Mikhail B. Korchemkin
Center for Energy & the Environment
Philadelphia
The Russian joint-stock company Gazprom, successor to Gazprom of the former U.S.S.R. and the world's largest gas company, faces a crisis of direction in the middle years of this decade.
With recent memories of annual additions to its transmission pipeline capacity of more than 6,200 miles, Gazprom officials must face the economic and operational realities that call for rehabilitation projects rather than new construction.
Additionally, the overall demand for natural gas in the former Soviet Union (FSU) is leveling as the economies and energy use of all customer countries are declining and gas has already supplanted oil nearly everywhere possible. With the European gas market showing limited space for additional gas, Gazprom's major task in the short-term must be to maintain current production and supply levels.
GAZPROM'S EVOLUTION
Gazprom was the second largest nonmilitary ministry in the FSU. The federal government's July 1989 campaign to cut spending merged the two largest Soviet ministries for oil and natural gas into a super-giant Ministry for Oil and Gas.
Shortly thereafter in August, the natural-gas division stepped out of the new ministry and the state concern Gazprom was founded.
After the breakup of the U.S.S.R. in December 1991, Gazprom attempted to transform itself into a multinational joint-stock company but failed.
Now the company is in charge of production, transmission, and processing of natural gas within the borders of Russia.
Even after losing a part of its assets and responsibilities, Gazprom still remains the last Soviet-type giant to survive. The accompanying box summarizes Gazprom's 1992 performance.
Institutionally, Gazprom consists of 10 producing associations, 14 territorial transmission companies ("transgazes"), 6 gas-processing plants, as well as several research institutes, machinery plants, inspection units, equipment-procurement companies, and other entities.
Fig. 1 shows the major producing fields and transmission pipeline routes within Gazprom.
Gazprom also has the new Urengoy directorate for the gas-processing complex (under construction), central dispatching board, and gas-export company.
Gazprom's charter fund consists entirely of the company's fixed assets: natural-gas infrastructure in Russia and shares held by Gazprom in several Russian joint-stock and foreign enterprises.
Under the Russian government's Decree No. 1333, 28.7% of Gazprom shares will be sold to residents of the regions in which it operates, and 5.2% will be given to ethnic minorities of the Yamalo-Nenetsky Autonomous District. Foreign investors will be able to buy as much as 33.9% of the shares after the Russian shares are distributed.
It is unclear how the Gazprom divisions are being evaluated for privatization. For instance, fixed assets of the largest producing division of Gazprom, Urengoygazprom (44.9% of the total gas output of Russia), were evaluated at approximately 473 million rubles (as of Jan. 1, 1992), while the assets of Nadymgazprom (10.8% of Russia's output) at approximately 1.3 billion rubles.
Gazprom's highest management body, the annual meeting of shareholders, elects the board of directors which in turn elects and supervises the executive board and its chairman.
RESERVES; PRODUCTION
Russian estimates of the country's proved reserves of natural gas are on the order of 1,700 tcf, 52.5% of which are in the books of Gazprom.
About 820 tcf are located in the Nadym-Purtazovsky basin, West Siberia, that includes the producing fields of Urengoy, Yamburg, and Medvezhye, as well as new fields of Novy Urengoy and Zapolyarnoye (both to the north of Urengoy).
At the region's 1992 production level of 54.1 bcfd, the reserve-to-production ratio is about 42 years. According to Gazprom's plan, flow from the Yamburg field will reach a plateau of 22.7 bcfd by 2000.
Today there are six 56-in. pipelines running from Yamburg, each designed to carry as much as 3.1 bcfd. In total, Gazprom operates 70 producing gas fields with the flow coming from 4,700 wells. In addition, there are 50 fields awaiting or under development.
Table 1 shows the gas production breakdown by divisions of Gazprom. Natural gas is also being produced by some transmission divisions of Gazprom and Russian oil companies, formerly part of the U.S.S.R. Ministry for Oil.
Gazprom's plan foresees a production increase in two West Siberian basins, Nadym-Purtazovsky and that of the Yamal peninsula.
In the Nadym-Purtazovsky basin, the plan assumes exploitation of deeper layers of the producing fields of Yamburg, Komsomolskoye, Yubileinoye, and Yamsoveiskoye, as well as introduction of North Urengoy, Zapolyamoye, and 14 other smaller fields. This could push the total production to 65.4 bcfd by 2000.
Further development of the Nadym-Purtazovsky basin would also compensate for the expected decline in output of the fields of Urengoy and Medvezhye and provide a stable flow through the existing pipeline system (Table 2).
Conventional wisdom in the old Soviet ministries was "the more state money you spend, the more important you are." This approach recommended looking at supergiant projects first. Gazprom is following this advice in pursuing development of the Yamal peninsula gas.
Yamal has 10 gas, 9 gas-condensate, and 6 oil-gas-condensate fields with 320 tcf of proved and 585 tcf of potential reserves of gas. About two-thirds of the proved reserves are concentrated at three fields: Bovanenkovskoye (almost 129 tcf) Kruzenshtemoyskoye (45.4 tcf), and Kharasaveyskoye (33.3 tcf). The Yamal deposits are located at a relatively shallow depth of 1,800 to 6,000 ft.
