While the collapse of Communism in Russia was followed by a dramatic decline in oil production from 587m tons in 1987 to 301m tons in 1996, the decline in gas production was much less marked. It fell from a peak of 636 billion cubic meters (bcm) in 1990 to 571 bcm in 1997, before starting to rise again, achieving 634 bcm in 2004, a rise of 2.8 percent over 2003. Production is planned to stabilize at this level in 2005.

There are a number of reasons why the gas sector has performed better than oil industry. One is undoubtedly Russia’s huge reserves of gas, which currently stand at 46,900 bcm of proved and probable gas. Another reason is the preservation of most of the gas industry in one giant corporation, Gazprom, which, despite all its faults, has succeeded in maintaining a degree of stability in the industry. Successive governments have balked at any reform of the gas sector which could disrupt the industry, damage exports and cut gas supplies to apartments in winter.

Independents

In 2003, Gazprom accounted for 540.2 bcm of the total output of 616.4 bcm, or 87.6 percent, which dropped to 86 percent in 2004, when it produced 545.1 bcm out of a national total output of 633.9 bcm. However, Gazprom’s hegemony in the market has been gradually whittled away as a number of small independent gas producers have sprung up, often winning tenders to explore and drill fields that Gazprom considers too small to bother with. Other companies, informally called “the independents,” increased their output by 16.5 percent to 88.8 bcm in 2004 from 76.2 bcm in 2003. The long-term plan predicts that oil companies will yield 50 bcm/yr and the independents 120 bcm/yr by 2020.

Itera, Nortgaz, and Novatek are among the main independents in the country, most of which obtained gas fields from Gazprom under less-than-transparent circumstances after the collapse of Communism. Gazprom has been trying to get some of them back since Alexei Miller was appointed chairman in 2001. A court recently ruled that the writing-off of shares in Nortgaz from the account of Urengoigazprom, amounting to 51 percent of the first issue of shares in Nortgaz, was illegal — a decision which will pave way for oil giant to restore its ownership of Nortgaz.

Domestic consumption

In the past, the domestic gas price was so low that Gazprom sustained losses on sales in the country. However, the price has been increased from 196 rubles/ton/cubic meter (tcm) in January 2003 to 244 rubles/tcm in January 2004, and by 20 percent last year to about 290 rubles/tcm. Gazprom is now making a small profit from its domestic sales, and its profitability should grow after a further price increase of 20.8 percent at the beginning of this year. The average delivered price for the middle of the 10 regional price bands is now 1,000 rubles/tcm or just about $35/tcm. The long-term strategy foresees delivered prices growing to $41/tcm in 2006 and $59-64 by 2010, but many experts say these rates are still too low to fund Gazprom’s massive investment needs.

Meanwhile, Russia’s current long-term plan is proving to be grossly pessimistic. Its “likely” variant expects gas production to grow to 635 bcm in 2010 and 680 bcm/yr by 2020, and even the “optimistic” production variant, which foresees 610-615 bcm in 2005, 635-665 bcm in 2010, and 680-730 bcm in 2020, is already being outstripped. This is because the predominant producing region of Western Siberia is yielding more gas than expected, partly because the declining super giants, Urengoi and Yamburg, are producing more than planned, and partly because new fields, such as the 100 bcm/yr Zapolyarnoye, have been brought on-stream faster than expected.

However, the main reason for the surging output is growing domestic demand. Russia’s gas industry does not suffer from production constraints — it can produce as much gas as it wants, within reason. The constraints are basically demand by consumers and pipeline capacity. High production costs and huge transportation tariffs have made alternative cheaper energy sources such as coal unattractive for consumers. Consequently, the demand for gas has continued to grow.

Gas exports

Gazprom has become an increasingly important player on the Western European gas market. Its total gas exports have increased from 109 bcm in 1990 to 132.9 bcm in 2003 and 140.5 bcm in 2004. All the increase has been taken by Western Europe, which bought 94 bcm in 2004, compared with 63 bcm in 1990. Sales to Eastern Europe have stabilized at about 46 bcm/yr. Russia’s share of the Western European gas market has grown to the extent that politicians in some countries are becoming somewhat nervous, tending to forget that Russia has never failed to honor its contractual obligations. Any cutoff in supplies, for whatever reason, would hurt Russia more than the importing country.

