IEA urges Russian gas sector reform

July 25, 2006
Massive volumes of natural gas wasted annually in Russia's gas sector and the lack of investments in developing new fields to offset depletion of key producing fields "will begin to affect Russia's position as a secure and reliable supplier," cautions a recently released IEA study.

Doris Leblond
OGJ Correspondent

PARIS, July 25 -- Massive volumes of natural gas wasted annually in Russia's gas sector and the lack of investments in developing new fields to offset depletion of key producing fields "will begin to affect Russia's position as a secure and reliable supplier" unless structural and regulatory reforms are introduced swiftly, cautions an International Energy Agency study released at the close of the G8 Summit in St. Petersburg last week.

The study faults OAO Gazprom's 90% gas sector monopoly, which limits upstream gas investments and third party access to its gas lines by independent gas producers and oil companies.

President of this year's G8—the world's eight most-developed countries—Russia had put the focus on energy security, a moot point for the world's largest gas producer and exporter whose ability to supply Europe's growing gas needs is open to question by the IEA publication.

Russia, like its seven counterparts, all signed the final Summit communiqué outlining a "plan of action for global energy security." It calls for transparency, predictability, and stability of energy markets, improved investment climate, enhanced energy efficiency, and energy conservation, and addresses climate change and sustainable development. However, IEA's 200-page study, "Optimizing Russian Natural Gas—Reform and Climate Policy," found all of these lacking in Russia.

The study focuses on energy security and reduction of greenhouse gas (GHG) emissions and highlights Russia's energy-saving potential and the means for achieving it. IEA determined that at least 30 billion cu m—more than 20% of Russian exports to Organization for Economic Cooperation and Development countries in Europe—could be saved annually by introducing more advanced, available technology and energy efficiency measures to reduce leaks and greenhouse gas (GHG) emissions in the transmission and distribution sector and gas flaring at oil fields.

Gazprom officially reports flaring 15 billion cu m/year of gas, but IEA's preliminary estimates puts it as high as 60 billion cu m/year in a Satellite Image Calibration Study of West Siberia conducted with the US National Oceanic and Atmospheric Administration.

The principal reason oil companies and independents flare the gas is Gazprom's refusal to buy their associated gas. The use of associated gas also is limited by low domestic gas prices, the distances between production and consumption points, limited gas requirements by oil companies, cost of necessary infrastructure, and low associated gas flow rates.

Savings hovering between 5-10 billion cu m could also result from reducing gas losses from the country's under-invested and poorly maintained gas transmission and distribution system, according to the report. Together with gas flaring, an estimated 298 million tonnes of CO2 equivalent GHG was emitted in 2004.

The study identifies beneficial synergies between climate policy goals and the huge potential for energy efficiency possible in Russia. The large volumes of gas saved could be exported at current high prices, and the reductions of 150 million tonnes of CO2 equivalent could be sold on the emerging international carbon market.

"Monetizing GHG reductions improves economics," IEA said.

IEA also is troubled by Gazprom's priority focus on foreign acquisitions and on developing export infrastructure to the detriment of its domestic network and upstream development. Much of its estimated $7 billion/year investments since 2003 have been so directed, and Russia's focus on proposed megaprojects—an LNG project on the Yamal Peninsula and development of Shtokman gas-condensate field in the Barents Sea—will further require huge investments to produce expensive gas (OGJ, Feb. 20, 2006, p.30).

Gazprom's reliance since 2003 on Central Asian gas to meet the growth of its European contracts also worries IEA. This policy "has put off addressing the fundamental problem of compensating for the decline of its three major fields and the need for reform of the Russian gas sector," the study said.

EIA envisages a gradually increasing supply shortfall against Gazprom's existing contracts "beginning in the next few years if timely investment is not made in new fields" and all barriers to "a sustainable functioning" of its gas sector are not lifted.