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. Last Updated: 07/27/2016

Gazprom Ready to Hike Tariffs

Gazprom has received the go-ahead from regulators to raise wholesale rates for natural gas from May 1 by as much as 20 percent on the domestic market, a move aimed at helping the company meet production costs, which exceed revenues for national sales.

Tariffs will rise by an average of 20 percent for industrial users and 15 percent for households, with varying rates set for different locations in Russia.

"The previous prices didn't compensate for Gazprom's extraction and transportation costs," said Alexei Arefiyev, assistant to Andrei Zadernyuk, chairman of the Federal Energy Commission, or FEK, which is responsible for supervising gas and electricity prices.

Gas rates were last raised in October, when gas for industrial use went up 16 percent and 5 percent for households.

City dwellers will see more of an increase in their gas prices than those living in rural areas, analysts said. But the hike will most likely not be a large burden even for urban dwellers.

"Rates are already low," said Viktor Mishnyakov, a NIKoil brokerage oil and gas analyst. "A couple more kopeks won't make a difference.

"We'll see what happens in the winter," he added. "If oil prices rise again by then, perhaps gas rates will be lowered."

However, Dmitry Avdeyev, an oil and gas analyst at United Financial Group, said Gazprom would still lose money on domestic sales after the rate hike.

"The gains will still not compensate for the effects of inflation and [the 1998] ruble devaluation," Avdeyev said.

The price increases will generate some 9 billion rubles ($300 million) a year in extra revenues, Avdeyev said.

The company's total revenues last year stood at 423.85 billion rubles, according to World Gas Intelligence.

Current rates for industry users average 308 rubles ($10.73) per 1,000 cubic meters, while households pay 212 rubles per 1,000 cubic meters on average. Gazprom sells gas to Western nations for $80 per cubic meter, the company said.

Alexander Agibalov, an oil and gas analyst with Aton brokerage, said the price increases would not constitute a significant amount.

"It's not much compared to increases for the products of other natural-resource monopolies," he said.

That is bad news for Gazprom, which has reported steadily declining production levels, the result of a lack of cash needed for investment in gas extraction.

Production slumped to 545.6 billion cubic meters last year from 553.7 bcm in 1998, World Gas Intelligence reported.

Gazprom chiefly invested in the downstream branches of its business, such as building pipes and developing distribution, while neglecting investments in upstream extraction.

Since the gas giant effectively subsidizes domestic supplies, the only way for the company to make a profit is to increase exports by lowering the amount of gas it sells on the domestic market.

Earlier this month, Gazprom announced it would halve supplies to national electricity grid Unified Energy Systems because of the utility's failure to pay its gas bill. That resulted in a spat between UES chief Anatoly Chubais and Gazprom head Rem Vyakhirev.

UES faces cash-flow problems because a large number of companies and government bodies in Russia refuse to pay electricity bills. UES is owed 19 billion rubles, company officials said.

And, just like Gazprom, UES and its subsidiaries have to win regulatory approval for any price hikes.

President-elect Vladimir Putin ended the standoff by ordering the monopolies to resolve the conflict. Gazprom met UES halfway by agreeing to provide 24.207 bcm of gas to UES for the first quarter, while the electricity provider said it would cut supplies to some of its non paying customers.

"Putin took control of the Gazprom-UES question, and perhaps the [gas rate] increases are part of the settlement," NIKoil's Mishnyakov said.