Natural gas deficit notion will disappear by the year 2010. Alexander Ryazanov, Deputy Chairman, Gazprom Management Committee, answered questions by Mirovaya Energetika magazine regarding natural gas industry reforms.
Mirovaya Energetika: What are the similarities in Gazprom proposed reform concept and other reform proposals?
Alexander Ryazanov: There are two full-fledged industry reform concepts, namely proposed by Gazprom and the Ministry of Economic Development and Trade. At the same time, the Ministry of Energy and the Federal Energy Commission prepared separate proposals quite professionally. Besides, the Russian Union of Industrialists and Entrepreneurs also made a number of proposals. Proposals by the so-called independent natural gas producers, a number of public and parliamentary groups deserve certain attention as well. Boston Consulting Group research performed at the request of our overseas shareholders is interesting as well.
Mostly everyone agree that there are a number of barriers hampering the development of the domestic natural gas market. There is a complete understanding regarding the fact that domestic market natural gas prices are not market based, the prices were artificially suppressed, and a liberalization of natural gas prices is urgent.
Everyone agree that there should be a gradual, as opposed to an instant one day process, price liberalization. The consumers must have a lead time to adapt to such changes. Therefore a two-tier market model is proposed. The first market sector prices will be government regulated. The second market sector will be market price based.
Still, a number of authors propose more or less radical measures in terms of consumer prices policy. For example, the Russian Union of Industrialists and Entrepreneurs proposes to supply 120 billion cubic meters of natural gas into a free market, which amounts to almost a third of total domestic consumption, and one half of these supplies must originate from Gazprom. Our proposals are more conservative, although we must complete the gas market reform by 2010, contrary to 2013 as proposed by the Russian Union of Industrialists and Entrepreneurs. At the same time, the authors of different concepts agree that the population must be the last to join the liberalized gas market.
Mirovaya Energetika: How many stages are there in the Gazprom proposed natural gas market reform concept?
Alexander Ryazanov: There are three stages. The first stage is under way now. Initially, we suggested to have a "zero based" regulated price, meaning the unit cost of natural gas extraction, treatment and transmission en route to the end-user. According to the Government of the Russian Federation Decree, starting from January 1, 2004, the natural gas tariff for end-users in Russia will be increased by 20%. As a result, an average price of natural gas excluding VAT and excise tax will be RUR810 for one thousand cubic meters, which will enable us to operate without losses, excluding investment expenses and debt servicing expenses.
At the same time, we made a proposal to sell part of our natural gas in a free market through a commodity exchange. Up to now, and it is widely known, there are two natural gas trading floors - one is the electronic natural gas exchange at Mezhregiongaz, and the other is the Mezhregional"naya (Interregional) Oil and Gas Industry Exchange. Unfortunately, the government has not issued the executive order regarding the initiation of the Gazprom free price based partial gas supply sales experiment.
Besides, we suggest introducing a new domestic market long term contracting, similar to gas exports contract negotiations.
The second stage, according to our plan, begins in 2006 and ends in 2008. It precludes, according to our long term plan, a gradual expansion of the free market sector and a contraction of the regulated sector.
Export oriented industries that sell their products at the international market prices, primarily the energy industry companies, should be the first to enter the free market sector. Then, gradually, natural gas will be supplied at market prices to other consumers. Still, the residential sector and the population in general must be state-regulated.
The third stage, according to our plans, will be over by 2010. The consumers will have a choice of different gas suppliers. According to the authors of natural gas market reform concepts, natural gas price at the free market (for Central Russia) will stabilize at the level of US$50 to US$55 for one thousand cubic meters.
Mirovaya Energetika: Does that mean a fully operational natural gas market by 2010?
Alexander Ryazanov: It does. The natural gas liberalization process will simultaneously engage market regulation mechanisms in the industry. This will lead to a different type of fuels competition - consumers will pay more attention to other energy sources, such as coal, heavy oil, energy saving technology implementation. Therefore, the natural gas component in the country"s fuel consumption will become lower, according to our estimates, from today"s 49% share to a secure 40% to 42% share. At the same time, every natural gas producer will secure a domestic market price level with profitability sufficient for new gas exploration and production, as well as investments into mineral resource base development and renewal.
The industry"s investment attractiveness is increasing. New investments will lead to production and transmission of natural gas volumes meeting market demand. Starting from 2010, all gas producers including Gazprom will be able to produce 650 to 700 billion cubic meters of natural gas. Therefore, we, as well as independent producers, will be capable to supply all Russian and foreign consumers. The notion of natural gas deficit will no longer exist.
Mirovaya Energetika: What are the clauses of the above mentioned concepts and projects that Gazprom objects to?
Alexander Ryazanov: We object to the Ministry of Economic Development and Trade proposal on radical changes in the structure of Gazprom itself. The Ministry suggests a "splitting" of the company and Gazprom production affiliates, separation of the gas transmission system and the Central Gas Dispatching Center from Gazprom.
Our position is that there is a distortion of logic in this instance: as far as gas market reform is concerned, the discussion focuses exclusively on Gazprom. Price liberalization must be the key point of the reform as opposed to Gazprom reorganization. The idea of Gazprom"s splitting is only a disguise for property redistribution, and does not seem to be a genuine concern about the future of the natural gas industry.
