In 2008 Gazprom’s companies supplied Russian consumers with 287 billion m3 of gas.
When planning gas deliveries to consumers Gazprom relies on its Gas Resource Allocation Provision and takes into consideration gas exports and production by independent companies.
In accordance with this Provision, OOO Mezhregiongaz – the major gas trading company in Gazprom Group – collects consumer requests for gas deliveries over next year. Gas is allocated based on these data.
At the same time, consideration is given to whether consumers have fulfilled their gas payment obligations for previous years. If necessary, Gazprom provides solvent customers with extra gas volumes with due regard of available technical capacity in UGSS and existing international and domestic commitments.
In addition, gas is supplied to new consumers. To secure gas supply, a new consumer is required to file a form, attach detailed spreadsheets showing the consumer’s heat and fuel needs, and a report from a transportation organization confirming it has the facilities and capacity to supply the gas. The permit to use gas is issued with account of resource availability in Russia’s regions, optimal pipe flow requirements and economic feasibility of using gas as fuel.
At the same time, account is taken of whether consumers have fulfilled their gas payment commitments in previous years. If necessary, Gazprom provides solvent customers with extra gas volumes with due regard of available technical capacity in UGSS and existing international and domestic commitments.
In Russia wholesale prices of gas extracted and supplied by OAO Gazprom and its affiliates are annually set by the state represented by the Federal Service for Tariffs.
The final wholesale gas price includes the following regulated components:
Gazprom receives its revenues from gas sales at the regulated wholesale price. Revenues of gas distribution companies conveying gas by gas distribution networks are formed through regulated transport tariffs. Regional gas sales companies receive fees for providing supply and sales services.
The average wholesale price of gas sold to industrial consumers in 2008 was RUB 1,699.2 per 1,000 m3 (net of VAT) and the average wholesale price of gas intended to be sold to the population – RUB 1,288.8 per 1,000 m3.
The prices for 2009 have been introduced by the December 24, 2008 Order No. 413-e/11 of the Russian Federation Federal Service for Tariffs. These prices are differentiated by 60 price zones. The Order provides for the following schedule of quarterly gas price increase in 2009: by 5% from January 1, by 7% from April 1; by 7% from July 1 and by 6.2% from October 1, all of which will provide for an average annual increase in prices of 15.9 %. In 2010 regulated wholesale natural gas prices are scheduled to be increased by 13% from January 1 and by another 13% from July 1. From 2011 and onwards, natural gas prices are to be determined based on equal yield of gas supplies to the foreign and domestic markets. However, prices may be increased by not more than 40% in 2011.
Retail gas prices for the population are set by respective regional authorities of the Russian Federation. Gas pricing for the population has its features, in particular privileged consumer categories. If there are no gas meters in apartments, charges are calculated on the basis of existing standards.
In 2007, in order to notify the gas market players about the formation principles for wholesale gas prices to be introduced in 2011, FST of Russia calculates indicative gas prices under a preset formula that is aimed at meeting the principle of equal yield of gas supplies to the foreign and domestic markets. The indicative prices for 2007- 2008 exceeded the average regulated prices on an average by 2.2-2.9 fold.
Gas in Russia is the cheapest and hence the most widely used fuel. The share of gas in the primary energy mix of the Russian economy exceeds 50% and in the fuel balance of thermal power plants accounts for over 70%. Russia’s top-heavy fuel balance threatens national energy security; with gas being as cheap as it is, the other fuel alternatives such as black oil, peat and coal tend to stagnate. Cheap gas calls for careful utilization of this nonrenewable natural resource.
Regulated gas prices are nowadays artificially restricted and prevent from recovering gas production, transportation and marketing costs. Such prices not only hinder the development of the gas industry but also hamper the formation of an efficient structure of the Russian economy. Subsidized in effect by Gazprom, companies have no stimuli to cut operating expenses due to cheap energy supplies. Cheap gas made the introduction of energy conservation technologies and new eco-friendly fuels noncompetitive. The Russian economy is presently the most gas-consuming economy in the world. Unlike in many industrial countries where gas is mostly consumed by households, in Russia gas is primarily supplied to power generating companies and metallurgical and chemical enterprises.
Moreover, deliveries of cheap gas to Russian export-oriented producers can be viewed upon as unjustified export subsidies. Effectively subsidizing whole industries of the Russian economy, Gazprom ends up experiencing investment difficulties when implementing new large-scale field development projects, upgrading capacities and constructing new gas pipelines.
Such a situation can hardly be characterized as normal. Given this circumstance, in recent years the Russian Federation Government has been pursuing the policy of systematically increasing gas prices to an economically substantiated level as well as has been expanding the opportunities of applying the market based pricing practice.
The Russian gas market is divided into a regulated and a non-regulated sector.
The regulated market segment currently dominates. The Government regulates:
Independent producers sell their gas at non-regulated prices, but altogether they only meet around one fourth of Russia’s blue fuel demand. At the same time, the Government stopped regulating the prices of alternative fuels, notably coal and fuel oil, in the early 1990s.
Since 2006 the Russian Federation Government has been taking measures to develop the Russian natural gas market based on market principles. In particular, it determined the dynamics for the change in the regulated wholesale natural gas prices and envisaged bringing them up to a level that would provide for equal yield of gas supplies to the foreign and domestic market using the market based pricing formula.
