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The Russian Gas Industry to 2020
CWC Publishing, April 2003
The Russian Federation is by far the world’s largest gas reservoir. According to British Petroleum, Russian gas reserves in 2001 amounted to 48 trillion cubic metres. This accounted for 32.9% of the world total. Iran was in second place with 15.7%. It was followed by Qatar at 5.8% and the United Arab Emirates at 4.1%.
Gazprom is Russia’s state-run gas monopoly. Founded in 1992, it produces nearly 94% of Russia’s natural gas, and operates the country’s 140,000km gas pipeline grid, which includes 43 compressor stations. Its gas reserves amount to about 33 trillion cubic metres. Reflecting its vast scope, the company is Russia’s largest earner of foreign exchange; in 2000 it exported 123bn cu metres to Europe worth $12.5bn. It is also the largest contributor to the Russian treasury, accounting for some 25% of all federal government tax revenues in both 2000 and 2001.
Notwithstanding its huge size, Gazprom still faces two major problems in developing Russia’s gas resources. The first is the low price it receives for its gas in the domestic market. At the end of 2001 this amounted to $9.48 per 1,000 cu metres of gas for household users (22 cents less than it was costing them) and $14.43 per 1,000 cu metres for industrial users. According to Gazprom, these prices meant that it was producing gas at a loss. By contrast, the average European price for both household and industrial users in 2001 was $116.55 per 1,000 cu metres. (In 2002 the European average price was expected to slip to about $90.00 per 1,000 cu metres).
Gazprom’s second major financial problem is the widespread tendency of Russian gas customers not to pay their bills. In 2001 the company estimated that some $2.7bn in gas payments were in arrears.
The major effect of the low domestic gas prices and the unpaid gas bills is to severely limit the amount of money that Gazprom has at its disposal to invest in new Russian gas developments. This suggests that without a fundamental reform of the entire Russian gas market, Russia’s gas production will never reach the potential allowed by the mammoth size of the country’s gas reserves.
The mainstay of Russian gas production is West Siberia, with the major producers including Urengoy (the largest gas field in the world), Yamburg and Medvezdhe.
The largest West Siberian gas development in years went onstream in October of 2001. This was the Zapolyarnoye field, which had an initial production level of 20bn cu metres/yr. Peak production of 100bn cu metres/yr is expected to begin in 2004.
But the large Zapolyarnoye output notwithstanding, West Siberia is still facing serious gas depletion problems, and many analysts believe that by 2003 or 2004 its production levels will begin to contract by more than 5% annually. As a consequence of this trend, Gazprom is looking to spread its wings into other promising gas development areas in the Russian Federation such as the Yamal Peninsula, which lies adjacent to the Arctic Ocean due north of the Urengoy field.
But Gazprom’s Yamal initiatives aside, many Russian analysts still remain skeptical about the ability of the Yamal development projects to get off the ground much before 2010, if even then. There is also a serious question of financial feasibility, particularly within the context of gas development plans in the Central Asian republics of Kazakhstan, Turkmenistan and Uzbekistan. Always assuming that the plans bear fruit, it would make much more sense for the Russian Federation to use Central Asian rather than Yamal gas in fulfilling its domestic gas needs and its European gas export obligations. This reflects the cost differential between Central Asian gas development on the one hand and Yamal gas development on the other.
In addition to Yamal, Gazprom is also eyeing the area of the Barents Sea (in European Russia) for future gas development projects. One Barents project of particular interest to it is the Shtokmanovskoye field, which could have resources in excess of 2 trillion cu metres.
In addition to Gazprom, several other large Russian hydrocarbon companies are also eager to expand their presence in the Russian gas arena. That presence has traditionally been limited, largely because of Gazprom’s control over Russia’s gas pipeline system. A major demand of the hydrocarbon companies is for the Russian government to guarantee equal pipeline access within the context of its pending reform programme for the Russian gas industry.
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