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Katarzyna Kosowska*, Piotr Kosowski** 25 YEARS OF

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Katarzyna Kosowska*, Piotr Kosowski** 25 YEARS OF AGH DRILLING, OIL, GAS Vol. 32 No. 2 2015 http://dx.doi.org/10.7494/drill.2015.32.2.289 Katarzyna Kosowska*, Piotr Kosowski** 25 YEARS OF GAZPROM ON THE GAS MARKET 1. INTRODUCTION Gas sector belonged to one of the best developing branches of Russian industry over the last decades of the Soviet Union. It was possible thanks to the discovery of natural gas fields in Western Siberia in the 1960s and 1970s, followed by launching natural gas production and construction of transmission infrastructure, i.e. gas pipelines across Soviet Union and abroad. The history of Russian gas industry is inseparably connected with Gazprom, a concern established in 1989 in the place of the former Soviet Ministry of Gas Industry. Gazprom is composed of companies responsible for the geological and prospecting activity, production, processing, transmission, distribution and storage of natural gas. Gazprom production amounts to 74% of Russian and 14% of Worlds gas extraction (2013) [30]. Two stages can be distinguished in Gazprom history: I stage Chernomyrdin-Viakhirev period (19912000), II stage Miller period (20012014), These periods considerably differ in, e.g.: gas prices and financial condition of the Concern, type of activities undertaken by the State in reference to Gazprom, relations between Gazprom and CIS countries. * Jagiellonian University, Faculty of International and Political Studies, Krakow, Poland ** AGH University of Science and Technology, Faculty of Drilling, Oil and Gas, Krakow, Poland 289 2. GAS PRICES AND FINANCIAL CONDITION OF GAZPROM 2.1. Gas prices for domestic customers At the beginning of the 1990s Gazprom, with its founder V. Chernomyrdin, controlled the entire natural gas production in Russia (800bn m3 annually), transmission (gas pipelines 160,000 km long), processing and storing. After the breakup of the Soviet Union gas indus- try was better off than other fuel-energy sectors, although Gazprom lost part of its assets in the former SU republics about 25% of total compressor stations, over 30% of pipeline networks and 30% of underground gas storage capacities [19]. The major pipelines running from Russia to Europe started to be controlled by the CIS countries. The transition from centralized economy of the former Soviet Union to a free market option was realized through the ‘shock therapy’1 under Yegor Gaidar, a young economist in Boris Yeltsin government. After introducing price liberalization in January 1992 the Rus- sian economy was in a deep crisis. It started to recover under the sponsorship of energy sector, the only branch of industry where State-regulated prices were in power. Gazprom compensated for the artificially lowered gas prices in Russia by high export prices. Unfortu- nately about 70% of Russian gas was directed to the domestic market and the losses were huge [24]. The economic break-down and social disturbances in 1990s could be avoided largely thanks to Gazprom, who neither could increase the domestic prices for natural gas to the level of World’s prices nor disconnect debtor gas clients. Thanks to the low gas prices the Concern subsidized Russian economy and companies running bankrupt. The debt level of gas customers resulted in cash-flow difficulties for Gazprom. Four raises of domestic prices for natural gas in the beginning of 1993 did not improve the financial condition of Gazprom, but only increased the amount debt to be paid off [19]. In December 1996, 19 years ago, Gazprom established a company Mezhgiongaz (MRG) responsible for the collectivity of receivables. Since 2008 MRG has regularly reported losses. According to data of 2013 the loss amounted to 28.83bn RUR. About 80% of debt came from the Northern Caucasus regions. On the 1 October 2014 the debt of Russian consumers totaled to 118.2bn RUR (3bn USD) [26]. As already noted, the biggest problem of the gas monopolist since the former Soviet Union breakup were the low gas prices on the domestic market. According to some special- ists, this resulted in higher export gas deliveries at expense of the domestic market. Since 2002 the gas prices in the State-regulated segment in Russia have increased year by year. In May 2007 the Government issued a decree No. 333 [22], which assumed the equalization of gas prices for the Russian and foreign markets in 2011. However, a rapid increase of oil prices in 2007 and in the first half of 2008 and the World’s financial crisis imposed certain corrections. At the end of 2010 a governmental resolution No. 1205 about 1 shock therapy plan of economy improvement lying in immediate transition to market economy, liberalization of prices and privatization of companies. 