Loser-Out Game Started In Urals Gas Market

22.09.2009 — Analysis

The GAZEKS Holding owned by CJSC Integrated Energy Systems is planning to significantly increase amounts of natural gas supplied to the Sverdlovsk Oblast. The company, previously dealing with transportation and distribution of gas, is planning to control 10-12% of the regional market as soon as in 2010. The Oil and gas company Itera that supplies 70% of the Sverdlovsk Oblast's gas is forecasting problems in gas supply. Experts surveyed by RusBusinessNews are convinced, however, that market competition will help stabilise gas prices.

The GAZTEKS Group offered largest companies in the mid Urals to sign 2010 gas supply contracts. The vendor is ready to furnish these consumers with exclusive supply conditions. Denis Pasler, the Managing Director of CJSC GAZTEKS explained that this standard formula translates into the flexible pricing policy: "We will take into account the amounts of gas purchase as well as the size of sales markups which resellers impose. Our markup will be lower".

Offering better conditions the company is planning to sell 2-2.5 billion cubic metres of gas in 2010. At the time of crisis these are formidable quantities: by expert estimates, in 2009 the Sverdlovsk Oblast will have consumed no more than 17 billion. It is apparent that the new player in the market will not go unnoticed by the Itera Group, the main gas supplier to the region. Consumers do not rule out the possibility that 2010 might become the beginning of the end of the exclusive relations the company enjoys with the regional authorities.

Itera has been supplying gas to the Sverdlovsk Oblast for over ten years. During this period the consumption volumes have been constantly growing, having reached 20 billion cubic metres in 2007. The company managed to cope with the volumes earning rather good dividends. Being a regional monopoly Uralsevergaz (abbr. for Ural North Gas), an Itera subsidiary, could not fix the market price for gas but was able to independently set the markup on the tariff approved by the Government. Today, for instance, if you pay for the gas you have used, that is after the end of the month when you consumed the fuel, the markup amounts to 24%. In 2005 it was 19%. Neither remained the same the set by the Federal Tariffs Service price of a cubic metre of gas, which forced consumers look for alternative fuel sources.

Oil and gas companies (TNK-BP for instance) in the beginning of 2000-s tried to dismantle the monopoly on gas supply to the Sverdlovsk Oblast. Itera, however, enjoyed the support of Governor Eduard Rossel, who personally lobbied for the establishment of Uralsevergaz. He was personally interested in the provision of gas supply to the Oblast which is why Itera managed to obtain the exclusive right for the supply of gas in exchange for investment into the gas transport system of the mid Urals.

In order to maximize the income Itera, through its subsidiary Regiongaz-Invest started working on renovation of old and the construction of new boiler houses. There also were plans to build generating capacities which would enable them to sell electric power as well as gas. The diverse business, evidently, did not allow for market relations which led to a strange situation: having shortages of own gas, Itera was buying it from Novatek and selling to consumers on own conditions.

Gazprom could have dismantled the Itera monopoly but in the years of industrial growth Gazprom did not have extra volumes of gas to sell in the domestic market.

The situation changed dramatically with the onset of the economic crisis. The volumes of gas sold to Europe fell, fuel consumption in Russia also dropped, the market price for a cubic metre dropped below the Government set tariff. In these conditions the monopoly on the gas supply to the Sverdlovsk Oblast began affecting the consumers' performance. 

The head of the Trading Division of CJSC Integrated Energy Systems Eduard Smelov calculated that the Territorial Generating Company № 9 will be forced to pay in 2009 a billion roubles too much if it continues to buy gas from the monopoly. Complications in the relationship with Uralsevergaz arose because the market prices for fuel have dropped while the supplier continued to charge for gas in accordance to the old scheme.

The generating company made their opinion public that they would work with Itera, but on conditions dictated by the market. Eduard Smelov stressed that today the division can buy gas from independent producers much cheaper than those set by the Federal Tariffs Service. Most companies, he says, have extra volumes to sell - Novatek, TNK-BP, LUKOIL, Rosneft.

The quarrel between the generating companies and gas suppliers has brought about the situation in 2009 whereby TNK-BP and Gazprom began supplying gas to the Sverdlovsk Oblast. The volumes they supply are not that great yet, according to Denis Pasler, the figures do not exceed 5% of the total consumption. The expert predicts, however, that in 2010 the situation will change. The lion's share (70-75% or 12-13 billion cubic metres) will still be supplied by Uralsevergaz. It will be competing with Novatek (10-15%) and GAZEKS (10-12%), the two companies able to supply up to 5 billion cubic metres of gas. TNK-BP and Gazprom will supply 500 million cubic metres of gas each.

Denis Pasler stressed that time will tell who will become the key gass supplier to the Sverdlovsk Oblast. Competitors, in his opinion, will be fighting for clients reducing prices. Even today the suppliers have different purchase price for gas and middleman companies have different sales markups. Denis Pasler said: "We know whose gas and at what price it is sold in the Sverdlovsk market. For two years we have been selling small volumes ourselves, having entered into 600 contracts with consumers. This is why we want to expand our presence on this market, offering a lower markup."

Vladimir Mashlov, the Chairman of the Committee on Industrial, Agrarian Policies and the Subsoil Use of the Sverdlovsk Oblast Duma, reckons that competition in the fuel marked will allow fixing gas prices for very long time. The Oblast, having transferred the services privileges for certain categories of people into monetary format, is not interested in regular fuel tariff increases.

Consumers see their benefit from the new players coming to this market. According to Grigoriy Abramov, the head of the Department for Planning and Accounting of Energy resources of the Bogoslovsk Aluminium Smelter, buying fuel from GAZTEKS will enable the company to do away with the need to enter a tripartite contract between the consumer, the supplier and the transporter. It will be much easier for the company to work with a single company which, to boot, is prepared to sell gas at a stable price. Metallurgists experiencing the crisis have a great interest in this.

Viktor Filippov, the Chiefe Engineer of the Serov SDPP, says that the change os supplier has happened without disruptions. According to him the consumer can only win when there are several strong players in the market.

Vladimir Makeyev, the Board Chairman of the Oil and Gas Company Itera Ltd., however, spoke very much against GAZTEKS's coming to the mid Urals market. In his opinion competition and possible fuel supply at more attractive prices will destroy the stable gas supply system of the Sverdlovsk Oblast. The monopoly is concerned that only insolvent clients, social sphere, and services will remain its clients.

Denis Pasler commenting on the non-payment problem pointed out that GAZTEKS has experience in working with consumers and that the payment collection situation is not that bad. Likely as not, everything might be revolving around the flexible pricing policy.

Vladimir TERLETSKI