Gazprom’s Hands Ever Deeper In State’s Coffers

10.03.2010 — Analysis

The programme for the development of fields in the Yamal Peninsula and adjacent offshore areas until 2035 which should be officially approved in the first quarter this year is so far raising more questions than giving answers. The Yamal-Nenets Autonomous Okrug administration preferred not to comment on it, possibly due to being hardly familiar with it. Gazprom representatives reduce their comments to general figures: the amount of investment by 2035 will reach 180 billion dollars and gas production will amount to 350 billion cubic metres per year.

The large Bovanenkovo field will be developed first, its reserves amount to 4.9 trillion cubic metres. Gazprom is planning to spend about 12 billion dollars on the development of this field and further 90 billion on the construction of new transport system Bovanenkovo-Ukhta (5-6 lines about 1,100 kilometres long) and further to Pochinki. Having made the decision in 2006 to invest in the development of Bovanenkovo field Gazprom built into the project the in-house rate of return standard of 13.5%. In the beginning of 2010 the company representatives have suddenly started talking about the threat of a drop in this indicator down to 7.5% which is what made the monopoly resort to asking the Government for support.

Gazprom is rather vague when talking about the essence of their proposals to the State: Vasiliy Savchenko, the Deputy Manager of the Department for Forecasting the Integrated Development of the holding's capacities, only stresses that they are talking about a set of tax and customs measures aimed at the acceleration of the development of the Yamal Peninsula. According to him without the support from the Government Gazprom may develop just one field, Bovanenkovo, as the development of Kharasavey, Kruzenshtern, and South Tambey fields with reserves amounting to 3.3 trillion cubic metres will be "difficult".

Alexei Belogoryev, the Manager of Expert Analysis Department on Fuel and Energy Complex at the Energy Strategy Institute, does not understand the logic of the monopoly. The mineral extraction tax (MET) rate at 147 roubles for 1,000 cubic metres has not changed for over four years, if we take inflation into account, it has even dropped, the company's revenues grew from 60 billion dollars in 2006 to 100 billion in the financially hard 2009, and in 2010 it will grow further to 116-118 billion dollars. Gazprom's net profit also has grown significantly whilst technological conditions for the development of the fields have not changed much. This is why Gazprom's demands to reduce the MET rate to zero are in no way connected to the internal economy of the project.

Mr Belogoryev reckons that "The real cause is in the unmanageable investment load which Gazprom had to sign up to under pressure from the Government. As well as Yamal, this includes fields in the East Siberian and the Far East, Shtokman field, construction of export pipelines to Europe and China etc. Carrying these considerable investment obligations Gazprom is trying to share them, be it just partially, with the Government which initiated many of the mentioned projects. This is the position which in all likelihood is reflected in the company's proposals regarding Yamal".

Mikhail Korchemkin, the Director General of the East European Gas Analysis, a consulting company, does not see any grounds to give Gazprom tax concessions either. According to him, tens of billions of dollars can be saved by not building the Bovanenkovo-Ukhta pipeline. The Yamal gas, the expert reckons, should be channelled to Yamburg which would require just a short link.

Vasiliy Savchenko informed RusBusinessNews that initially it was planned to send gas here from Bovanenkovo field but that the route had to be changed at the request of the YaNAO administration. The Okrug authorities said that the line to Yamburg will disturb water flows creating serious environmental and economic problems for the peninsula's indigenous population. Moreover, piping hydrocarbons from Bovanenkovo to Yamburg will make independent gas producers very unhappy as there will be no room in the pipe left for their gas.

Mikhail Korchemkin disputes the monopoly's representative's arguments. He thinks that by the time of commissioning of Bovanenkovo field (2012) there will be enough room in the pipe due to the decline in production in the Nadym-Yamburg-Urengoy region. There are available transport capacities even now as the sales and production volumes of gas are significantly lower than in 2007. The experts explain the decision to build the new transport corridor to Ukhta by the desire of middlemen and subcontractors of the Russian gas monopoly to lay their hands on serious money.

