Wednesday, June 21, 2006

Liberalisation of the gas market needed

RAO UES of Russia, the country biggest buyer of gas, is currently experiencing gas shortages. In order to combat this, the government is proposing price hikes, but true liberalisation of the gas market is needed is the country is to avoid huge energy shortfalls in the future.

RAO UES controls a third of the domestic gas market, which translates to 150 billion cubic meters of gas annually (total production is 640.6 billion, total export – 151 billion and rising). Two thirds of the gas it buys comes from Gazprom itself (through a daughter-company named MezhRegionGas), while the other more expensive third comes from “independent” producers, which are usually not only controlled by Gazprom itself but are a gateway to money laundering and corruption.

The gas shortages are due to the fact that Gazprom, the nation’s source of gas, cannot deliver any more gas because it is saving for the winter by transferring gas into the reserves. Additionally, as many analysts have many times pointed out, Gazprom will experience gas deficit by 2010. As the nation’s demand increases, Gazprom is simply unable to keep up.

The domestic market will see prices of USD100 per thousand cubic meters of gas, but this will do little to solve the underlying problem. If the situation stays unresolved, gas shortages have the potential of hurting the nation and taking away as much 5 percent of the annual GDP. A full liberalisation of the gas market is needed, which would allow independent companies to stake their claim on the domestic pipe-politics.

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Currently, most of Gazprom’s profit is from export to foreign countries, where the prices paid are higher. The monopoly has already planned for gas increases for Russia’s neighbors, and even those countries that are considered “friendly” will have to pay the price Western Europe is paying. There are suggestions that countries that happen to be in the Russian orbit might get better treatment, with Gazprom allegedly seeking ways to minimize damage to the economy from sudden price increases for countries such as Belarus. However, some are more cynical about the proposed price hikes with BrokerCreditService’s analyst believing that Russia will try to tempt other countries into maintaining pro-Russian stance in return for cheaper gas. It will be important to see how the price dispute with Belarus turns out.

Vedomosti, Gazeta, RusEcon

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