“The Russian economy demands”

Gazprom has shifted its priority to the domestic market

After a small official farewell ceremony for Dmitry Medvedev and the board of directors of Gazprom, the concern’s chairman of the board, Alexey Miller, declared a new priority for the company’s activities. “Now the main task set by the board of directors is the domestic market,” he told reporters, recalling the 13 million “freshly gasified” residents of Russia. “We will continue to work on gasifying the country with the understanding that the Russian economy requires more and more energy resources, since economic development and economic growth mean an increase in energy consumption.” Meanwhile, domestic gas supplies will remain less attractive for producers for quite some time compared to exports, despite the widely advertised principle of equal profitability (the price for Russian enterprises is supposed to be calculated from the cost of gas at the German border minus a 30 percent customs duty and transport expenses). Yesterday, Deputy Head of the Ministry of Economic Development Andrei Klepach said at a meeting of the government commission for regulating social and labor relations that equal profitability will be achieved no earlier than 2014-2015.

There are no market relations in the gas supply system to Russian consumers and are not expected to do so in the near future. There is an administrative struggle over supply limits on the part of the monopoly and an equally closed process of distributing the remaining volume of gas through a system of providing access to the pipeline to independent producers. And all of Gazprom’s efforts to “develop the market” have so far been associated with lobbying for the liberalization of gas prices for industry (softer rhetoric has been adopted towards the population for political reasons). At the same time, the volume of gas exports is determined by long-term contracts providing for increased supplies. And in a number of cases, there are intergovernmental agreements that have priority status over domestic legislation, in accordance with which gas is supplied to Russian consumers.

The desire to liberalize prices and the shortage of additional gas for new consumers, as is known, led to an absolutely inadequate government decision on November 30, 2006 to switch to an equal-income price formula from 2011. That is, as a result of liberalization, instead of a price competitive with other types of energy resources, gas consumers in Russia will have to receive a price that is designed to equalize Gazprom’s profitability. And if in European markets (especially in Western Europe) the Russian concern is forced to compete with alternative suppliers, then in the domestic market this is simply impossible due to its monopoly position - the business of independent producers is almost completely dependent on the favor of Gazprom management. In the materials for numerous meetings, the need to transition to equal returns from domestic and export supplies was explained not only by the country’s distorted fuel balance, but also by the objective lack of gas to meet growing needs.

But the principle of equal profitability not only looks strategically inadequate, but has already turned out to be tactically unworkable. In early May, at the initiative of the Ministry of Economic Development, the government decided not to switch to this principle in 2011, since at current oil prices (on which the price of gas on world markets depends) this promised at least a twofold increase. Gazprom reluctantly agreed to a 40% increase in regulated prices, noting in informal comments that it was ready to accept a delay in the transition for a year. However, the state now seems likely to delay the transition. “If we directly applied the principle of equal profitability, it would be necessary to increase gas prices (in Russia - Ed. ) by 95-100%,” said Mr. Klepach. - A compromise decision was made. We are maintaining the installation on net back (price minus transport costs and customs duties. - Ed. ), since it is spelled out in many agreements, but at the same time, in fact, the transition stretches over several years. We will actually move on to it in 2014-2015.”

Gazprom did not agree with the deputy minister’s opinion. “There was a decision to switch to equal profitability in 2011,” a representative of the concern repeated to Vremya Novostey. - But due to the increase in export prices in 2011 there will be a 40 percent increase in domestic prices for industry. And the principle of equal profitability should work starting in 2012.”

Alexey GRIVACHS