Andrei Karunos

Sea pipelaying crane under operation at the construction site of Blue Flow gas mains (Russia-Turkey)

R

ussia is on the verge of liberalizing the domestic gas market as prices are still regulated by the State. Many analysts predict inevitable reorganization of Gazprom and feel confident that, sooner or later, it will stop to exist as ”the Ministry of Gas”. In an interview with Eurasian Metals Valery Yazev, the chairman of the State Duma subcommittee on gas and president of the Russian gas community, shared his views on prospects for establishing a free gas market in Russia.
In Yazev’s opinion, first, there is no need to link creating a gas market to reforming Gazprom and, second, it would be too premature today to talk about a concept of establishing a gas market as a fait accompli.
"Although the time set for working out a concept has passed, no concept emerged either", Yazev says. There are different options for reforms within the various organisations concerned: Gazprom, the Ministry of Economy, Federal Energy Commission, Union of Industrialists and Entrepreneurs and the Union of independent Gas Producers. It is necessary to consolidate their positions. Like any law, this concept should be a product of compromise.
The deputy believes that at this moment reaching a compromise is hindered by sharp contradictions between main players and the big wariness of the public. Gas consumers, both large companies and the population, are worried that gas prices will increase as soon as the State stops regulating them.

Urengoy is one of the largest gas fields in Russia

Yazev thinks that prices of natural gas in Russia should be raised. Today they are unjustifiably restrained by the State and are inadequately low against actual costs of gas production and transportation. The average price for gas paid by Russian industry amounts to about $20 per 1,000 cubic meters. Just to compare: German metallurgists pay about $350 for the same volum.
"I am far from the idea that we need to raise its price twenty times as much but it is necessary to make it balanced", says Yazev. Russian producers should not profit from the inadequately low price of gas. This is the criterion that the deputy is proposing to use in debates on prices.
However, a number of key questions should be answered first. For example, the possible price for gas on which taxation will be based. This question should be addressed to the State.
On their part, producers should correctly assess the elasticity of demand because with gas price increases some consumers will inevitably start switching over to other fuel like coal or black oil.

Valery Yazev, the chairman of the State Duma subcommittee on gas and president of the Russian gas community

"If we are talking about the market access of independent producers, then, we should make up our mind on the Unified Gas Supply System", reasons Valery Yazev. It is a backbone of energy security. "Today Gazprom is the owner of the unified pipeline transport system. It operates about 150,000 km of trunk networks, maintains and develops them with funds received from gas sales. In my opinion, the monopoly on the gas transport system should be kept. I assume that at the first stage this function could be performed by Gazprom’s subsidiary, which should be completely transparent to both the State and independent producers".
Forming a gas market does not mean breaking up Gazprom. And it would be wrong if one presented this company as an enemy of market liberalization. "For a long time Gazprom has been fighting for a chance to sell at least 5% of gas at free prices", Yazev explains.
Deputy Yazev supports division of the gas market into two, regulated and unregulated, sectors. A consumer will be able to get as much gas as he wants at a definite contracted price. The regulated sector should be subdivided into three segments: the group of social consumers, the industry ("maybe, without dividing it into branches yet", Yazev notes) and the electric power sector. For each of these subgroups prices will be increasing at different rates. They should rise least of all for the populations and more steeply for industry and the electric power sector.

Valery Yazev, the chairman of the State Duma subcommittee on gas and president of the Russian gas community

"I do not think that our prices will level off soon with world prices. By 2007 the domestic price of gas will amount to $35 to $40 per cubic meters. The reasonable increase of gas prices in the country is an alternative to export. The higher the prices in Russia, the less gas we should export", Yazev believes.
Europe should not worry over coming changes. The EU countries will get everything provided for by contracts. Today, Russia is exporting 130 billion cubic meters of gas and Gazprom has long-term contracts for supplying 170 billion cubic meters in 2007 and 250 billion cubic meters in 2010. Besides, Gazprom will be able to purchase gas from independent producers for export shipments.
The increase of the gas price should have a positive effect on Gazprom’s economy. As the deputy sees it, only in this case large projects can be considered seriously, projects like Alliance-1420 and building a large-diameter pipe mill in the Urals, which are of much interest to Russian metallurgists.
Today import of pipes meets most of the gas industry’s needs with ensuing obligations under tied contracts. Gazprom has no free investment resources. Today the volume of its borrowings is coming close to $14.5 billion. Attempts are being made now to restructure this debt.

Gazprom accounts for over 27% of the world gas production and for 94 % of the domestic output. The GDP share of this largest national company amounts to about 8 % and about 25 % of all tax contribution to the federal budget. Its shareholders number more than 500,000 natural persons and legal entities. Foreign investors own a fixed 10.3% stake in the company’s share capital. Gazprom’s enterprises employ 300,000 workers. Gazprom is the world’s largest gas exporter. Its shipments meet about 20% of the demand for gas in Western Europe and almost completely satisfy needs of Eastern Europe.