Publication: Eurasia Daily Monitor Volume: 5 Issue: 136

A gap has opened between Gazprom’s stagnant production and its growing commitments to internal and external consumers of that gas. The gap looms even wider between Gazprom’s projected output in the years ahead and its multiplying offers to external customers for the same years, in addition to its internal supply obligations. Moscow has indirectly confirmed this situation in recent days but seems at a loss for a way to remedy the problem.

Anticipated by some independent experts in the West and Russia but otherwise widely ignored, Gazprom’s gas deficit became a reality by 2007 at the latest. Russia was able, however, to hide it temporarily through imports of Central Asian gas, which it used partly for Russia’s internal consumption and partly for re-export as “Russian” gas. This method no longer suffices to cover the deficit, as top officials in Moscow are now forced to admit, albeit obliquely.

According to Gazprom President Alexei Miller on July 4, Russian gas output is no longer growing but will remain constant for the years 2007 through 2009. In fact, output growth slowed down and stopped altogether after 2006. That year’s gas extraction was 556 billion cubic meters, just 1 billion cubic meters more than in 2005. The extraction decreased for the first time in 2007 to 548.5 billion cubic meters, or 1.3 percent less than in 2006. Miller incorrectly attributed the output decrease to the warm winter in Europe. This, however, could justify the decrease in exports but not in output, particularly considering Russia’s fast-growing internal demand. Miller declined in his statement to forecast the output for 2008 (Interfax, July 4).

Output projections at the moment envisage some 670 billion cubic meters of gas to be extracted per annum in Russia by 2020 (Interfax, July 11). Drafted last year, those projections may already have been overtaken by Gazprom’s chronic underinvestment in new major fields. Even if fulfilled, however, those projections would imply an output growth rate of 20 percent in a 12 year period, clearly below the growth rates in internal and external demand anticipated for the same period.

Last year Gazprom declined for the first time to set a target figure for gas extraction in the three-year planning time frame to 2011. The company evidently anticipated stagnant or declining extraction and wanted to delay admitting it publicly. The landmark year 2011 is when Russian internal prices for gas were scheduled to reach the level of Gazprom’s netback prices in Europe (sale price minus transportation costs).

Such equalization was a centerpiece in the proposed reform of Russia’s energy sector and also a political commitment to the European Union within the energy dialogue. Russia had adopted a four-year schedule in 2007 for gradual implementation. Moscow, however, is backtracking on that intention.

On July 8 Miller and Prime Minister Vladimir Putin confirmed on television that the state would continue subsidizing gas consumption by the public an unspecified period after 2011. This announcement seems to cancel the annual increments that had been scheduled to bring the internal price of gas to European netback levels. The annual 25 percent price hikes remain in effect, however, for industrial consumers, at least until further notice (Rossiya Television, Interfax, July 8; RIA, July 10).

Cheap gas for the “social-communal sector” (households and municipalities) will therefore continue to encourage waste and discourage conservation. Subsidized gas is also an element in the authoritarian government’s social contract with its subjects.

Putin chaired an energy sector leadership conference on July 11 in Severodvinsk, with the participation of oil and gas industry top management and relevant government ministers. Miller reported two key facts at the conference. First, Russia’s internal consumption of gas (by industry and the public) was growing faster than the growth rate in Russia’s contractual commitments for export. And, crucially, each one of those curves, internal and external obligations, was rising faster than Russia’s extraction of gas (Interfax, July 11).

This statement clearly suggests that Russia cannot keep up with either of the two demand curves, let alone with both, from Russia’s internal production alone. And it suggests obliquely that Russia will hasten to absorb more Central Asian gas to cover at least part of the deficit.

Faced with conflicting priorities, the leadership conference in Severodvinsk apparently opted to give priority to the internal market over export markets. The meeting focused on two internal priorities: expansion in gas deliveries to the electricity generation sector and “gasification” (i.e., building gas supply grids) in Russia’s territories that are not connected to the central grid. The vast “ungasified” territories, however, necessitate capital expenditures to the detriment of investments in exploration and production.

To offset the shortfalls in natural gas production, Moscow is pressuring oil companies to deliver associated gas from the oil wells. At the Severodvinsk conference, Putin termed the flaring of gas at the well “a barbaric practice” and demanded imperatively that the gas be captured and used commercially (Interfax, July 11). This is a chronic problem not only in Russia, but its scale there is unparalleled. A government program requires oil companies to capture and use 95 percent of the associated gas by 2011. Implementation, however, is lagging badly. The deadline will be extended to 2012, according to Putin in Severodvinsk. The current, record-high oil and gas prices render that program less prohibitive economically, but it could hardly resolve the growing problem of Russia’s deficit of natural gas.