Officials Debate Gas Price Increase

Itar-TassGazprom official Alexander Ananenkov flanked by Duma deputies Alexei Varlamov, left, and Valery Yazev at the forum.
Gas executives and some state officials pressed Tuesday for a steep increase in domestic gas prices ahead of a key discussion on the industry's strategy to be chaired Wednesday by President Vladimir Putin.

But analysts said they doubted Putin would welcome any potentially unpopular gas price rise before State Duma elections in December 2007 and the election of his successor in March 2008.

"By the end of this decade, sometime in 2009-2010, regulated prices could reach $90 per 1,000 cubic meters, based on discussions we have had in the past month or two," said Igor Volkov, an official from the Federal Customs Service.

Volkov was speaking at a forum organized by Gazprom, which has long pressed the state to free gas prices in the country, now capped at less than one-fifth of the level paid by Gazprom's European export customers.

Deputy Industry and Energy Minister Andrei Dementyev declined to predict the outcome of Wednesday's meeting on prices, at which officials will also review the gas production plans of Gazprom and independent producers.

Other issues include long-term prospects of the country's energy consumption and coordination of investment plans by Gazprom and power utility Unified Energy Systems, or UES, which is heavily dependent on gas for electricity production.

"Some concrete proposals have been made and if they are approved, the development of the gas and electricity market will take a good pace," Dementyev said.

Putin has called on the government to work out measures that would allow Gazprom to reduce cheap gas supplies to domestic consumers and to boost exports without damaging the country's economy, which has long remained competitive due to cheap gas.

Leonid Mikhelson, CEO of No. 2 gas firm Novatek, told the conference he believed prices could rise as high as $120 by 2010.

He said the increase was crucial to avoid a gas shortage in the midterm as independent producers could then boost output to 180 billion cubic meters per year from around 100 bcm currently.

Analysts have said independent gas producers stood to benefit most if prices rose steeply, but warned this was unlikely to happen in 2007.

"Given the approved 2007 budget plan, we continue to doubt that the state will adopt radical proposals to increase gas prices as it would translate into higher inflation," Uralsib brokerage said in a note.

"Additionally, the hike seems unlikely any time ahead of presidential and Duma elections," it said, adding that it did not rule out an increase of slightly more than 15 percent.

Mikhelson acknowledged it would be difficult for the government to approve a steep increase next year, saying it could amount to slightly over 15 percent and be done in two steps during the year.