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. Last Updated: 07/27/2016

For Indie Gas Firms, Access Is Crucial

Heartened by the rising gas prices for industrial consumers, independent gas producers are looking to the government's next step: A law that would give them stable access to Gazprom's main pipelines.

Combined, the measures would allow the Russian gas industry to meet the soaring demand both at home and abroad.

The State Duma is this month scheduled to consider the crucial second reading of a long-delayed bill that would provide fairer access to trunk pipelines for independents such as Novatek, LUKoil and TNK-BP.

"We have long wanted this," Viktor Baranov, head of the Independent Gas Producers' Union, said in a recent interview. "Everybody welcomes this."

The bill comes in addition to a government plan, adopted in November, that raises gas prices for industrial consumers to market levels by 2011. That price is expected to reach $125 per 1,000 cubic meters, more than double this year's $50.60.

"Improving returns in the gas sector should lead to accelerated development of natural gas reserves by Russian oil companies and independent gas producers," MDM Bank said in an overview of the gas industry released last month.

The country's long-neglected independent gas producers have the potential to help Gazprom plug a looming supplies gap by servicing the growing local market.

Many experts are skeptical about whether Gazprom, which holds a gas export monopoly, will be able to meet its domestic and international commitments over the next few years. The firm has repeatedly delayed plans to develop the giant Shtokman and Yamal gas fields, and its production plans beyond 2010 are not yet clear.

In the past five years, independent gas producers have increased annual supply from 69 billion cubic meters to 95 bcm, the Independent Gas Producers Union said in responses to questions. They expect to further boost production to 180 bcm in 2010, the MDM Bank report said.

Eager to coordinate the growing domestic gas market, Gazprom bought 19.4 percent of Novatek, the largest independent gas producer, in September. "No one has lifted the overall responsibility for gas supply in Russia from Gazprom," Baranov said. "Gazprom isn't demonstrating moves to take over, but to influence the commissioning of new facilities, coordinate the marketing policy and develop the gas market."

The government regulates prices only for Gazprom's domestic supplies, which currently make up 76 percent of the market, while independents are free to set their own price. Given Gazprom's dominance, the going price of independent gas is usually higher only by 10 percent to 15 percent.

The higher prices and lower outlays, compared with those of Gazprom, allow independents to make a modest profit, Baranov said. "But production is chiefly funded by borrowed money. There's an understanding that gas prices will grow."

Independents mostly pump up wet gas, which contains condensate and therefore costs nearly twice as much to produce as Gazprom's gas. But they do not sell it far from their fields, and therefore can keep their transportation costs down.

Gazprom said it lost 11 billion rubles ($420 million) on domestic gas sales last year.

The regulated price went up by 15 percent for 2007, but the effect appeared minimal because of a hike in the gas transportation rate, which also went up by 15 percent. As a proportion of wholesale and spot prices, the gas transportation tariff will slightly decrease over the next three years, MDM Bank's analysts said.

"By 2010, we estimate that transport tariffs will represent 48 percent of the regulated wholesale gas price, down from 53 percent in 2006," Nadya Kazakova and Andrei Gromadin wrote in the report.

Just as important as the price is the issue of access to Gazprom's trunk pipelines. A guarantee of access would allow independents to expand their market share, but Gazprom has sometimes refused to transport gas, citing a lack of spare pipeline capacity.

"Northgas and Itera were all but bankrupted by Gazprom's refusal to provide them pipeline access," Kazakova and Gromadin wrote in the MDM Bank report.

Under the bill, Gazprom would have to transport independent gas from producers proportionately to their requests if it does not have the capacity to transport all of the volumes. The bill would also give independents a chance to build trunk pipelines that they need by forming joint ventures in which Gazprom would have majority control.

"Independent gas producers will effectively need to repay Gazprom for building new infrastructure by co-financing such projects, or by paying additional transportation tariffs for the use of any new facilities," if the bill becomes law, the MDM Bank report said. It estimated the cost of building additional transportation facilities at $500 million to $700 million.

Separately from the bill, Gazprom is heavily investing in expansion of its trunk pipelines, MDM Bank analysts said in their overview of the gas market. It is also likely to try to free up additional capacity by diverting some of its output from domestic consumption to export markets, the report said.

"We believe that Gazprom will have sufficient spare transport capacity to accommodate any additional production," MDM Bank's Kazakova and Gromadin wrote. "The company will be obliged to support the government's policy of encouraging domestic gas production to avoid shortages."

In a sign of emphasis that the government places on the independent gas producers, Industry and Energy Minister Viktor Khristenko said the independents would meet 45 percent of domestic demand by 2010 and more than 50 percent by 2015. Khristenko made the statement on the sidelines of a Cabinet session in November that approved the gradual hikes of regulated gas prices for industrial consumers.

To meet those targets, independents would have to produce 178 bcm per year by 2010 and 235.5 bcm by 2015.

These estimates coincide with the forecasts that Novatek chairman Leonid Mikhelson made at a recent gas industry conference in Moscow. "These figures are based on real and explored reserves that we are not using as effectively as Gazprom because of the restrictions of the gas transportation system," he said.

Independents account for 23 percent of explored gas reserves, or 11 trillion cubic meters, Mikhelson said at a separate energy forum.

Novatek, the largest independent gas producer, will account for one-fourth of domestic gas consumption in the next few years, according to its forecasts. LUKoil, TNK-BP and Rosneft are the next-largest independents.

While freeing up room for independent gas, Gazprom would rake in extra revenues by shipping more gas to the lucrative Western markets where demand is also growing.

In another mutually beneficial development, Gazprom and independent gas producers agreed to sell jointly some of their gas at free market prices at a new Gazprom-owned trading site that opened in November. In 2007, Gazprom and the independents will sell 10 bcm of gas on a parity basis and plan to triple the sales next year, Baranov said.

"Our task is to ride into the free market on the shoulders of Gazprom," Baranov said of the possibility of cooperation with a former adversary. "Our task is not to stand in Gazprom's way, but only to offer help."