WHY RUSSIA HAS A GAS SHORTAGE


14.11.06
MOSCOW. (RIA Novosti economic commentator Vasily Zubkov)

Russia controls 29 trillion cu m of proven gas reserves and over 1.2 billion metric tons of gas condensate. This is about one third or one fourth of the world's total reserves, depending on which estimate is used. Yet next year Russia may be hit by a gas shortage of 4 billion cu m, according to the Industry and Energy Ministry, which drafted a report for a meeting with President Vladimir Putin devoted to the Russian energy sector. The meeting, which was postponed several times, has been put off once again, this time because several ministers led by Prime Minister Mikhail Fradkov have gone to China, said Arkady Dvorkovich, head of the Kremlin administration's expert department. Yet this does not seem a plausible explanation. A more likely reason is that there are serious disagreements between ministries about increasing gas and electricity prices.

Next year's shortage will be just above 0.5% of the amount Russia will have at its disposal, 785.7 billion cu m (this includes the output of Gazprom and independent producers, as well as gas purchased from Central Asia). This does not seem like a lot, all the more so as a partial reduction of exports in the first nine months of 2006 (by 0.3% to countries outside the CIS and by almost 30% to the CIS) could make up for it. Nevertheless, if the gas sector is not reformed, the problem will get worse and worse, and by 2010 Russia may have a shortage of about 30 billion cu m.

The country's main gas producer is Gazprom, which accounts for over 90% of total output. This year, Russia is expected to produce at least 551 billion cu m, and 561 billion cu m next year. But it no longer has any significant reserves left that could be put into production anytime soon. The depreciation of Gazprom's fixed assets is approaching 60%, and its key fields are similarly exhausted. The development of new ones is moving farther and farther into the Arctic, in the zone of permafrost and the northern sea shelfs.

Gas producers' operating costs are rising fast. Today they stand at $6 per 1,000 cu m, having almost tripled since the late 1990s. On the Yamal Peninsula, which lies in the Arctic and has 26 gas fields, they will exceed $20 per 1,000 cu m because of extremely severe conditions. A geologist told me that Yamal is "a piece of something unknown frozen together over millions of years, and it is unclear how it will be possible to build or produce anything there."

The above-mentioned problems are technical and naturally accompany the stage of extensive growth in gas production. You do not have to be an expert to understand that the near term will require huge investment in new and promising fields and infrastructure. Only by doing so will we be able to hope for a breakthrough in gas output in 10 or 15 years.

Which gas sector development strategy will the Kremlin choose? In reality, there is not much of a choice. It can either produce more and increase exports indefinitely, or it can use gas sparingly at home, putting off any large increase in exports until better times. Yet under existing contracts, Gazprom has to export over 2.5 trillion cu m over the next 15 years.

Devising a Russian gas strategy is turning from a purely economic issue into a political one. On the one hand, the prosperity and economic growth of a nation, whose only competitive advantage cheap gas and electricity, are at stake. On the other hand, the choice will determine the prosperity of Russia’s largest company, even if the government does own the controlling stake.

Is it possible that we are exaggerating the effects of higher domestic gas tariffs? Yevgeny Gavrilenkov, a leading analyst with the Troika Dialog brokerage, is positive that a price hike will have only a minor influence on inflation. His colleague at Uralsib, Vladimir Tikhomirov, disagrees. Raising tariffs will lead to changes in the country's macroeconomic performance and lead to higher inflation, he says. Dr. Yelena Telegina, director of the Russian Institute of Energy and Geopolitics, says that energy has a direct influence on the prices of goods.

Another difficult issue is the amount of investment the gas sector needs. Ahead of the G8 summit in St. Petersburg, Claude Mandil, executive director of the International Energy Agency, said that Russia would need $11 billion of investment annually because of the potential gas shortage. The Industry and Energy Ministry in its report said it would be necessary to invest $600 billion by 2011. Gazprom will come up with only half that sum, while the few independent gas producers will be responsible for the rest. Even a price hike would bring in only $10 billion. That is a lot of money, but nowhere near enough.

Many people are now talking of the need to offer special gas tariffs to poor households, partially regulate prices, set price limits and make broader use of fuel oil and coal for power generation. But no one can say what the president's final decision will be. Dvorkovich says that, just to be on the safe side, as many as ten possible scenarios for energy tariffs in the year before the election have been drafted. –0–