Publication: Eurasia Daily Monitor Volume: 3 Issue: 215

As Russia faces a natural gas shortage and the government mulls higher domestic prices for 2007, the gas monopoly Gazprom fired its top executive in charge of domestic supplies and some exports to the Commonwealth of Independent States.

Following a government report that Russia could face gas shortages beginning next year, on November 15 Gazprom released deputy CEO Alexander Ryazanov, officially because his contract had expired. Ryazanov also lost his post as head of Gazprom’s oil subsidiary, GazpromNeft.

Last month the Russian Industry and Energy Ministry said the country could face a natural gas shortage of 4.2 billion cubic meters (bcm) in 2007 and suggested nearly double gas prices for industrial consumers, rising from $45.3 per thousand cubic meters (tcm) up to $80/tcm. Unless adequate measures are taken, Russia’s gas shortage could reach 8.4 bcm in 2008, 27.7 bcm by 2010, and 46.6 bcm by 2015, the ministry said in a report released on October 19.

The Industry and Energy Ministry said it would be necessary to invest up to $600 billion by 2011 in order to sustain its gas output levels in the long term. Earlier this year, the International Energy Agency estimated that Russia would need to invest some $11 billion a year to forestall the looming gas shortage.

The current low gas prices encourage high consumption rates and discourage investments in expanded gas production. Meanwhile, Russian gas production costs are estimated at between $6/tcm for more accessible gas fields and $20/tcm at the Yamal Peninsula in the Arctic.

If the Russian Industry and Energy Ministry’s plan for an immediate price hike is accepted, Gazprom is expected to sell 60-90 bcm of gas at $80/tcm, thus raising its 2007 sales by $2-4 billion. The remaining domestic supplies of 210-240 bcm are slated to be delivered to the country’s energy sector and retail customers at $51.80/tcm. A decision on gas prices, which remain regulated by the Russian government, is expected at a cabinet meeting in late November.

Gas prices play an important role in Russian domestic politics. (About 60% of Russia’s natural gas output is consumed domestically.) According to Kommersant, the Kremlin presumably decided to act now rather than hike gas prices before the 2008 presidential election (Kommersant, November 16).

Russian media outlets also linked Gazprom’s reshuffle to pre-election political maneuverings. Vremya novostei suggested there were more serious reasons for Ryazanov’s hasty dismissal, namely consolidating Gazprom’s financial resources ahead of the inevitable pre-election infighting among the Russian president’s inner circle (Vremya novostei, November 16).

Prior to his sudden dismissal, Ryazanov went to Dushanbe to discuss joint projects with Tajikistan’s President Emomali Rakhmonov. “We have a very good level of cooperation with Tajikistan,” Ryazanov said at the time. Gazprom is spending $7 million to explore Tajik gas deposits this year and plans to spend $12 million in 2007. Gazprom would now develop the Sarikamysh, Rengan, Shaambary, and Sargazon fields, which have estimated reserves of more than 100 bcm (RIA-Novosti, November 10).

Ryazanov’s clout has fallen throughout 2006, as Gazprom negotiated major imports from Central Asia without him. However, he still oversaw gas supplies to Ukraine and Belarus. Ryazanov’s successor faces an inevitable protracted conflict over Russian gas supplies to Belarus (Kommersant, November 16).

Amid continued bargaining, top executives from Gazprom and the Belarusian pipeline company Beltransgaz met on November 17 to discuss the price of Russian natural gas for Belarus in 2007. Gazprom CEO Alexei Miller reportedly described the company’s objective as introducing “free-market prices for natural gas supplies to Belarus.” Gazprom also said Miller and Beltransgaz head Dmitry Kazakov had discussed an independent valuation of Belarus’ pipelines, as the assets could eventually be used to pay for gas supplies (RIA-Novosti, November 17).

Gazprom, which is expected to supply around 20 bcm of gas to Belarus this year, has suggested that Minsk pay $180-200/tcm in 2007, up from the current $50/tcm. But Minsk has resisted Gazprom’s attempts to take over Belarusian pipelines, arguing that Belarus should enjoy similarly low gas prices as Russia, because the two countries are building a union state.

Gas prices for Ukraine also remain a matter of debate. In October, following a meeting between Russian Prime Minister Mikhail Fradkov and his Ukrainian counterpart, Viktor Yanukovych, both sides indicated plans to sign an agreement to supply 55 bcm of “Central Asian” gas to Ukraine in 2007 at a price of $130/tcm, up from $95/tcm earlier in 2006. Yet a final agreement appears to remain some time off.

Russia has repeatedly pledged to honor all its export commitments, drawing on the country’s estimated 29 trillion cubic meters of gas reserves, or around one-quarter of the world’s total reserves. However, Gazprom has pledged to export more than 2.5 trillion cubic meters over the next 15 years. Meanwhile, depreciation of Gazprom’s production facilities has been estimated at some 60%, and its key fields are believed to be equally exhausted. Gazprom also does not have any significant gas fields that could be developed quickly and cheaply, hence doubts still remain about viability of its export commitments.

Gazprom’s dismissal of one of its top executives came amid debates over Russian gas supply trends. There are serious disagreements between key Russian ministries about gas pricing. Russia may either produce more gas and increase exports, while consuming less gas domestically, or it could limit exports until the crunch passes (RIA-Novosti, November 10). As the Russian presidential election campaign approaches, gas policies will inevitably become entangled with domestic policies.