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. Last Updated: 07/27/2016

Cabinet Disagrees on Gas Production

Itar-TassGref and Alexei Kudrin before the Cabinet meeting on Friday. Gref warned against a lack of planning by Gazprom.
Economic Development and Trade Minister German Gref said Gazprom must urgently present its plan for gas production after 2011 at a Cabinet meeting Friday.

Speaking about the expected performance of the economy from 2008-2010, Gref, who is a Gazprom board member, said it should include measures to ensure stable gas supplies from the company in successive years. The lack of adequate planning may compromise the country's economic development, he said.

Independent observers have warned that Gazprom will be unable to keep up with growing demand if it fails to invest in new projects as production falls in existing fields.

"As of today, it is the biggest problem," he said. "Its scale is such that we need to act urgently. We cannot put it off till 2008, or even until the end of this year."

But Gref's concerns were rejected by Prime Minister Mikhail Fradkov and First Deputy Prime Minister Dmitry Medvedev, who is also Gazprom's chairman.

"Don't make a drama out of this situation," Fradkov said.

The Cabinet has to adopt an economic projection for 2008-2010 before it can consider a federal budget for the three years. Although it adopted the basic outlines of the projection Friday, Fradkov ordered further work to be carried out on several provisions before March 11. The deadline for the budget to go before the State Duma is May 1.

Under the scenario considered Friday, Gazprom will produce 722 billion cubic meters of gas in 2010, but an Economic Development and Trade Ministry spokeswoman said the company had not submitted production plans running through 2020.

Gazprom plans growth of its gas production until 2011, but "even Gazprom specialists" predict a shortage of gas supply on the domestic market afterward, Gref said.

Gazprom's board postponed deliberations on gas production plans at its latest session at the end of February because the issue had not been prepared for, Gref said.

"There are concerns that we will not get the forecast even in the next few months," he said.

But Medvedev said the delay was understandable as Gazprom first wants to gauge demand as domestic prices gradually go up until 2011. The Cabinet and Gazprom will return to the issue of production plans for after 2011 in the near future, Medvedev said.

Gazprom has been trying to secure higher prices for industrial consumers by seeking long-term contracts with them that would last at least five years.

"They first want to create a market for long-term contracts and make long-term forecasts based on the real situation on that market," Medvedev said.

Gazprom CEO Alexei Miller agreed, saying the production plan should be based on real contracts rather than expectations.

"Gazprom's motto is 'gas will not be produced before it is sold,'" Miller said, Interfax reported.

Dmitry Loukashov, oil and gas analyst at Alfa Bank, said Gref's concerns about possible shortage in domestic gas supply were unjustified.

"Gazprom has enough fields and the reserves to develop them if necessary," he said.

Jonathan Stern, director of gas research at Oxford Institute for Energy Studies, said domestic demand for gas would fall as its price rises over the next three years. If Russian businesses paid the same as businesses in Ukraine and Belarus, where prices increased sharply recently, "Gazprom wouldn't need to produce more," he said.

The International Energy Agency and other critics of Gazprom believe that the company is in danger of defaulting on its gas supply commitments to Western Europe because of delays to current international gas production projects and a shortfall of investment into its reserves.

But Stern said Western markets would not suffer because Gazprom would have to pay "billions of dollars in damages" if it violated its contracts.

There is also confusion about more immediate gas supply needs, Gref said. The Cabinet, in its estimates of the country's economic performance for the next three years, says the electricity industry will need 186 billion cubic meters of gas in 2010, while Gazprom puts the figure at 168 bcm, he said.

Fradkov said the gap, 18 bcm, should be eliminated by determining regional electricity needs jointly with regional governors and presidential envoys to the seven federal districts.

Gref also announced that domestic gas prices would grow at a slightly faster pace after 2008, compared with the government plan adopted in November. The prices will grow by 27.7 percent in 2009 and 2010 each and reach about $100 for 1,000 cubic meters of gas, he said.

The government plan had stipulated increases of 26 percent and 25 percent for these respective years, leading to the price of $102.2 for 1,000 cubic meters before the start of 2011. Next year, the price will grow by 25 percent as was previously planned, Gref said.