We think that splitting Gazprom up will not lead to any sensible results. A positive economic effect is not at all obvious. As a result, gas consumers - the population of Russia - may be victimized. Currently, Gazprom is responsible for the energy security of the country in terms of guaranteed gas supplies across Russia, and for observation of international contractual obligations. Besides, today Gazprom is Russia"s largest tax contributor. The company bears huge social obligations that are not likely to be shifted to small-scale gas producing companies. In the world market, the current trend for multinationals is characterized by mergers and acquisitions. Gazprom" divestiture may shatter Russia"s position as a major natural gas exporter.
There is another issue that experts of the Ministry of Economic Development and Trade overlooked in their concept of gas market reform. Gazprom is a joint stock company. There is no specific option of resolving problems with our stockholders - numbering more than half a million - suggested by the Ministry"s officials.
And, finally, there is another problem. Suppose you are an investor with a large stake in a given project. You expect return on your investment. Suddenly you realize that the company you work with is going to be divided into a number of parts. Your question is whether the project you invested in would bring returns. What are the guarantees to recover investment. These are also the questions asked by creditors.
Mirovaya Energetika: The Ministry of Economic Development and Trade is pushing for the gas transmission system to be separated from Gazprom so that the transportation tariffs structure is more transparent. How can that goal be achieved without the company"s restructuring?
Alexander Ryazanov: The gas transmission cost structure is already transparent enough. You should know that Gazprom has a separate gas transmission expenditures accounting system. All data is reported to the regulators. All you have to do is refer to it.
At the same time, some of our gas transmission companies are involved in other businesses as well, such as gas production, gas treatment and storage, and we are ready to take the necessary steps to reflect transmission business revenues and expenditures in the balance sheets of these companies.
Mirovaya Energetika: What is the outcome of the reform for independent gas producers?
Alexander Ryazanov: The key issue is that independent producers will have a possibility for dynamic development and production expansion. According to our estimates, independent producers may get a 40% share of the domestic market by 2010. It is quite clear that liberalization will resolve the issue of access to the transmission pipeline network. I would like to remind that currently Gazprom approves all access requests from independent producers for transmission through the United Gas Transmission System provided gas quality is in line with the requirements, gas is supplied to end users on time, and the sufficient capacity is available.
When Gazprom is blamed for hampering pipeline access, it is not Gazprom" fault, the issue is that there is no available capacity at given pipeline sections at given points in time. And this is the problem. It cannot be resolved by means of separation or mere calculation. This problem can be resolved by modernizing the transmission system facilitating sufficient throughput capacity increase. And this is exactly what we are doing. In order to have returns on investment in the United Gas Transmission System, an economically justifiable transmission tariff is necessary, and the tariff, in its turn, is based on low regulated gas prices. Therefore we have to consider the necessity of price liberalization again. There will be sufficient investment for the United Gas Transmission System modernization, and the problem of insufficient capacity will be resolved at the price level of US$35 to US$40, and the transmission tariffs at US$1 per one thousand cubic meters.
Mirovaya Energetika: Would Gazprom allow independent producers to export natural gas?
Alexander Ryazanov: Our position is that Gazprom and independent producers should be on equal footing: in case domestic gas sales are at market prices, there are unified transport tariffs and equal taxation, there could be equal share structure in exports. This is the point of mutual understanding among all authors of the Russian gas market reform concepts, and there should be a single exports sales channel. This is our position. We estimate that under these conditions it is possible to facilitate a maximum export price of the Russian natural gas, and a maximum level of return on investment. And it is in the interests of Russia to increase its hard currency sales proceeds.
On the other hand, in case domestic gas sales proceeds is equal to that in exports, the companies will not have to choose between domestic or foreign market to sell their production.
Mirovaya Energetika: What are the implications of the reform for foreign customers?
Alexander Ryazanov: None. And that is the most important thing. They will still have guarantees of steady supplies. In case the market is liberalized in accordance with Gazprom scenario, we will unconditionally fulfill our obligations, which would be impossible in the case with the Ministry of Economic Development and Trade"s Gazprom divestiture concept. Besides, production increase will enable to satisfy increasing demand in Gazprom"s traditional European markets, and simultaneously tap new markets, such as the US and Asia Pacific.
Therefore the reform will bring about only positive outcomes.
Mirovaya Energetika: What are the implications of Gazprom reform concept implementation for the company itself?
Alexander Ryazanov: Gazprom has already managed to stabilize its annual gas production, and shifted to a growth phase in its development. Gazprom increased its annual mid-term production volume target figure from 580 - 590 billion cubic meters of gas by 2020, and to 610 - 630 billion cubic meters of gas by the year 2030. We have adjusted our plans in line with the tasks set forth by the President of the Russian Federation, namely the economic growth and development, and doubling the GDP within the next decade.
The Gazprom concept of gas market liberalization will lead to stabilizing the growth rate and make the process irreversible.
By keeping Gazprom intact we will maintain the stability of the gas transmission network and the production chain operation, and structural integrity. This will enable us to continue our corporate efficiency improvement and market capitalization increase efforts. Thus we will facilitate further corporate development of Gazprom, and bring the company up to the level appropriate of the world"s largest natural gas corporation.
January 12 2004