC Gazprom are sufficient for maintaining current industrial activities, but a catastrophic growth of expenses started off. There are enough grounds to suppose that a fall of export prices of gas will not be followed by a proportional decline of expenditures. The rollback effect may generate a new wave of financial imbalance of OJSC Gazprom.

The external borrowings of the company are so critically large and the potential for attracting capitals through equity offering is significantly limited, for which reason pressure on the internal market of gas in the rollback scenario may be very high.

Independent regulation of prices and tariffs is fraught with the risk of squeezing independent gas from the market

Many factors, such as the imbalance in regulation of prices and tariffs, absence of an active position of the Russian Federation Government, and tendency of OJSC Gazprom towards vertical integration, create a situation when independent gas producers are legitimately squeezed out of the market of gas sales to end users.

Differentiation of consumers will bring about risks of gray and black markets of gas

The dominant concept of price growth on the internal market implied inevitable differentiation of Russian consumers. First of all, this is the protected social class of consumers — the population and the housing maintenance and utilities sector. These consumers, according to the Russian Federation Government, should not feel any discomfort from changes on the gas market. Second, this is the electric power industry. The growth of gas prices is translated by the Russian Federation Government into the price of electricity generated and sold to consumers (including the population). Thus, the electric power industry should have some privileges (guaranteed volumes of consumption at fixed low prices). All other consumers have to undertake the burden of covering all expenditures of the gas industry for supplying gas to the internal market and financing the aforementioned governmental privileges.

The presence of three different markets of the same product with essentially different prices will ineluctably lead to gas flows between them, organization of gray and black gas reselling schemes, and corruption.

Summary

1. The unpredictability of gas industry development, high level of subjectivity in decision making, and poor manageability of OJSC Gazprom are the main risks of the industry. These risks may only be reduced by constructive and regular works at all levels of management in the industry: political, managerial, procedural, technological, and commercial.

2. The gas industry of Russia remains to be extremely sensitive to the level of export prices. The growth of internal prices will not solve this problem because of the considerable number of stringent long-term export obligations. A fall of export prices will result in a crisis in the gas industry and the country.

3. The Government is incapable of efficient management of the gas industry. Instruments of state regulation are actively used by the gas monopoly in its own interests. These risks may be reduced through constructive procedural support of governmental structures.

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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