On May 28, 2007 the Russian Federation Government approved the Directive No. 333 “On Improving State Regulation of Gas Prices”, which stipulates introducing a new pricing mechanism for gas supplied by Gazprom. This mechanism contemplates setting a regulated price ceiling (minimum and maximum price levels) for different consumer categories. Fixed gas prices set by FST of Russia are identified as the minimum price levels. The maximum price levels are set on the basis of regulated fixed prices to be increased by 60% in 2007, by 50% in 2008, by 40% from January 1, 2009, by 30% from July 1, 2009, by 20% from January 1, 2010 and by 10% from January 1, 2010. The right to determine gas prices within these limits is granted to suppliers and buyers. This pricing procedure is applied to new consumers that sign their first supply contract after July 1, 2007 as well as to the volumes of natural gas to be supplied in excess of those stipulated in contracts. In 2008 Gazprom’s natural gas sales to such consumer groups amounted to 15.9 billion m3. The actual wholesale price was higher than the regulated price for industrial consumers by an average 40%, while the maximum permissible limit was 50%.
Long-term gas supply contracts play a crucial role in the Russian gas market development. In the course of its 2008 contractual campaign, OAO Gazprom signed 66 thousand long-term contracts with companies in the power sector and other industries with the supply due in 2008-2012 for a total of 185 billion m3 of gas, which is more than 80% of the total volume of gas consumed by the industries. The contracts call for the transfer of the consumers to make settlements with Gazprom at non-regulated prices when the Russian Federation Government adopts the appropriate regulation.
Practice shows that long-term contracts are mutually beneficial both for suppliers and prominent gas consumers.
The market based pricing method prescribed in the contracts will allow, as compared to the current regulated method, for more flexibility in adjusting prices to gas consumption levels by different industries and seasonal fluctuations, as well as permit consideration, as may be agreed with certain consumers, of such factors as changes in prices in the case of suspended supplies and fluctuations in gas withdrawal during a day, a week, etc.
The balance of interests of natural gas consumers and producers in Russia will be achieved in the process of wider application of market based gas pricing methods during state regulation of tariffs for gas transportation services.
The world gas market development experience shows that long-term contracts can steadily guarantee gas deliveries to the consumer and investments necessary for the gas industry development to the producer. A further 20% of gas should be sold under yearly contracts. The remaining 10% - via a gas exchange, in cases when the consumer needs extra gas volumes in excess of the limit set in long-term or yearly contracts.
The application of stock exchange quotations as market price indicators is one of the main features of a civilized gas market. Practice shows that for exchange prices to become the benchmark for contract prices, 5%-10% of the industry output should be traded via an electronic platform.
In 2007-2008 the Russian gas market players gained the necessary experience in using modern gas exchange technologies at an electronic trading platform (ETP) of OOO Mezhregiongaz – a trading company of Gazprom.
In effect, ETP was the first step toward setting up a natural gas exchange in Russia.
During experimental gas sales via ETP in 2007 and 2008 Gazprom Group and independent producers sold 7.04 billion m3 and 6.09 billion m3 of free priced gas respectively. The bulk of the gas – over 55% in 2007 and 86% in 2008 – was purchased by energy utilities.
The trading sessions recorded relatively stable price indicators – the weighted average price of gas sold via ETP exceeded the regulated wholesale prices by an average of 36.9% in 2007 and 38% in 2008.
Given the experience gained at ETP, exchange trading in natural gas is planned to be arranged in Russia on a permanent basis.
Gasification of Russia is the major goal of Gazprom. As a result of the Company’s consistent actions, over less than 5 years the average gasification level of the Russian Federation has reached 62%. In cities and towns the gasification level has increased by 6% and in rural areas – by 8%.
During 2005-2007 the gasification process was underway in 58 constituents of the Russian Federation and due to its significance was assigned the top priority national project status. Over the three-year period more than RUB 43 billion was channeled for the gasification program execution.
As a result, 543 facilities were built; the total length of new gas distribution networks amounted to 8,400 km; nearly 1,200 settlements, 4.4 million apartments and houses (3 million in cities and towns and 1.4 million in rural areas) were connected to UGSS of Russia. 23,500 household utilities along with around 5,000 rural boiler houses and 570 agricultural companies were converted to natural gas. All this made it possible to raise the gasification level in Russia to 67% in cities and towns and 44% in rural areas.
In 2008 the gasification program embraced as many as 64 constituents of the Russian Federation. Construction was completed on 153 inter-settlement gas pipelines with a total length of 2,700 km. Gazprom’s investments were RUB 24.18 billion. 2.5 thousand km of street distribution grids were connected to inter-settlement gas pipelines, around 60 thousand households and 300 boiler houses were supplied with gas.
In 2009 RUB 18.5 billion of investments are earmarked for gasification activities in 69 constituents of the Russian Federation.
A well adjusted system of interaction between OAO Gazprom and Russia’s regional authorities contributes to the successful implementation of the gasification program. This system hinges on cooperation agreements that were in force with 78 constituents of the Russian Federation in 2008.
In Gazprom Group the responsibility for the operating efficiency of gas distribution infrastructure and the reliability of gas deliveries to consumers is vested in OAO Gazpromregiongaz that integrates and controls the activities of around 200 gas distribution companies. The existing vertically integrated management system enables to pursue a unified technical and tariff policy in the gas distribution sector.
