The Russian Gas Deficit - is it Real?
Tunne Kelam’s speaking notes in the EP Baltic-Europe Intergroup on 23rd September 2008 in Brussels
Analysis by Boris Nemtsov (former Russian deputy Prime Minister) and Vladimir Milov (former Russian deputy energy minister). Moscow, 2008-09-22
· The position of Gazprom in Russia is unique. In 2007 Gazprom earned 93 billion USD which is 7% of the Russian GDP (2, 5 times more than the Russian defence budget).
· Gazprom provides more than 12% of the volume of Russian industrial output and 16% of the value of Russian exports.
· Gazprom supplies provide for 40% of the Russian electricity production. In other words, Gazprom is the energy heart of Russian industry.
Gazprom has become the most important personal project of Vladimir Putin. The Russian president has renovated the management of the company, not on the basis of professional abilities but on the basis of their membership of his Petersburg clan. Prime Minister Kasyanov's attempts to reform the gas industry in 2002-2003 and to open it to competition were blocked by the Kremlin.
Putin also approved the decision to raise the price of gas for Russian customers. Gazprom had lobbied for this move during the past 15 years, but unsuccessfully. The Fradkov Government, however, decided in May 2007 to double the domestic price of gas by 2011 (from 64 USD for 1000 cubic meters to 125 USD).
Management which is loyal to Putin has operated Gazprom for 7 years. Its main "achievement" has been not to allow the company to fulfil its key job - to provide for a reliable supply of gas for Russian customers. Gas production has, in fact, stagnated during all these years. In 1999 it was 546 bcm, in 2007 - 548 bcm (in 2006 a record 556 bcm).
Gazprom supplies for domestic customers have increased by 2% (from 2001 till 2007), while internal demand has increased by 18%. In 2007, Gazprom supplied 307 bcm to domestic markets, while the unsatisfied demand is 132 bcm (increase of 72 bcm a year since 2001). One third of Russian internal gas consumption has to be supplied through "non-Gazprom” sources.
As for the domestic markets, Gazprom supplied 301 bcm (in 2001) and 307 bcm (in 2007). At the same time, domestic demand was 373 bcm (in 2001) and has increased to 439 bcm (in 2007). The gap between demand and supplies increased from 72 bcm (2001) to 138 bcm (2007). This gap has been traditionally covered by supplies from Russian independent producers and by gas imports from Central Asia. Now the Government has strictly curbed the potential of independent companies while the prices of Central Asian gas have skyrocketed. As a result of this new situation, during the winter of 2007/2008, Gazprom almost totally exhausted its underground gas reservoirs.
The stagnation of gas supplies for the domestic market can be explained only by the systematic lack of investments into the production of gas. The new super-giant gas field lies in Yamal peninsula - 600 km to the north of functioning fields. Gazprom obtained licences to exploit the Yamal fields, committing itself to start production of gas there by the end of 1990s. Nothing really has happened. Under the Gazprom chief Aleksey Miller, licences were extended by 8-12 years. However, even the new terms are not being met.
Nowadays, the costs of the whole project of starting production and transportation of gas from Yamal peninsula are estimated to be ca 200 billion USD - a sum which exceeds the Russian Stability Fund.
On the background of general economic growth (GDP increase of 70% in 2000 - 2008), Gazprom production has not increased. This leads Russia to the deficit of gas.
Gazprom’s burden of debt has grown from 13, 5 billion USD (2000) to 61,6 billion USD (2007). This amounts to two thirds of the company's earnings. The increasing debt burden does not allow Gazprom to make sufficient investments into gas production. Default in the foreseeable future is not excluded.
For the biggest state owned company, Gazprom's contribution to the Russian state budget is surprisingly modest. Gazprom paid 7 USD taxes for every barrel of produced oil and gas while oil companies pay 40 USD per barrel.
As a result of the policies of economic-political expansion, Gazprom lost control of 60 billion USD of its assets.
Gazprom spent 14 billion USD to buy the oil company Sibneft (this sum equals 3 year investments to the production of gas). The economic result of this deal has turned out to be catastrophic - in 3 years Rosneft production fell by 11, 5%. ???
Lack of efficiency in running the company has exceeded the worst expectations. Since 2003, the operational costs of the company tripled - from 4, 9 USD a barrel to 14, 8 USD.
Alan Riley's analysis from October 2006.
/Riley is Research fellow, Centre for European Policy Studies, Brussels/
· The core issue - for the EU - is not the threat of a politically motivated gas cut off (as happened in January 2006) but that Russia, as a result of lack of investments, will not be in a position to produce enough gas to cover both Russia's domestic needs and the EU demand.
· Riley ( 2 years ago) - if no action is taken by 2010 the EU may be facing a deficit close to or even beyond its current Russian gas import level. The decline of supply from the Russian gas fields is likely to make it increasingly difficult for Gazprom to meet its supply contracts ... which will lead to a significant supply crisis across Russia, the CIS and the EU.
