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. Last Updated: 07/27/2016

UES Faces Chance of Running Out of Gas

SHATURA, Moscow Region -- At the groundbreaking of a new gas-run turbine Tuesday, locals and UES officials turned up to celebrate, but whenever the topic turned to supplying the machine with gas, an awkward silence seemed to fall. Gazprom has given the turbine's owners faint hopes, not guarantees.

"I hope we are in the concluding phase of our negotiations with Gazprom," said Unified Energy System CEO Anatoly Chubais after the ceremony at the Shatura power station, 150 kilometers east of Moscow.

"Days ago, I officially asked them to reach a conclusion on this issue. ... If Gazprom responds to the request, then I hope the question will be decided in the next few days."

Gazprom on Tuesday declined to comment on the negotiations, and analysts were skeptical about a deal being struck anytime soon.

Gas on the domestic market sells at subsidized prices up to five times lower than in Europe, giving Gazprom little reason to expand its sales at home. In 2005, domestic sales accounted for 57 percent of volumes, but only 24 percent of profits, according to analysis by Alfa Bank.

Only in 2012 will domestic prices be brought in line with those abroad, by which time UES says it needs to install some 34,000 megawatts of new capacity -- the equivalent of 85 gas-fueled turbines of the kind to be built at Shatura -- to meet the country's growing demand.

But after prices are liberalized, Gazprom may have new reasons to withhold its gas. According to Renaissance Capital, Gazprom has secured 45 percent of the nation's power production as of Friday, when it won control of two of the country's largest generating firms -- OGK-2 and OGK-6.

"If Gazprom is coming in, that's great for us," OGK-6 spokesman Dmitry Filatov said Saturday. "They have as much gas as we could want."

Other generating companies may not be so lucky, however.

OGK-4, which owns the Shatura power station, and OGK-3, now majority-owned by Norilsk Nickel, will have to compete with Gazprom once the power market is liberalized. And it is far from clear whether Gazprom will want to supply its competitors with fuel, let alone the discounted fuel it is sure to give its own electricity companies.

Gazprom's growing share, and possible manipulation, of the market has led some analysts to lose hope in Russia's power sector reform. Vladimir Sklyar, an analyst at Renaissance Capital, said in a note to investors Monday that it was "no longer prudent to assume the development of competitive generation markets by the 2011 deadline previously established."

In the case of Shatura, OGK-4 will probably have to turn to independent gas suppliers such as Novatek, UES board member Andrei Trapeznikov said on the sidelines of the ceremony Tuesday.

"We have received offers from independent suppliers. ... We hope to receive some of the supplies from them," he said, naming Novatek specifically. He declined to comment on the details.

The problem with independent suppliers, however, is that Gazprom has a monopoly on the country's high-pressure pipelines. Even though these suppliers hold more than 20 percent of the country's gas reserves, they are often kept from pumping gas to their consumers because Gazprom says its pipelines are already full.

This is what has allowed it to manipulate prices on the country's free gas exchange, established in November by Mezhregiongaz, a Gazprom subsidiary. Analysts and several generating companies that buy gas on the exchange say Gazprom charges so much for transportation through its pipelines that the prices become unreasonable, leading the companies to walk away empty handed.

In light of challenges like this, Chubais seemed to acknowledge that, when installing new turbines that cost upward of $300 million each, you needed to be more than just hopeful of having the gas to turn them on.

"If generators bear the financial responsibility for supplying [electricity], then of course they need to have an agreement for their gas," Chubais said.

But on this score there have been some bitter disappointments.

In a ceremony attended by President Vladimir Putin in November, the Northwest Thermal Power Plant near St. Petersburg was to unveil its new gas turbine. But Chubais informed his press office that morning that negotiations with Gazprom had stalled and that they did not have any extra gas to run it. The $375 million machine is still gathering dust, UES officials said Tuesday.

At the groundbreaking ceremony, a troupe of seven local children read a poem for the occasion: "Of course Chubais will help us out," they said. "And we think that's great!"

But if the concerns of analysts and UES officials are anything to go by, a serenade for Gazprom could have been more to the point.