vk.com/id446425943

Gas output

Renaissance Capital

20 June 2019

Russian oil & gas

Russia’s gas output increased by 5.3% in 2018 to 669.5bcm, according to BP. In 2018,

Russian gas production accounted for 17.3% of the world total, net of flared, recycled and lost gas. The BP estimate is substantially below the officially reported Russian output figure of 741bcm, which includes flared gas and losses.

Following the collapse of the Soviet Union, Russia’s gas industry suffered a considerably less severe downturn than its oil segment. This reflects both the fact that Gazprom was not broken up and that Western European demand for Russian gas has continued to grow. Gas was also inexpensively priced in Russia, making it the obvious choice for domestic consumers. Indeed, Russia remains one of the world’s largest gas consumers, second only to the US, according to BP.

That said, the gas segment remained isolated from market practices, unlike the oil arena. Domestic industrial gas tariffs for Gazprom continue to be regulated in an uneconomic fashion; third-party access to Gazprom’s pipeline system is not as transparent as it is for oil pipelines, and the transportation tariffs that Gazprom charges for third-party shipments are substantially below economically justified levels, in our view. Since 2006, the government has pursued the deregulation of domestic gas tariffs for industrial users, which was supposed to culminate in the proposed regulatory (albeit not ownership) separation of Gazprom’s gas production and transportation activities from 2011; however, that timeline has been stretched on several occasions, with no obvious progress achieved to date.

Specifically, in November 2006 the government committed itself to much higher domestic gas pricing in the future, targeting export netback parity for industrial-use gas by 2011. This was followed by a government resolution in May 2007 (signed by then Prime Minister Mikhail Fradkov) ordering the abolition of price regulation for industrial users by 2011. The resolution also regulates pricing in long-term supply contracts for any incremental gas volumes supplied by Gazprom to existing customers, setting price ranges that can be no lower than the regulated price – which was set to rise rapidly. However, the government’s commitment to full price liberalisation in 2011 was put to the test by the high volatility in oil prices in 2008-2009, followed by the sharp contraction in the Russian economy in 2009, as well as volatile gas prices in Europe. Consequently, the implementation of the netback parity concept has been reconsidered. We believe the deregulation of domestic gas prices is long overdue.

We understand that the current approach to regulation of the domestic gas market is based on the status quo remaining unchanged until at least 2020. This date was specifically mentioned in a draft Energy Strategy by 2035, but was removed in its most recent version. The current draft Energy Strategy by 2035, scheduled to be introduced to the government by 1 December 2019, stipulates a transition to market-based pricing mechanisms instead of government regulation as one of the priorities, but no timing for the possible liberalisation of the domestic gas sector is provided.

Russia’s gas market is second only to the US

Domestic gas sector reform is long overdue

Figure 8: Russian gas industry indicators, bcm

	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Gas output	582	595	620	634	641	656	654	665	596	665	688	672	684	653	648	653	704	741
Domestic consumption	373	389	393	402	405	432	439	416	390	414	425	416	425	422	409	421	431	454
Net storage	-2	5	14	4	4	3	3	16	-14	6	2	3	6	5	2	-22	3	-3
Imports	19	18	23	14	13	14	25	70	45	37	33	33	34	30	22	19	21	21
Non-CIS exports	127	129	139	149	155	162	151	159	149	153	165	155	178	165	175	195	213	232
CIS exports	73	43	44	64	55	51	40	32	51	68	74	64	59	48	40	33	34	36

Source: Gazprom, InfoTek, Interfax, BP's Statistical Review of World Energy 2019, Oil & Capital

12

vk.com/id446425943

Figure 9: World natural gas consumption, bcm

		North America										Other										Europe & Eurasia
		Russia										Asia Pacific										Middle East
1,200
1,000
800
600
400
200
-
1991	1992	1993	1994	1995	1996	1997	1998	1999	2000	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018

Source: BP’s Statistical Review of World Energy 2019

Figure 10: Worldwide trade flows of piped natural gas and LNG, bcm

Renaissance Capital

20 June 2019

Russian oil & gas

Source: BP’s Statistical Review of World Energy 2019, Renaissance Capital

13