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Volume and price controls for gas

The Gas Supply Law

Pursuant to the federal law On Gas Supply Law, dated 31 March 1999, and the General Provisions on Formation and State Regulation of Gas Prices and Tariffs for the Services of Gas Transportation (approved by a decision of the Russian government), dated 3 January 2001, wholesale gas prices are established by the FAS (following its absorption of the FTS in 2015) and its regional departments. The Gas Supply Law also grants the authorities extensive powers over natural gas supplies:

▪To set projected natural gas production levels and Russia’s sales balance.

▪To regulate natural gas deliveries.

▪To set procedures enabling independent organisations to gain access to the natural gas transportation and distribution networks.

▪To establish customer gas prices and transportation fees.

▪To define categories of customers to whom natural gas deliveries cannot be restricted or suspended.

Renaissance Capital

20 June 2019

Russian oil & gas

Gas Supply Law grants government significant powers, and imposes burdens on Gazprom

The Unified Gas Supply System (UGSS)

The Gas Supply Law defines the UGSS as a centrally managed, technologically and economically regulated system of gas production, processing, transportation, storage and supply. Gazprom is the current owner of the UGSS. To ensure reliable gas supply and compliance with international treaties signed by the Russian Federation and existing gas delivery contracts, the UGSS is mandated to: maintain and develop the network; monitor the function of its facilities; procure the use of equipment and processes for power-saving and environmental safety at its industrial sites; take action to ensure industrial and ecological safety within the UGSS; and operate disaster management systems.

Under the terms of the Gas Supply Law, Gazprom, as owner of the UGSS, is obliged to provide independent gas producers with access to its natural gas transportation system in Russia subject to capacity being available in the UGSS, the gas being compliant in terms of quality and technical parameters, and the availability of connecting and branch pipelines to consumers. The access rights of independent producers are also governed by the Natural Monopoly Law, which stipulates that Gazprom is required to take into account the protection of the rights and legitimate interests of citizens, the security of the state, and the protection of environmental and cultural heritage in determining whether to grant access. Presidential Decree No. 1333 of 5 November 1992, which established Gazprom as a joint stock company, as amended, makes Gazprom responsible for providing transportation access to gas producers in proportion to the volume of gas produced by them on the territory of Russia. Similar proportional access rights to regional gas supply systems are also enshrined in Government Resolution No. 1370 of 24 November 1998. According to this resolution, any legal entity on the territory of the Russian Federation has the right to access the regional gas supply systems to facilitate delivery. In addition to public service obligations, the owner of the UGSS (i.e. Gazprom) has been subject to a higher Mineral Extraction Tax (MET) from 2012, as discussed on pages 164-167.

Dealings between suppliers and off-takers are governed by the Regulation on Natural Gas Supplies in the Russian Federation approved by Government Resolution No. 162 of 5 February 1998. This grants priority rights to off-takers that purchase natural gas for the government, utilities, consumers and households, and to certain off-takers wishing to extend their existing natural gas supply agreements.

UGSS ownership gives Gazprom extensive market power, but also public-service obligations and higher tax

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Renaissance Capital 20 June 2019

Russian oil & gas

Under Government Resolution No. 858 of 14 July 1997, On the Provision of Access of Independent Organisations to the Gas Transportation System of OJSC Gazprom, Gazprom must provide independent suppliers with non-discriminatory access to available UGSS transportation capacity in Russia – again subject to the natural gas from independent suppliers being of sufficient quality, and the availability of connecting and branch pipelines to consumers. In addition, associated gas has been granted preferential access to UGSS in accordance with relevant changes to the Gas Supply Law, which became effective 1 January 2013.

While there is a sufficient legislative base to ensure unrestricted access to the gas transportation infrastructure, actual access is heavily dependent on negotiations with Gazprom and its willingness to provide it, which was a particularly acute problem in the early 2000s. However, in our coverage of major Russian oil & gas producers we have not encountered any of the companies having major problems with pipeline access in recent years.

The government has resumed its focus on the provision of non-discriminatory access to Gazprom pipelines in 2018 with the passage of the roadmap towards an introduction of greater degree of competitiveness in certain sectors of Russian economy (Decree No 1697-p dated 16 August 2018). Specifically, this document has prescribed the Ministry of Energy and FAS to propose new rules for non-discriminatory access by 1 October 2018. On 29 May 2019 this deadline was extended until 1 July 2019.

