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. Last Updated: 07/27/2016

Gazprom Pushes Gas Exchange

VedomostiDeputy CEO Alexander Ryazanov
The government must speed up the liberalization of gas prices if Gazprom is to stop losing money on its domestic operations, the company's deputy chief executive, Alexander Ryazanov, said Wednesday.

Ryazanov's comments come as Gazprom's proposal for a domestic gas exchange -- which would set market prices for industrial consumers -- faces delays within the government.

"The initiative is sinking in the bureaucratic corridors of power," Ryazanov said. "It will delay the launch of the exchange by another year." Gazprom had originally proposed a 2006 start for the exchange.

Gazprom now sells gas to domestic customers at prices regulated by the state.

Ryazanov said Gazprom would lose 27 billion rubles ($964 million) this year in the domestic market, selling gas for between $34 and $36 per 1,000 cubic meters.

In Europe, Gazprom charges around $140 for the same amount of gas.

The low domestic prices curb Gazprom's ability to invest in new or existing facilities in the coming years, Gazprom said.

In addition, the annual increase in gas prices is smaller than in other industries. While last year metal prices grew 66 percent and industrial prices grew 28.3 percent, compared to a 14 percent drop in gas prices in real terms, said Yelena Karpel, head of Gazprom's pricing department.

Next year the government is proposing an 11 percent increase in gas prices. But prices must increase by 22 percent in 2006 -- and by 21 percent and 12 percent in the two following years -- if the company is to break even in 2009, Karpel said.

The government -- which has previously said it was looking at various proposals for the exchange -- is now stalling on the issue. It fears that higher prices will trigger inflation and that there will not be enough gas to sell with export demand on the rise.

Ryazanov rejected the government's concern that increased gas prices would set off inflation, but did not elaborate. In terms of available gas, warmer winters have helped stem demand over the past two years, Ryazanov said.

"We would like to take into account interests from all the parties on this issue," said an official from the Industry and Energy Ministry in response to Ryazanov's comments.

Establishing a gas exchange at home would give Russia a head start in setting up an international benchmark for export prices in the coming years, said Alfa Bank chief strategist Chris Weafer.

"There is fierce competition to establish a gas exchange among Arab countries," Weafer said. "[They] are keen to do it but they cannot do it unless Russia participates."

"It makes more sense for Russia being the dominant exporter to set it up and bring in European partners," he said.

"It's right for Gazprom to do it now."