RUSSIA’S GAS PIPELINE NETWORK FACES REALITY CHECK

In recent weeks Russia has announced a number of high-profile export-oriented gas pipeline projects, notably the Europe-bound Nord Stream and South Stream, the China-bound Altai route, and the Caspian pipeline in Central Asia. However, all these pipelines will be connected with the existing Gazprom pipeline network. Therefore, the successes of these ambitious projects will depend on the state of Gazprom’s aging pipelines.

The latest gas pipeline accident came as a reminder that the network still faces technical problems. On July 26, a gas pipeline exploded in the Vsevolozhsky district north of St. Petersburg. The blast reportedly shook buildings up to five kilometers away and caused a huge fire that lit up the night sky. The explosion damaged 50 meters of the pipeline.

Gazprom’s distribution subsidiary, Lentransgaz, claimed it had not stopped gas supplies to consumers as a result of the blast. “All clients are fully provided with gas. We are fulfilling all obligations in relation to export contracts,” Lentransgaz said in a statement.

However Finnish consumers have reported some difficulties. “The explosion and fire of a gas pipeline in Russia near St. Petersburg cut gas supplies to Finland for about six hours,” the Finnish gas company Gasum said in a statement. “Gazprom informed Gasum immediately after the explosion happened. The parallel pipeline to Finland was temporarily out of use due to repair work, but was quickly fixed by Gazprom” (Interfax, St. Petersburg Times, July 27).

Russian regulators also noted safety problems at Gazprom’s facilities. On July 30, the Federal Service for Ecological, Technological, and Atomic Oversight (Rostekhnadzor) announced the results of inspections at Gazprom’s production and pipeline subsidiaries. Inspections discovered a total of 1,025 safety violations at nine subsidiaries, including three pipeline outlets: Samaratransgaz, Yugtransgaz, and Tyumentransgaz, Rostekhnadzor said in a statement (Interfax, July 30).

Gazprom has conceded that it did not make sufficient investments in maintaining its gas pipelines during 1992-2002. Many pipelines are 30 or more years old. Amortization of major pipelines has been estimated at 56% by Gazprom, and at nearly 80% by Russian pipe producers. In early 2002, Gazprom drafted a program to invest no less than 50 billion rubles ($1.96 billion) a year to maintain its pipeline network.

The Russia gas monopoly makes no secret that it heavily relies on its pipeline system, which was designed and developed during the Soviet era by the Gas Industry Ministry. On June 14, Gazprom deputy CEO Alexander Ananenkov reiterated that the Unified Gas Supply System (UGSS) remained a cornerstone of the country’s gas industry. The UGSS includes 156,400 kilometers and major pipelines and 485,000 kilometers of distribution network owned by Gazprom, he said.

Apart from export-oriented projects, Gazprom also pledged to improve its domestic supply system. On June 19, Kyril Seleznev, CEO of Gazprom’s distribution subsidiary Mezhregiongaz, said that last year natural gas amounted to half of Russia’s total energy consumption, up from 42% in 1990. In 2006, Gazprom invested 17.6 billion ($690 million) rubles to develop its distribution network, he said. This year, the company plans to invest 20 billion rubles ($784 million), aiming to make gas available for some 62% of the population, up from 54% in 2005, according to Gazprom’s statement.

According to Ananenkov, Gazprom is making it a priority to modernize and develop the distribution network due to the expected growth of domestic gas production by Gazprom and independent producers. Gazprom has drafted a program to develop the UGSS in 2007-2010, aiming to raise gas transit capacities by some 32 billion cubic meters per year. He also pledged to attract investments by independent gas producers in order to develop the UGSS.

Yet despite pledges to upgrade its pipeline network, on July 21 Gazprom disclosed a draft on how to cut its investment programs in 2007. The plan involved cutting pipeline construction funding from 184 billion rubles ($7.22 billion) down to 160 billion rubles ($6.27 billion), as well as investments to develop the Shtokman, Urengoi, Zapolyarnoye, Yamburg, and Prirazlomnoye deposits. Russia’s Nezavisimaya gazeta daily commented that the proposed cuts raised questions about Gazprom’s commitments to guarantee stable, long-term gas supplies to consumers (Nezavisimaya gazeta, July 24).

Furthermore, Gazprom appears to remain reluctant to allow independent players into its pipeline fiefdom, despite efforts by some government officials, notably the Economic Development and Trade Ministry. The Russian RBK Daily quoted anonymous Gazprom sources as saying that the gas monopoly would allow independent gas producers to invest no more than 25% of the funds needed to build new gas pipelines. Meanwhile, such capital would not guarantee any gas transit privileges for these investors anyway, the sources said (RBK Daily, July 6).

Simultaneously, Gazprom is watching for potential market openings that do not require building new pipelines. On June 14 Ananenkov pledged to develop infrastructure to expand into liquefied natural gas (LNG) markets, aiming to deliver Russian gas to markets currently inaccessible by pipelines. Russia’s UGSS would eventually include LNG capacities, he said.

Russian gas policies continue to evolve around the nexus of the country’s ageing pipelines. Therefore, Moscow’s ambitious export-oriented gas pipeline projects would remain largely dependent on the existing pipeline network, at least until the emergence of the country’s LNG industry.