Andrey Belogoryev suggests not to count on the transport capacities becoming available in the Nadym-Pur-Taz region due to declining production at traditional fields. Calculations made in 2004 by VNIPIgazodobycha Ltd show that the current pipeline system will be capable to take only 90 billion cubic metres of gas from the peninsula in 2010s. This is quite enough for the initial stages of the development of Bovanenkovo field but serious problems can develop later on: the total production volumes in Yamal will reach according to various predictions 250-350 billion cubic metres. This is what led to the idea of the construction of the new line to Ukhta with the capacity of 140 billion cubic metres per year.

The expert reckons that we must not forget the significant wear of main assets of the Unified Gas Supply System (UGSS) which today exceeds 56%. A quarter of main pipelines in Russia have been in use for a term exceeding their nominal lifecycle (33 years). One of the key consequences of this is the reduction of technically available UGSS capacity. The main reduction is recorded precisely at the output of the Nadym-Pur-Taz region from where it is impossible to pump more than 550 billion cubic metres annually. The expert is convinced that is the gas transportation infrastructure is not renovated it will lead to the delays in the Yamal project. Investments needed for the modernization of the gas transportation infrastructure are comparable in size to the cost of the construction of the new Bovanenkovo-Ukhta route.

Gazprom, however, has managed to discredit even these reasonable arguments. Experts are concerned with the excessive costs of the construction of the gas pipeline. Even if we take into account the total length of the linear part of the main lines of 12-15 thousand kilometres the cost of the construction of one kilometre amounts to 6 million dollars. Gazprom does not plan this kind of costs even for the construction of the Dzhubga-Lazarevskoe-Sochi gas pipeline almost all of which will be laying on the seabed. According to Alexei Miller, the Head of the company, the cost of one kilometre will not exceed 2.7 million dollars. Experts think this insanely expensive: according to the data provided by Mikhail Korchemkin, laying one kilometre of pipeline on the seabed cost the proprietors of Langeled 1.6 million dollars, of the Trans Adriatic pipeline - 2.2 million. Furthermore, the conditions of the construction and pipe diameter of these projects do not speak for Gazprom at all.

Gazprom's calculations cause mistrust also due to the fact that PeterGasEngineering Ltd in 2008 valued one kilometre of the Sochi gas pipeline at 0.8 million dollars. The Bovanenkovo-Ukhta gas pipeline cannot cost more simply because most of it will be on dry land. Experts' rough estimates show that the development of a gas field in the West Siberia with the production levels of 10 billion cubic metres annually costs about 0.5 to 1 million dollars and the construction of one kilometre of a linear part of the main gas pipeline (taking into account the costs of compressor stations) amounts to about a million dollars.

The development of Yamal is made difficult by its specific relief. According to Vera Yakutseni, the Chief Specialist of FSUE Russian Oil Science and Research Geological Exploration Institute, Bovanenkovo field will in time submerge as the surface is sinking. The geological conditions in the meantime are virtually the same as in Yamburg, and so is the quality of gas. This is why the increase in the price of the project, taking into account the difficulties of the development, may amount to about 20%. Experts estimate the cost price of gas from Bovanenkovo field at a broad range of figures - 20 to 70 dollars per 1000 cubic metres. Gazprom does not publicise their production cost data. Vasiliy Savchenko only says that the Yamal gas will be significantly more expensive, about 50% more than gas from Nadym-Pur-Taz region.

Back in early 2000s, CJSC ERTA-consult experts predicted that through the increasing production costs Gazprom will be unable to fund the development of new fields using only their own money. The consultants tied the involvement of investors to improvements in the transparency of projects and elimination of inefficient spending of the gas monopoly.

Gazprom, however, went another way deciding to lay off its non-transparent spending onto the whole of the Russian people. This year industrial enterprises will be paying more for gas: in YaNAO - by 50%, in the Sverdlovsk Oblast - 42%, in the Kurgan Oblast - 38%. Counting fuel price increases for private individuals average prices in Russia have gone up 46%. Starting in April people will be paying further 15% more.

Vladimir Terletski