290 amendments to the State regulation of gas prices [23] entered into force. Pursuant to this regulation the transition period was prolonged to the year 2014. In the years 2000–2008 the gas prices increased from 220 to 1266 RUB for individual consumers, and from 351 to 1711 RUB for industry. According to experts gas sales to most of the domestic consumers (apart from households, i.e. 20% of customers) were profitable [12]. The gas prices in USD for different categories of clients are presented in the Figure 1. Fig. 1. Average price of gas sold by Gazprom (USD/1000 m3) Source: www.gazprom.ru/about/marketing/europe/ The State-regulated prices policy has recently weakened the competitiveness of Gazprom on the domestic market. In 2012 the participation of this gas monopolist on the domestic market amounted to 73% as compared to 76% in the year before. In 2013 Gazprom delivered 228bn m3 of gas to the domestic market, i.e. 8.7% less than in 2012. The average wholesale State-regulated price of gas on domestic market equaled to 3393.9 RUB for 1000 m3 (no VAT included) [30]. Gazprom plans to maintain its participa- tion in the domestic market at a level of 75% by 2020. The drop of the participation in the market will be compensated by the planned gas deliveries to Siberia and Far East [3]. Since 2015 the Russian gas monopolist was offered consumer rebates on the domestic market. When realizing the previous price policy the concern was losing with the remaining players on the domestic gas market in the most attractive segment, i.e. industry. Both Novatek and Rosneft were not limited by State-regulated prices, and could offer more ad- vantageous delivery conditions. This state has caused that in 2013 Gazprom supplied 228bn m3 of gas to the domestic market, as compared to 265 and 250bn m3 in 2011 and 2012, respec- tively [4]. 291 2.2. Financial condition and production On the background of general break-down in the 1990s Gazprom’s position remained relatively stable. The company slightly decreased its natural gas production due to the rapid drop of gas demand in Russia. At that time the Concern provided 94% of domestic produc- tion from three biggest gas fields in the Western Siberia: Medvezhe, Urengoy and Yamburg, constituting 75% of annual gas production (Fig. 2) [13]. Despite the financial difficulties at that time Gazprom launched a few new fields. After the economic break-down in the 1990s and the final financial crisis of 1998, the first presidency of V. Putin met the time when the Russian economy started to dynami- cally develop in almost all sectors. High gas prices did not have an effect on the better financial situation of Gazprom. The growth observed by the Concern after the year 2000 was relatively small. ) 3 Production (bn m Fig. 2. Natural gas production in Russia (bn m3) Source: Ðîññèéñêèé ñòàòèñòè÷åñêèé åæåãîäíèê, Gazprom.ru After a few years of slow growth of gas production in Russia in 2003–2008, a rapid breakdown was observed in 2009. It was caused by the drop of gas demand on the domestic market and the situation on the European gas market, i.e. lower gas demand due to the global financial-economic crisis, aggressive sales policy of LNG suppliers, higher shale gas extraction in the USA. During the last decade the participation of Gazprom on the Russian gas market decreased from 88.3% (2002) to 74.3% (2012), which was connected with, e.g. realization 292 of projects of independent gas producers and oil companies, increasing the role of associat- ed gas production, and unfavorable situation of international gas markets. In the 2000s Gazprom launched the production on only two large fields: in 2001 the Zapolarnoe field discovered in 1965 and South Russian field discovered in 2007. The Yamalo-Nenets Autonomous Okrug still remained the main gas production center. In 2001 the Medvezhe, Urengoy and Yamburg fields gave 72% of Gazprom production, however the level of their depletion was 83%, 62% and 48%, respectively [2]. Another problem was the ageing of the pipeline network; the average age of Gazprom pipelines during the first presidency of Putin equaled to 22 years. Only 29% out of 153,000 km of major gas pipelines was under 10 years, 37% 10–20 years, 20% 20–33 years, 14% were over 33 years old (Fig. 3) [5]. Another factor hindering the further increase of this sector was the lack of funds for the investments, being a consequence of unfavorable investment climate and specific status of the monopolist in the Russian economy and politics [21]. Fig. 3. Age of gas pipelines owned by Gazprom For the sake of improving the financial condition of Gazprom in 2003–2010 the partic- ipation of excises and export duties was reduced from 26% to 16%. The NDPI tax for gas production stabilized at a level of 147 RUB/1000 m3 and has not increased since 2006. The budget plan for 2008–2010 assumed a fivefold increase of NDPI tax for gas, i.e.
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