OAO Gazprom essentially is the Russian gas industry.
The company produces 90% of Russia's domestic natural gas. It is one of the world's largest natural gas companies, accounting for 20% of the world's natural gas production.
Despite having been partly privatized in 1993, Gazprom remains state controlled. It has a de facto monopoly on gas production in Russia through its control of the pipeline network for transporting and marketing gas. This monopoly does Gazprom little good, however, because of the low rates for gas set by the Russian government.
The prices Gazprom charges consumers in Russia are state-regulated at an extraordinarily low rate (when they are paid at all). The Russian government employs Gazprom to effectively subsidize the Russian economy as a whole by keeping energy costs low.
Given the country's history of state regulation in the energy sector and the extraordinary requirements for heat imposed by the harsh winters in Russia, such a result should not be surprising. Using Gazprom in this way, however, has prevented the company from signicantly developing the Russian gas sector further.
Since the domestic gas tariffs are below its production costs, Gazprom effectively runs on the revenue it derives from exports of gas abroad. Foreign exports of gas allow Gazprom sufficient revenue to produce and market gas from current reserves but not to launch major new initiatives.
Production decline
As a result, natural gas production in Russia has been in a steady decline for over a decade, falling by 9% since 1992 (see chart). However, the country's natural gas exports have in fact increased—to 6.7 tcf in 2001 from 6.1 tcf in 1992. Since Russia possesses the largest natural gas reserves in the world at 1.6 quadrillion cu ft and is the world's largest exporter of natural gas, the decrease in production is a direct result of the continued regulation of the gas industry as a state monopoly.
Almost 80% of Russia's natural gas production comes from three fields operated by Gazprom—Urengoi, Medvezhye, and Yamburg in the Yamal-Nenets region of northern Western Siberia. Gazprom operates several other fields in the Yamal-Nenets region, on the Yamal peninsula, and along the Ob-Taz Gulf area. Due to the declining production in these fields, Gazprom intends to increase production by developing natural gas reserves in other fields. However, most of these reserve replacement projects have been delayed due to Gazprom's financial difficulties.
Pipeline system
In addition to producing natural gas, Gazprom owns and operates Russia's domestic natural gas pipeline grid and the pipelines used to export natural gas. The domestic grid comprises 90,000 miles of gas pipeline and 43 compressor stations.
Gazprom's monopoly extends to pipelines used to export natural gas to Europe, of which 90% is routed through Ukraine, then through Belarus and Poland to Germany. A second, parallel Yamal-Europe pipeline has been proposed, but disagreements between the Polish and Russian governments on price and location have temporarily halted this project.
In addition to the pipelines to Europe, Gazprom has completed a pipeline directly from Russia to Turkey via the Black Sea. The Blue Stream project is a 50:50 joint venture between Gazprom and Italian oil giant ENI SPA. Gazprom also has plans to construct pipelines to export gas to Northeast Asia, including China, North Korea, and Japan.
Monopoly
Most of the new Russian oil companies have nibbled at Gazprom's monopoly of gas production.
But the new Russian oil companies have little incentive to invest in commercial production of gas, given the domestic rate structure, even though they all produce gas incidental to their operations.
Moreover, only Gazprom really has the distribution and marketing network in place for large-scale commercial gas production.
Several independent gas producers have also emerged—such as Itera, North Gas, and Novafininvest/Tarkosale—but are unlikely to have much impact on the Russian gas industry, given Gazprom's control of the gas distribution system.
Until Gazprom is reorganized, privatized, or otherwise renovates its operations, the Russian gas industry is not likely to experience the same boom in production as the Russian oil industry.
