|EXPORT INTERESTS ABOVE ALL?
MOSCOW, (Igor Tomberg for RIA Novosti)
The Kremlin administration is devising a new fuel strategy for Russian
energy generation. The main concept is to convert generating facilities to
coal and fuel oil to save natural gas, which is running out.
Currently, natural gas accounts for more than 50% in the national energy
balance, but the country needs about 30% more.
The administration is spotlighting this critical problem. On September 18,
chief of the Kremlin staff Sergei Sobyanin held a conference on the fuel
balance in Russian energy generation in the immediate future. It was the
first in a series of consultations planned for the next several months.
President Vladimir Putin is expected to sum up their work at the October
conference on a fuel strategy for the national energy generating industry
In a nutshell, electricity producers lack natural gas.
In 2006, Russian gas monopoly Gazprom supplied 100.5 billion cubic meters
of gas to electricity producers, 11 billion less year-on-year. Electricity
holding RAO UES of Russia, which spent 90 billion from January to August,
claims that it lacks gas and has to use fuel oil (its fuel oil spending
exceeded the plan by 34% in 2005) and coal (it has increased coal
consumption by 8.4%).
Electricity producers claim that inflation will accelerate if they convert
to more expensive fuels. UES says it must have enough gas, or else the
electricity rates for consumers will grow.
Electricity producers currently buy gas at $45-$55 per 1,000 cubic meters.
If they convert to fuel oil, they will have to pay an equivalent of $185,
according to RAO UES CEO Anatoly Chubais. Raising electricity rates to
make up for the shortage of natural gas will definitely be discussed at
one of the conference. In short, we can expect higher electricity rates in
But this will not solve the problem of gas shortages, because Gazprom is
not in a hurry to increase deliveries to electricity producers even at
commercial prices. Its stand is logical: if gas can be replaced with coal
and fuel oil, why increase gas supply to electricity producers when the
monopoly has export commitments?
If the current growth rates of internal gas consumption persist, it can
reach 630 billion cubic meters by 2020, increasing gas shortage on the
domestic market to about 200 billion cubic meters. Gazprom has contracts
until 2020 for the export of 2.2 trillion cubic meters for more than $250
billion. By 2008, it is to deliver about 180 billion cubic meters of
natural gas to Europe annually. It also has agreements on the delivery of
70-80 billion cubic meters of gas to China from 2010, and is negotiating
deliveries to South Korea, Japan and the United States.
The Russian leadership supports Gazprom’s export expansion. Given the
current prices, growing exports are becoming a crucial revenue item and
ensure low domestic prices. It is better to sell gas at $250 per 1,000
cubic meters than burn it in Russia at $40.
The financial benefits are complemented with geopolitical advantages: the
advance of Gazprom to the European markets and to Asia and the U.S. gives
Russia additional levers of influence.
Unfortunately, Gazprom’s expansion to new markets is not accompanied by
an increase in domestic resources. So far, a balance is being maintained
owing to the acquisition of Central Asian gas, but the growing consumption
in Russia and gas demand in Europe, as well as the aspiration of Central
Asian countries to establish their own export routes may create problems.
According to the Institute of Natural Monopolies, the shortage of gas is
primarily due to the declining resource base. Exploration has fallen more
than fourfold and the commissioning of new wells fivefold in the past 10
There are solutions that could alleviate the dangers of the shortage of
gas, if not remove them altogether. For example, Gapzrom’s spending on
the acquisition of assets (not all of them core ones) could be channelled
into gas exploration, production and transportation. Alternatively,
independent gas producers and oil companies could supply generating
UES’s complaints about falling profitability sound surprising. Did
electricity producers think that gas will always cost $40-$50 per 1,000
The problem has not been addressed for decades. Indeed, it is better to
burn cheap gas without thinking of conversion to coal. Neither did UES try
to develop nuclear power generation. It is simpler to pay fines (50% of
state gas price) for burning gas in excess of plans than buy more
expensive fuel oil, or monitor global trends, which show that growing gas
prices have spurred the demand for coal.
In fact, coal is the dominant fuel in the world. It ensures 39% of
electricity production, and the demand for it is growing at a priority
rate. The share of coal in electricity generation is 40-60% in Europe,
51.9% in the U.S., 75% in Australia, 78% in China, 77% in India, 92.4% in
South Africa, and 94.7% in Poland. Moreover, it keeps increasing across
But Russian electricity producers ignore coal and modern technologies of
coal-based electricity generation. This is why Russia, which has the
world’s second largest prospected coal reserves, has a negative dynamics
of coal in electricity generation: 19.5% in 2003, 18.4% in 2004, and 16.8%
Russian coal producers have forwarded to the Kremlin administration data
showing that coal reserves would suffice to produce enough electricity to
make up for the potential growth of consumption until 2030.
There are about 20 coal/gas burning power plants in Russia. According to
the Institute of Natural Monopolies, the conversion of gas/coal burning
power plants solely to coal would save up to 27 billion cubic meters of
gas a year.
Sergei Mironosetsky, deputy director general of Siberian Coal Energy
Company (SUEK), says gas can be replaced with coal in all Russian regions.
The prime cost of a coal-burning power plant is comparable to the cost of
a gas-fuelled plant: $800-$1,200 per 1 KW.
The Kremlin administration has started searching for ways to secure the
supply of fuel to electricity generating companies without curbing the
ambition to maintain and increase energy (primarily gas) exports. It has
apparently made some plans, or else Putin would not have promised to
increase gas supplies to Europe at the recent meeting with the French and
Dr. Igor Tomberg is a senior research fellow at the Center for Energy
Studies, the Institute of World Economy and International Relations,
Russian Academy of Sciences.