Future unclear after a decade of recklessness RUSSIA: Its gas industry is facing a new, global era. But the country has a bad hangover, with its state-run gas monopoly, Gazprom, deep in debt, writes Tom Warner in Moscow
With about 40 per cent of the world's known reserves, and plenty of
prospects for further discoveries, the potential of Russia's natural gas
industry is truly awe-inspiring.
Russia has enough gas to keep its export market in Europe growing strong
while opening up a new market in rapidly industrialising China and going
global with exports of liquefied natural gas (LNG).
But today's reality is a headache. A decade of recklessness has left
Russia's state-run gas monopoly, Gazprom, deep in debt and facing an
imminent production decline at the Siberian fields that have been its
workhorses since the 1970s.
"The future demands estimated for Russian gas far exceed what Gazprom is
going to be able to produce," says Paul Collison, an oil and gas analyst
at UBS Brunswick.
Gazprom's main challenge for the next decade will be to finance the
development of replacement fields in more difficult locations, particularly
the far-northern Yamal peninsula. That will require investments "on a
scale unprecedented for Russia", Mr Collison says.
How the government expects Gazprom to raise the money still isn't clear.
However, Russia's president, Vladimir Putin, has ruled out proposals to
break up or privatise Gazprom. The state holds a narrow majority stake,
including shares held by Gazprom subsidiaries.
Mr Putin's vision is of a stronger, more centralised Gazprom working
hand-in-hand with a stronger, more centralised Russian state.
As he said in a speech to Gazprom's board last year, he wants to
preserve the company's role as "a powerful political and economic
lever of influence over the rest of the world".
That special status makes for an arduous climate for private investors who
are welcome to explore and develop gas deposits but are unable to freely
market the product.
Gazprom uses its monopoly on gas pipelines to reserve profitable export
markets for itself while relegating private producers to Russia's
domestic market where prices are fixed below the cost of production.
To see just how discouraging the conditions are for private gas production in
Russia, one only has to take a flight over Siberia at night. Giant flares
visible from miles up in the air show how Russia's oil producers regard
the associated gas they find while drilling for oil as a worthless annoyance,
most easily disposed of by burning it off. However, a schedule of gradual
price increases should end this practice over the next two or three years.
Some oil producers have even been acquiring gas fields in anticipation of
further improvements.
Gazprom also blocks central Asian producers from selling to the west European
and central European markets. Only a few well-connected private traders have
cracked through these barriers.
Such policies clash with the liberalisation under way in the European Union
but Mr Putin has signalled he will stand firm. The conflict doesn't
appear to have hurt Gazprom's relationships with western gas companies
such as Ruhrgas and Wintershall who are both involved in a consortium that
plans to build a new pipeline to Europe across the Baltic Sea, adding to two
current pipelines to Europe across Ukraine and Belarus and another across the
Black Sea to Turkey.
Meanwhile, BP and its Russian partner TNK are in talks with Gazprom on
launching a first pipeline to China from the giant Kovytka gas field in which
the BP-TNK joint venture owns a 64 per cent stake. The talks recently
appeared to have been stalled, but Stephen O'Sullivan, head of research
at Moscow's United Financial Group, says he sees "signs of
compromise".
He says Gazprom is likely to acquire a 25 per cent stake in the project from
the Russian company Interros.
The other big private gas development likely to reach production in this
decade is off the coast of Russia's far eastern Sakhalin Island.
The Dollars 10bn project, run by a consortium led by Shell, will extract gas
from underwater fields off the island's east coast and then liquefy it
in a plant on the island. Shell has already booked commitments from Japanese
consumers for its planned production launch in 2007.
Sakhalin-1, another offshore project in the same area led by Exxon, is
focusing on oil in its initial phase.
Sakhalin-3, a longer-term exploration and development project led by Exxon
and Chevron, was cancelled by the government earlier this year.
Gazprom is also in talks with Conoco on building an LNG plant in Murmansk, on
Russia's White Sea, targeting the US market.
But the bulk of investment in new production will clearly have to come from
Gazprom itself.
Increasing domestic prices is one way Gazprom could raise some extra cash.
Another strategy is to increase the market value of Gazprom's stock by
eliminating restrictions that make it more difficult for foreigners to buy
shares.
A higher market capitalisation would allow Gazprom to raise more debt.
Mr Putin installed a new management team at Gazprom in 2001 that has reduced
corruption and improved the company's credit rating.
But most of the improved borrowing abilities have had to be used on
refinancing high-interest, short-term debt built up in the 1990s.
Analysts expect Mr Putin to announce a plan within the coming year to knock
down the so-called "ring fence", which Mr Collison describes as
"a complete albatross".
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RUSSIA IN FACTS
