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Article Excerpt
1. INTRODUCTION
According to the U.S. Energy Information Administration (EIA), Russia is the largest natural gas supplier, with dry gas production in 2006 of 23.2 trillion cubic feet (tcf) representing over 20% of global output. Russia could also significantly expand production. The Oil and Gas Journal (OGJ) reported Russian proved natural gas reserves of 1,680 tcf in 2007, and the United States Geologic Survey (USGS) reports a mean estimate of undiscovered, technically recoverable natural gas resources of 1,168 tcf and an additional 358 tcf of potential reserve growth in existing fields, yielding a total of more than 3,200 tcf of recoverable natural gas resource.
In 2006, Russian exports, primarily to Europe, equaled 7.8 tcf. Europe as a whole now relies on Russia for about one-quarter of its natural gas supply with the reliance of some countries even higher. For example, Russia supplies over one-third of Germany's requirements, and East European and Baltic countries, which were closely integrated with Russia in the Communist era, are even more dependent.
Gazprom produces more than 80% of Russia's natural gas and controls access to Russia's domestic natural gas pipeline system. While renegotiating export prices to Ukraine in the winter of 2006, when demand in both Ukraine and Western Europe was high, Gazprom temporarily reduced supply to Ukraine. (1) While the principal motivation may have been a desire to raise Ukrainian prices closer to European netback parity, the move was widely interpreted as an attempt to interfere in Ukrainian politics. In addition, the event substantially raised energy security concerns among European consumers.
Concern is also mounting over Russia's ability to meet its future contractual commitments. Although Russian natural gas production was about 10 percent below 1992 levels by 1997, it was above 1992 levels by 2005. Nevertheless, strong growth in domestic demand and exports has required Russia to increase its imports of gas from Caspian states. This, however, may not be sustainable, and prompted the Ministry of Industry and Energy to state in October 2006 that Russia could face a natural gas shortage as early as 2010.
Growth in domestic production requires new investments, but Gazprom is restricted in its ability to use external capital. In addition, Gazprom has difficulty generating internal investment funds since more than 70% of its production is sold domestically at highly subsidized prices (currently approximately $0.80 per thousand cubic feet (mcf) according to EIA (2008)).
In late 2006, the Russian government proposed a gradual increase in natural gas prices to market-based levels and in May 2008, the government approved tariff increases of up to 28.6% in 2008, followed by 19.9% in 2009, 28% in 2010, and 40% in 2011. Fearing the inflationary consequences, the government has stopped short of the original goal of complete liberalization by 2011, at least for the industrial sector.
Even with price increases, gas production may not be sufficient to satisfy demand in the short-term. In addition, a commitment to raise future prices may perversely discourage production in the near term. To the extent that Gazprom can sell less natural gas domestically at current low prices (for example, through quantity rationing or by ceding market share), it will have more gas to sell at future higher prices.
Russian natural gas production in 2006 was 2.4 percent above 2005 output, but Gazprom's share declined from 85.9% to 83.9%. Novatek, Lukoil, and Rosneft collectively had total production capacity of about 6.4 tcf per year in 2006, or about one-third of Gazprom's output. The production share of independent producers is expected to increase in coming years as the Ministry of Industry and Energy has stated that Russian independent producers are expected to supply more than half of the country's industrial needs by 2015 (Blagov (2007)). However, growth of output from these independents may require investments in pipeline capacity, and, perhaps more importantly, full access to Gazprom's existing pipeline infrastructure. (2)
Over half of Gazprom's production comes from mature fields in West Siberia that are declining at an average rate of 0.7 tcf per year according to a recent International Energy Agency report (IEA (2006)). Gazprom therefore needs to develop new fields. According to Glazov (2007), total domestic production must increase substantially by 2030 to meet projected domestic demand and contracted exports. This will have to come from a combination of Gazprom's own production, the production of independents, and imports from Caspian states.
In 2005, Gazprom entered a joint venture to construct the offshore pipeline Nordstream to transport gas through the Baltic Sea from Russia to Germany.3 Gas supply is projected to come from the Yuzhno-Russkoye oil and gas reserve in the Yamal Peninsula, and the Ob-Taz bay and Shtokmanovskoye fields.4 In 2007, Gazprom also...
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