EBRD calls for breakup of Gazprom's monopoly

The European Bank for Reconstruction & Development has called for the breakup of Gazprom so as to encourage competition in Russia's gas supply sector. Such appeals have been made routinely during the past few years and have just as routinely been rebuffed by Russia. Many observers believe, however, that, sooner or later, the company will be split up, as there are several objective reasons for doing so that have nothing to do with IMF or EBRD pressures.


MOSCOW�The European Bank for Reconstruction & Development has called for the breakup of Gazprom so as to encourage competition in Russia's gas supply sector. EBRD's recommendation is a repeat of a similar call made some time ago by the International Monetary Fund.

Such appeals have been made routinely during the past few years and have just as routinely been rebuffed by Russia.

Speaking at the World Gas Conference in Nice earlier this month, Gazprom Chairman Rem Vyakhirev said the company would not be split into separate transport and distribution companies, at least not in 2000. But many observers believe that, sooner or later, the company will be split up, as there are several objective reasons for doing so that have nothing to do with IMF or EBRD pressures.

First, Gazprom has said it will be able to carry out only 58% of planned capital investments in 2000 due to low ceilings on domestic gas prices. Moreover, according to Gazprom Deputy CEO Pyotr Rodionov, the company lacks the resources to begin new field developments, a situation that eventually will lead to a decrease in Gazprom's gas production.

Meanwhile, according to Deputy Energy Minister Anatoly Yanovsky, Russia must increase its gas output from an estimated 590 billion cu m (bcm) in 2000 to 660 bcm in 2005 and to 725 bcm in 2015. Gazprom alone cannot achieve such targets. Thus, new gas producers must emerge to fill the gap.

Competition
Strictly speaking, Gazprom is no longer a true monopoly. There are already several independent gas producers in the Russian market, such as Itera Group, Rospan, and Vostokgazprom. Itera, for example, is expected to produce 20 bcm of gas in 2000 and plans to increase this volume to 64.5 bcm by 2005, an amount equivalent to 12% of Gazprom's 1999 output.

However, these companies are rumored to be affiliated to Gazprom management; therefore, it is doubtful that an open gas market really exists in Russia.

It has nevertheless become clear that Gazprom is prepared to surrender part of the domestic market to truly independent gas producers from among Russia's oil companies, whose current total output totals 30 bcm/year. In so doing, Gazprom is seeking to escape accusations by federal and regional authorities that local consumers are suffering as a result of the decrease in Gazprom's domestic shipments. At the same time, Gazprom plans to retain its export levels, if not increase them.

Surgutneftegaz, Lukoil, Rosneft, and other oil companies with substantial gas reserves have said that they are prepared to take up the slack if Gazprom decreases its output. Such news would be cheered by EBRD Acting Pres. Charles Frank, who said recently that Russia "needs to fully embrace a demand-led market system to encourage competition among a number of producers, with tariffs determined by competitive markets, rather than directly by the regulatory authorities."

Gas market concerns
It sounds great, but the fact is that no real competitor to Gazprom could exist at present.

Gazprom actually loses money when it supplies gas to domestic consumers at state-regulated prices, which cannot exceed $12/1,000 cu m. And no one among Gazprom's potential "competitors" would dare to sell at a lower price.

Gazprom is pushing for the government to increase gas prices.

Quite naturally, oil companies are also busy lobbying the government for a price hike, with a view towards entering the newly opened market. Lukoil Vice-Pres. Leonid Fedun recently stated that, in the near future, he expects domestic gas prices to increase about three-fold from their current levels. This will make domestic sales more attractive.

Surgutneftegaz has already said it is ready to increase gas output from the current level of 11 bcm/year to 20 or even 40 bcm/year in upcoming years. Other oil companies are also developing plans for an increase in gas output and are urging Gazprom to resolve the question of access to its gas transport network, which the gas giant has stubbornly resisted.

Quite recently, Gazprom management began considering the idea of allowing independent producers to enter the gas market. It might appear that Gazprom had unexpectedly softened its position, but some experts say the company is, in fact, developing a kind of a trap for would-be competitors.

Gazprom advantage
Gazprom is restructuring its domestic gas-marketing subsidiary, Mezhregiongaz, into a holding company that will own majority stakes in regional gas retailing subsidiaries. Nearly two thirds of them are rumored to already be under the control of Mezhregiongaz, which acquired them both by swapping their debts for controlling stakes and by direct acquisition through bankruptcy proceedings.

Moreover, Gazprom plans to take over the remaining state-owned gas distribution companies within a year. This will allow it to exercise control over their cash flow and, through access to end-users, to improve bill collection for gas supplies. This is certainly a positive development for Gazprom. But, on the other hand, it means that, in the future, shipments by all independent gas producers to the domestic market will be under the control of a Gazprom subsidiary.

Independent producers may turn their eyes towards export markets, especially in view of the fact that the 15 European Union states have agreed to open 20% of their gas market to competition by Aug. 10, 2000. However, this market is likely to be volatile and therefore unreliable, in terms of return on investments in the development of gas reserves. This is particularly true if gas shipments continue to go through Ukraine, with its notorious habit of "unauthorized" offloading of transit gas.

In addition, the creation of a special infrastructure to sell gas on the spot market could be too costly considering the volume of gas likely to be shipped in this way. Thus, independent producers would have to use the services of intermediaries. And Gazprom, which currently controls a third of European gas sales through long-term contracts, could well turn out to be the most suitable partner of them all.

The Russian gas sector is very likely to undergo fundamental change in the coming years. As Vyakhirev himself said, however, Gazprom will likely retain its position of dominance. While the company may legally cease to exist as a monopolist gas producer, it will continue to exercise its influence over the gas sector.

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