GAZPROM Ordering Russia To Get More Money Ready

25.11.2009 — Analysis

GAZPROM is going to get gas tariffs for Russian industry up to the European level by 2013. The company's management professes that resources must be spent sensibly and calculatedly. Managers of machine building companies, however, told the RusBusinessNews observer that GAZPROM is just being crafty - companies cannot modernize during the crisis without governmental help and all this idea with raising prices is aimed simply at getting additional revenues for the monopolist.

The Russian Government has decided to set gas prices for domestic companies on the basis of the fuel cost in the European market starting 2011. Since the single step introduction of new prices can cause production stoppages it is suggested to introduce discounts for the transition period until 2014.

Yelena Karpel, the Head of GAZPROM's Department for Economics Expertise and Pricing, however, said at the 7th international forum "Russian Gas 2009" that the market situation might prompt the authorities to revise the coefficients and start the calculations in accordance with European prices as early as 2013. The fuel costs increase, according to the expert, will force Russian industrialists to start saving energy. At the moment the consumption of gas per unit of gross domestic product in Russia is 10 to 20 times higher than in European countries. GAZPROM reckons that it is precisely the low gas price that is hindering the implementation of energy saving technologies.

Andrei Besedin, the Deputy Director of the Union of Machine Building Enterprises of the Sverdlovsk Oblast, is convinced that the choice of time for the implementation of energy saving technologies has been extremely unfortunate. More than a half of real sector enterprises are currently in a pre-bankruptcy state, merely trying to break even. This is why attempts of the State to put the only just alive industry into the same conditions as western competitors look like letting a village school soccer team play in a professional league.

Russian companies, according to the expert, are in a worse position right from the start. Metal prices in the country are higher than abroad, machine builders, for instance, buy stainless steel sheet in Sweden. Many components are purchased abroad too and this drives up the cost. This is why abolishing concessions on energy resources will result in the Russian industry ceasing to produce. "We will not withstand the competition," says Andrei Besedin, "because we have no support. The Italians, for instance, can take out loans to run export contracts with 8% annual interest, 4% out of which is reimbursed to them by the State. Loans offered to us by banks carry 24% annual interest. This is why, when talking about a level playing field, the State representatives are just trying to be clever, if you make the gas prices European then make the interest rates in banks European as well."

GAZPROM's course, nevertheless, is firmly set upon the introduction of new prices for domestic consumers in the nearest future. Yelena Karpel explained that the company needs the money for the provision of gas supply to the Far East and for the establishment of the infrastructure. Capital investment deficit for the domestic market will amount to 123 billion roubles this year alone.

Independent experts, however, point at a different set of figures: in 2009 GAZPROM will have made 70 billion roubles profit in the domestic market and in 2010 gas prices will grow by further 27%. It is interesting that the consumption of electric energy in the country is falling; in the Sverdlovsk Oblast, for instance, the drop amounted to 18%. It is obvious that this is a result of the reduction of production at industrial enterprises. With rising gas prices the deindustrialisation of the economy will go further as regional budgets have no money for the support of industry.

Starting from 2010 Russian regions where GAZPROM is producing will not receive a single penny of the extraction tax paid. Instead the company has kindly agreed to pay tax on moveable property which is used during the running of the gas transportation network. According to Olga Medvedeva, the Head of the Administration for Revenue Planning of the Department of Finance of the Yamalo-Nenets Autonomous Okrug, the Okrug will receive 2 billion roubles. This kind of money is a lot for Yamal but mere pennies for GAZPROM. Nevertheless, Yamal has been fighting for this decision at the federal level for four years.

Neither can regional budgets count on the profit tax as gas producing companies work in the regions but pay taxes in Moscow where the parent company is registered and located. It is a known fact that in USA royalty revenues are distributed somewhat differently - over a half of money is channelled into land reclamation, over a third - into the State budget, and only 10% goes into the Federal budget.

Russian gas producers are not spoiling the federal budget either as they are exempt altogether from extraction tax for the development of new fields in Yamal, East Siberia, and continental shelf. At the same time GAZPROM is continuing to make pricing policies in the domestic market tougher.

The monopolist's logic has been explained by Valery Yazev, the Deputy Duma Speaker and the President of the Russian Gas Society. According to him during the crisis there is a struggle to drive importers' purchase prices down and to get the highest revenue from sales of gas to the end consumer in domestic markets. USA drove up the competition in Europe having freed up some liquefied natural gas. Russians have to decrease prices in order to increase supply volumes to Europe. It is a very difficult job as the conditions of production are getting ever more difficult - gas is becoming oilier which requires further refining. Serious investments are needed to support production of volumes we are used to. All this forced federal authorities to make the decision regarding cutting down the consumption in the domestic market. Energy resources, according to Valery Yazev, should be given to those who spend less of them while producing more value.

It is not hard to understand that in not too distant a future GAZPROM will make profits exclusively on gas exports. Actually it is happening right now - according to Aleksandr Medvedev, GAZPROM's Deputy Chairman of the Board, export revenues of the company in 2009 will amount to about 1.3 trillion roubles, in 2010 - to 1.5 trillion roubles. GAZPROM's total revenues in the economically comparable 2007 amounted to 1.7 trillion roubles.

GAZPROM will encounter gas shortages soon enough - according to estimates from Ron Cochrane, the Vice President of Shell in Russia and CIS, in 2010-2020 there will be a tangible decline of gas production at Yamburg and Urengoy gas fields in Yamal. This means that we need to develop the raw materials base. The export nature of the development vector forces GAZPROM's involvement in the construction of the Nord Stream pipeline and the development of Shtokman field. Russia will not be able to manage these projects on her own as there are neither the needed money not technologies for it. This is why there is a strong dependence on help from the countries of the North Europe.

However, Matthias Warnig, the Managing Director of Nord Stream, said at the "Russian Gas 2009" conference that European tax payers will not pay a single penny toward the implementation of the project. The construction of the vast infrastructure with creation of hundreds of thousands of new jobs in the North Europe will be done with the use of bank loans. Around 4 billion Euro will have been allocated by the end of 2009 and further 2.6 billion Euro - in 2010.

There will be a serious infrastructure constructed in Russia too - overland pipeline on the coast, shipyard for making tankers in the Far East, the specialized port in the Murmansk Oblast for the transfer of liquefied gas and the world's largest plant for the production of this gas. These projects will also be financed by bank loans and the money needed for servicing these will be built into the fuel price.

It is obvious that it is Russian taxpayer that will have to pay for GAZPROM's large scale plans as the Europeans forethoughtfully have liberalized the gas market which brought down the purchase prices. In Russia GAZPROM is the one and only supplier of the fuel to virtually all regions and thus there can be no prices other than those set by the monopoly. The only exception from this rule is the Sverdlovsk Oblast where the market is monopolized by Itera Ltd. According to Sergey Ochakov, the Head of the National Association of Natural Gas Consumers, this company is making good money buying gas at a price about 100 roubles lower than that set by the Federal Tariffs Service for GAZPROM and selling it to industrial companies at a price 700 to 800 roubles higher. In his opinion it cannot be ruled out that a situation may arise in Russia where the gas prices are set by market forces while the relationships between suppliers and consumers remain as they were, i.e. prescribed from above.

Vladimir Terletski