GAZPROM’S EUROPEAN EXPANSION DILEMMA

Source : Eurasia Daily Monitor

Russian planners have consistently underestimated the rapid growth of gas consumption within Russia and the EU’s newly found ability to find alternative sources. A 2005 study prepared by Gazprom’s Research Institute for the Economics of the Gas Industry, NIIGazekonomika, revealed in a 2005 report that domestic consumption of natural gas was increasing at a faster pace than projected in Russia's Energy Strategy, the official guidelines for the energy sector adopted in May 2003. NIIGazekonomika found that earlier projections of Russian domestic consumption of gas were based on unreliable Soviet era data and were found to be off the mark by tens of billions of cubic meters (bcm). Domestic consumption, they claimed, was rapidly growing due to a number of factors: (1) The low price of gas for domestic consumers, which has been encouraging consumption; (2) The energy intensive nature of Russian industry; (3) Gazprom’s monopoly of the Russian pipeline system; by trying to maintain this monopoly, Gazprom has discriminated against independent producers of gas by limiting their access to the system (this applies mostly to oil companies, which are forced to flair off billions of cubic meters of associated gas); (4) Gazprom’s reluctance to investment in new gas fields that would replace the four currently producing fields, all of which are facing severe depletion rates; and (5) Russia’s pressing need to rely on the sale of relatively small quantities of Central Asian gas to Europe (10 bcm) in order to meet domestic needs and new export commitments. This quantity is bound to increase dramatically in the next few years.

On July 7 the Russian Daily Kommersant reported that Russian Deputy Prime Minister Igor Sechin had ordered Gazprom and the Federal Antimonopoly Service to expedite independent Russian gas producers’ access to Gazprom’s gas pipeline system. Sechin, widely regarded as the head of the siloviki or power clan in Russia, is also the chairman of the board of Rosneft, Russia’s largest oil company. Rosneft produces some 6.6 bcm of associated gas. Other independent gas producers (Novatek produces 15 bcm, Lukoil and Surgutneftegas seven bcm each, and TNK-BP 4.9 bcm) account for a combined total of 14-16 percent of all Russian gas production. All have faced obstacles from Gazprom in selling their gas, and many are flaring it off. These companies are currently being offered $46 per 1,000 cubic meters by Gazprom for their gas, while the price on the Russian market is $71 per 1,000. At the same time, Gazprom sells gas for an average price of $400 per 1,000 cubic meters in Europe. Adding to the current uncertainty, Russian President Dmitry Medvedev’s trip to Central Asian gas producing countries last month did not result in any firm commitments, only vague agreements in principle from the leaders of those countries to come to Russia’s rescue. Those countries have discovered new markets in China and India and are complicating Moscow’s ambitious plans in Europe".