· True, since 1968, when gas first flowed to Western Europe, Russia has been a reliable supplier to Western Europe. However, the same cannot be said of supplies to Eastern Europe - at least 40 cuts offs have been identified since 1991.
· The gas deficit was identified by the IEA /International Energy Agency/ and Vladimir Milov /former deputy energy minister and president of the Moscow-based institute of energy policy/. This deficit was already identified 2 years ago and is likely to grow above 126 billion cubic meters (bcm) by 2010. Current Russian exports to non-FSU Europe /non-former Soviet Union/ are ca 150 bcm.
· It seems unbelievable that the country with the world's largest proven reserves /47 trillion cubic meters - 26% of the global proven reserves/ can be running short of gas.
· During the first decade of the 21st century the supply deficit has become increasingly acute. It arises from two interlocking problems.
1. The run off from the existing super-giant fields in Nadym Pur Taz (NPT) region
2. The lack of domestic investments in new fields. /Gazprom has not opened up any new giant fields apart from Zapolyarnoye, which is a Soviet legacy project and has temporarily reduced the impact of the decline of the NPT fields/.
There has been no necessary investment to develop new super-giant fields. Why?
Gazprom itself is heavily in debt - just the purchase of Sibneft added 38 billion USD to its existing debt. Also, whenever Gazprom does have extra revenue, it fritters it away in higher operating costs.
The Russian financial system is weak and cannot provide financing on the scale necessary to develop super-giant gas fields. / The costs of developing the next super-giant filed in Yamal area are estimated to be 70 billion USD/ Gazprom's decision to develop the Shtokman field without a foreign partner will add significantly to these heavy capital demands.
Even where Gazprom invests, those investments are directed at foreign acquisitions and building export infrastructures, NOT on building and refurbishing domestic pipelines and opening up new fields.
While huge foreign investments will be needed to develop new gas fields, Russia is handicapped by its own policies which view foreign investors as a threat and do not provide room for open competition or for safeguarding investors' rights. Russia's unwillingness to comply with contractual agreements is likely to act as a powerful deterrent to potential future investors. The huge costs / 70 billion USD / of developing the Yamal super-giant fields are not likely to be covered even partially by foreign companies.
Another problem that has made foreign investors uncertain and hesitant is limiting their rights to 49% of shareholding. /Cases of Shell and BP in Sakhalin in 2006/. But the general hostility towards foreign investments forces Western shareholders in energy firms to accept much smaller percentages than the theoretical 49%.
The deficit was widened by the Gazprom decision to press on with domestic gasification, aiming at 60% regional gasification by 2008 and at building 12.000 km of new domestic pipe-lines.
The aging of much of the Soviet legacy infrastructures. Inefficient Russian compressors used to pump gas along the pipes cause an estimated loss of 42 bcm a year. (IEA estimates). 58% of the pipes are more than 20 years old. In harsh environments there is real concern of gas leakages from the aging infrastructures.
Lack of alternative supplies has forced Gazprom to engage in a desperate rescue strategy - to purchase gas from Central Asia. It must really be a desperate situation when the world's largest holder of gas reserves has to buy gas from abroad. In 2006 Russia planned to increase its gas imports from Central Asia from 6 bcm (in 2004) to at least 60 bcm in 2009 that is at least tenfold. To have such volumes really delivered seemed unrealistic two years ago.
Potential consequences of the possible gas deficit.
Russia itself will be most vulnerable to serious gas shortages. If Russia will cut foreign exports to protect domestic consumption Moscow will have to face dramatic cuts in foreign incomes (Gazprom provides 20% of federal tax revenues). For example, increasing pensions will become highly problematic. If the gas deficit will become even more significant, then cuts will strike at Russian industry which is (together with that of Ukraine and central Asia) the most energy-Inefficient in the world. This could also influence negatively earnings from oil, minerals and metals and start a vicious downward spiral which would undermine the economic gains achieved since 1999.
A longer shortage of Russian gas could throw several Central- and Eastern European countries into considerable difficulties both in respect of industrial production and in terms of the safety and comfort of their peoples.
The most dangerous consequence of significant gas shortages would be the effect on Germany. In the EU’s largest economy, such shortages could cause widespread economic disruption which would have repercussions across the EU. The sharp edge of this forecast is that the gas deficit will hit well before the NEP comes into operation and Shtokman gas comes on stream. As a result any gas shortage /whatever the formal contractual position/ will hit the most westerly EU states receiving Russian gas, first and hardest, and Germany as the biggest recipient hardest of all. For Germany there is an additional risk in the possible fall in value of German investments in Russia as the Russian economy will contract as a result of such gas shortages. This underscores the risk of individual member states seeking bilateral agreements with Russia. In fact, Germany has made a major strategic error. It has made itself heavily dependent on Russian gas without having the corresponding power to force its Russian partner to liberalize its own markets, to permit free flow of foreign capital and to ensure the protection of the rights of investors that would ensure that gas will be available and will be delivered.
End of TK speaking notes.