Conclusions

1. The share of natural gas in the fuel balance of the country is large and keeps growing. The largest Russian consumers of natural gas are electric power plants, the population, and the housing maintenance and utilities sector. The leader in natural gas consumption is the Privolzhye Federal District.

2. The official prospects of gas industry development are associated, first of all, with development of new production areas and growth of gas prices. The gas demand with increase in the nearest future even with the growing internal prices. The leaders in gas demand will be the population and the housing maintenance and utilities sector. Gas-saving mechanisms will not come into play on their own, and their implementation will require active administrative participation of the state and market players.

3. Gas production growth is possible only after solving the problem of throughput capacity of the gas transportation system. Reconstruction and modernization of the gas transportation system is yet another factor that will increase gas prices.

4. Gas supplies are of a seasonal nature. The shortage of gas and difficulties associated with meeting the requirements of OJSC Gazprom give rise to semi-legal schemes of gas supply, especially in winter.

5. Internal market prices are a macroeconomic regulation instrument rather than an indicator of balance between demand and proposal. It is unlikely that the situation will change I near future. The main driver of possible changes is a reform of the electric power industry.

6. Forecasts of the situation on the internal market of Russia require use of institutional models of decision making that take into account economic factors, social motives, political relations, legal restrictions, and regulatory obligations.

7. The Government has no intentions to radically change the structure of the gas industry in near future. This means that the «economically justified prices and tariffs» will be based on the part of information disclosed by OJSC Gazprom. Thus, the key issue in development of the internal gas market should be information disclosure and public discussion of the industry-related information.

8. The state capitalism model implies division of business into businesses that are good for the authorities and allowed to use cheaper and easier gas, and all other businesses made to search for alternative energy solutions. Gas will be actively used as an instrument of both foreign and domestic policy.

9. Despite the low absolute efficiency of OJSC Gazprom’s business, the company will remain in the industry and retain its position in the industry structure for a long time. Construction of gas business in Russia will be closely associated with having good relations with OJSC Gazprom

10. The structure of the gas industry will change for the better, but not as fast as market players may wish. The period of changes is approximately 5-7 years. Changes may be triggered by internal conflicts between the Russian Federation Government and OJSC Gazprom

11. The situation of price dumping at the expense of export supplies allows the sales companies of OJSC Gazprom to control the internal market and offer cheaper gas at regulated prices in competition with independent producers.

12. Gas transportation costs make a considerable part of wholesale prices of gas. The rules of gas supple allow consumer to purchase gas at the well and transport it to the place of consumption. Selling gas at the well to large consumers may become one of the possible strategies on the market.

13. Development of the system of gas supply balancing requires construction of new gas storages. Problems of peak consumption may only be solved by construction of gas storages of new types in regions, such as gasholders, storages of liquefied natural gas, etc. Supplies of peak gas from storages may become an attractive business in future.

14. 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. The gas trading floor is not a serious project capable of having real impact on the economy of the gas industry and country. As a negotiation floor, this project may allow its active participants to change the structure of informal relations.

15. Organization of joint ventures of oil companies and gas processing companies may be an efficient way towards technological upgrade of gas processing facilities..

16. 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

17. 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.

18. Serious problems with sources of trustworthy industry-related information are expected in near future due to the inconsistence of state regulation reforms and reforms in the gas industry.

19. The production and investment programs of OJSC Gazprom are mainly based on positive forecasts of European prices and consumption volumes. Europe cannot fully renounce Russian gas. OJSC Gazprom will have to defer to the position of European consumers, which pay for the main part of Gazprom’s production costs. An aggressive position of Russia may force the existing customers reconsider their plans and scare away new customers.

20. The Russian internal market will not pay European prices for gas and, if the prices keep growing, gas consumption by the population and the housing maintenance and utilities sector will reduce significantly. The gasification economy is still largely unprofitable and loss-making.

21. The most interesting enterprise in terms of gas marketing are power generating companies. Reforms in the gas industry make companies to shift their business interests and allow them to wedge into the existing schemes of gas supplies with fresh and original proposals. Greater attention should be paid to metallurgic companies. Petrochemical enterprises depend badly on supplies of natural gas. However, this factor played one of the main roles in the redistribution of property and ownership of these enterprises. Most of the petrochemical industry is directly or indirectly controlled by managers of the OJSC Gazprom group. One of the promising directions is selling natural gas to consumers of liquefied petroleum gases.

22. In the nearest future (spring 2007), markets players will raise the issue of making radical changes in the legal framework of the gas industry. OJSC Gazprom will support this initiative. However, the subsequent development depends on the initiatives of participants and their determination to attain their own goals. The best strategy is legalization of the relations already formed in the gas industry and covert formation of new relations through establishment of industry standards.

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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