Export monopoly

In July 2006, the State Duma and the Federation Council passed a bill granting the owner of the UGSS (i.e. Gazprom, although the company was not explicitly named) the right to export all Russian gas “extracted from hydrocarbon deposits and transported in gas or liquid form”. PSA-produced gas, however, was excluded. This law was relaxed somewhat in 2014 to exclude LNG exports from Gazprom’s monopoly.

Gas pipeline tariff regulation

Natural gas prices and transportation tariffs in Russia are regulated pursuant to the Natural Monopoly Law and the Gas Supply Law and several government resolutions. Government Resolution No. 1021, On State Regulation of Gas Prices and Tariffs for Gas Transportation on the Territory of the Russian Federation, of 29 December 2000, as amended, sets forth the main provisions for regulating the wholesale price of natural gas and transportation tariffs. This piece of legislation envisaged that regulation would eventually only affect transportation tariffs, although it enabled control of wholesale gas prices on an interim basis (until such time that the end-user tariffs are liberalised). This only affects Gazprom since natural gas produced by independent gas suppliers is not regulated, having been excluded from the list of regulated tariffs by the Russian Government Decree No. 865 dated 30 July 1998.

While the government confirmed on 28 May 2007 that the interim stage should expire on 1 January 2011, it has been postponed – first, until 1 January 2015 (Government Decree No. 1205, dated 31 December 2010), then until 1 January 2018 (Government Decree No. 342, dated 15 April 2014), and then this deadline was removed altogether (Government Decree No. 941, dated 4 September 2015). We discuss the regulation of end-user gas tariffs on pages 118-120 and focus here on the regulation of Gazprom’s pipeline tariffs.

Deregulation of Gazprom’s gas tariffs for industrial users is promised, although timing remains uncertain

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The tariff for transportation of independents’ gas shipped to end-users via the UGSS is set by the FAS (formerly, FTS). From 1 August 2006 (pursuant to the order of the FTS of 28 July 2006 No. 151 e/1), the FTS established a two-level tariff system. This consists of: 1) a fee for the transportation of mcm over 100 km; and 2) a capacity fee for the use of natural gas pipelines, which depends on the regions of input and output into and out of the gas transportation system. The pipeline tariff was historically set on a cost-plus basis, resulting in a level significantly below what was economically justified. There has been an expectation that, at some stage, Gazprom’s pipeline tariffs would eventually rise to an economically-justified level as envisaged by the law On Gas Supply. These hopes were all but crushed with the 2014 reform of the gas MET, which has linked the unlinkable, i.e. the regulatory and fiscal policies, by adopting a formula under which Gazprom’s MET would rise if its gas transportation tariffs were to increase at a rate above inflation (with the independent producers seeing an opposite effect, by which lower taxes would offset higher transportation costs). It works out mathematically that Gazprom has very little incentive to see its pipeline tariffs grow above inflation.

Following the introduction of the new pipeline tariff/MET tax regime in 2014, Gazprom saw little growth in its pipeline tariff, which, on average, went up by 2% on 1 July 2015, with no tariff increase during 2016, 2017 and 2018. Igor Artemyev, head of FAS, said on 24 April 2019 that FAS would not entertain raising gas transportation tariffs until Gazprom supplies separate accounts for its gas transportation business. We therefore expect this slow dynamic will continue until the regime is changed or the GTS is unbundled from Gazprom. One of the initiatives contained in the above-mentioned roadmap (Government Decree No 1697-p dated 16 August 2018) is the target introduction of a unified gas transportation tariff for all users, combined with the new information disclosure guidelines for Gazprom. With the original deadline of end-2018, the new deadline has been extended until 1 July 2019 by the government decree dated 29 May 2019. On the face of it, this new government initiative aims to address most of the inefficiencies in the current regulatory framework of gas pipelines. However, nearly two decades of delays in implementing targeted reforms of the Russian gas sector call for a cautious optimism.

There is also a portion of natural gas that is unregulated and trades on the SPIMEX. We discuss gas trading separately on pages 122-123.

Associated gas

The regulation of associated gas pricing was abolished in 2008 by a government decision (No. 59) dated 9 February 2008. This decision had been widely expected, and was designed to both streamline the legislative base for the oil & gas industry (because of various loopholes in the previous legislation, only a small proportion of associated gas was actually sold at regulated prices) and send a strong message to increase the utilisation rates of associated gas, in line with current government policy. Furthermore, associated gas now receives preferential access to the UGSS in accordance with relevant changes to the Gas Supply Law, which became effective on 1 January 2013.

Renaissance Capital

20 June 2019

Russian oil & gas

Associated gas prices were liberalised in 2008

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