Gazprom has also benefited hugely from surging gas prices. The long-term plan expected the average price of exports to rise from $86/tcm in 2002 to $87/tcm in 2003, $89-93 in 2004 and $91-97 by end-2005, before growing slowly to $119-136/tcm in 2020. The average price in 2003 rose sharply to $121.2/tcm, rising to $136.6 in 2004, and could grow further still this year. Like the oil companies, Gazprom has done very well out of the turmoil on world energy markets. Its hard currency revenue has grown from $7.2 billion in 1999 to $16.1 billion in 2003 and $19.2 billion in 2004.

The Turkmen problem

There is a rather vague plan to boost gas exports to Western Europe to 180 bcm/yr, as supplies from the North Sea start to dry up. However, this plan is dependent on a long-term contract, which Gazprom has signed with Turkmenistan for the supply of 70-80 bcm/yr by 2008. This plan involves Gazprom spending a considerable sum of money to renovate and expand the existing system of five gas pipelines from Turkmenistan to western Russia. Russians are becoming increasingly nervous about the project, and have demanded an independent audit of Turkmenistan’s gas reserves to ensure that they have enough gas to fulfil the contract and justify expenditure on the pipelines.

The Turkmens have not hurried to organize the audit, and Turkmen President Saparmurat Niyazov has now decided to stop supplying the 7 bcm Gazprom was expecting this year, until the gas giant is ready to pay a price of $60/tcm, compared with the contracted $44/tcm. Russians have pointed out that the price is fixed for three years, and Niyazov is not entitled to renegotiate the contract.

Pipeline access

Meeting the gas-production targets will partly depend on the ability of independent producers to gain access to Gazprom’s pipeline network. Apart from short pipelines built by Itera in Sverdlovsk province, Gazprom has a monopoly over the pipeline system, and it permits the independents to use it if there is excess capacity, but problems arise where Gazprom is able to fully utilize its pipeline capacity. The solution to such problems lies in Gazprom and independent gas producers jointly building more pipelines. However, mechanisms for realizing such projects have yet to be drafted, although Gazprom claimed last summer that it had drawn up a draft proposal. During 2004, Gazprom granted 35 independent producers access to its pipeline network, four more than in 2003, and allowed them to transport 60.2 bcm of gas, up 14.9 percent from 2003. Gazprom also allowed Kazakhstan, Turkmenistan, and Uzbekistan to transport 50.2 bcm of gas through its pipelines, 7 percent more than the 46.9 bcm in 2003.

In the more-distant future

While the targets of the long-term plan are being fulfilled for the present, serious question marks hang over the gas sector beyond 2010. The industry has so far succeeded in boosting output largely by working existing fields in existing gas-producing regions. The real test will come when Gazprom has to venture out into new regions on which the targets for 2020 depend. These include the Yamal and Gyda peninsulas of Western Siberia with their extremely difficult working conditions, including continuous permafrost, the Barents Sea where the Shtokmanovskoye field is expected to give a peak 69 bcm/yr from reserves of 3,200 bcm, and remote fields of Eastern Siberia, initially the Kovykta field, if Gazprom and its license holder, TNK-BP, can get around to starting its development, and finally the Sakhalin Shelf, where offshore fields are to be exploited with foreign companies.

The first target is the Yamal Peninsula, where reserves of over 10,000 bcm have been discovered. Development of the Bovanenkovsk field is due to start in 2007 and, together with the nearby Kharasavei field, it is planned to produce 175 bcm/yr by 2020. Current plans expect part of this gas to be liquefied at a gas plant to be built at Kharasavei on the western coast of the Peninsula, and tankered to Western Europe and North America.

The rest of the gas will be pipelined through the Yamal-Germany pipeline, of which the sections in Poland and Belarus have been completed. Also, a 550-km stretch has been built in Russia up to the Belarus border. The pipeline is fed with gas from other parts of Gazprom’s system and it carried 23 bcm to Poland and Germany in 2004. The output is expected to rise to its 32 bcm/yr projected capacity as more compressor stations are added.

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