In 1988, Gazprom completed a technical feasibility study for the development of Kbarasaveyskoye and Bovanenkovskoye fields and the construction of a new system of transmission pipelines from Yamal. The entire program assumes the construction of 13,000 miles of new pipelines equipped with 10,000 mw (13 million hp) of compressor capacity.
In the first stage alone, development of the field and construction of two 56-in. pipelines with the combined capacity of 6.2 bcfd was estimated to cost $15 billion (U.S.). The project's reserve-to-production ratio is only 17.3 years, or 22.1 years if the Kruzenshternoyskoye field is added.
Gazprom has established a joint venture with Amoco to develop the Bovanenkovskoye and smaller Novoportovskoye fields (7,450 bcf of gas and 1,600 million bbl of oil).
In early 1989, however, the governments of both Tyumen province and its Yamalo-Nenetsky Autonomous District banned development of the Bovanenkovskoye field because of environmental damage caused by Gazprom's activities.
Production from this field was to have started earlier this decade. The additional environmental costs of the project were estimated at $1.4 billion (U.S.; 1989).
This was the first successful action of local governments against the powerful U.S.S.R. Ministry of Gas Industry. By that time, the regional authorities had gained enough strength to oppose the federal government, and the decision was not overruled.
Since then, regional governments have become so much stronger that now it would be even more difficult and expensive to acquire necessary rights for construction and operation. The most serious limit to natural-gas expansion, however, is set by the shortage of capital for pipeline construction and maintenance.
TRANSMISSION SYSTEM
The FSU has developed an extensive gas-transmission system, supplying more than 190,000 cities, townships, and villages with a total population of 237 million people.
The integrated gas-transmission system of the country, established 30 years ago, consisted of some 133,700 miles of pipeline, more than a quarter with a diameter of 56-in.
By early 1992, the transmission system had some 900 compressor stations equipped with about 5,700 compressors with a total capacity of 47,482.4 mw (nearly 62 million hp).
After the breakup of the U.S.S.R., Russia inherited by far the major share of transmission capacity, about two-thirds of line pipe and more than three-quarters of compressor capacity (Tables 3 and 4).
Gazprom suffered a significant loss in the underground storage capacity, however. More than a half of it is now controlled by other gas companies of the FSU republics (Table 5).
THREE CORRIDORS
With more than 85% of the total gas production of Russia provided by Gazprom's divisions in West Siberia, the most important pipelines are those running from that region.
Geographically, Siberian gas from the Urengoy, Yamburg, and Medvezhye fields is delivered to consumers in European Russia and for export through the three main pipeline corridors.
- The central corridor, from Urengoy and Nadym through Nizhnyaya Tura (Urals), Pomary, and Yelets to central and west European Russia and Ukraine, is the most important route for deliveries of Siberian gas. The uppermost section of this route (Nadym-Punga) consists of fifteen 56-in. pipes and transmits more than 41.5 bcfd.
The central system is fed by the fields of Urengoy, Yamburg, and smaller fields of the Punga group. The first pipelines of the central route were laid in the mid-1970s, and new sections were being added every year until 1992.
In 1984, the famous Urengoy-Uzhgorod pipeline was completed. The 2,766 mile long, 56-in. system operates under a pressure of 1,067 psi and has an inlet capacity of 3.1 bcfd.
From Nizhnyaya Tura through Perm, West of the Urals, the pipelines Urengoy-Petrovsk and Urengoy-Novopskoy take gas to the south from the main flow. They supply gas to petrochemical plants in Ufa Bashkortostan Republic (former Bashkirian A.S.S.R.), as well as to Samara, Ulyanovsk, and Saratov provinces on the Volga River.
They hit the southern corridor at Novopskoy, Ukraine.
- In turn, the southern system feeds the central one through the Petrovsk-Algasovo pipeline. The central system has another connection with the southern route through the Elets-Ostrogozhsk and Novopskov-Ostrogozhsk pipelines.
The southern corridor is fed by the Urengoy field, and Vyngapur, Gubkinskoye, and Komsomolskoye, and other smaller fields. About 1.5 bcfd is consumed at the petrochemical and gas-processing plants in Surgut (north of Tyumen, West Siberia).
The two 56-in. lines pass Tyumen, Chelyabinsk, Petrovsk, and Novopskoy and deliver gas to southeast and southwest European regions of Russia and Ukraine. At Novopskoy, Ukraine, the flow of Siberian gas meets the flow from the fields of Central Asia Kazakhstan, and Orenburg.
From Novopskoy, the Orenburg-Western Border ("Soyuz") pipeline takes gas to the West, while the rest of the flow goes to the southern provinces of European Russia. Gas from Karachaganak field (Kazakhstan) comes through Orenburg junction, as well.
Southern provinces of the Russian Federation are supplied through the Novopskov-Lugansk pipeline. These regions also receive gas from the Astrakhan field and the smaller fields of the east Caspian area.
At Shebelinka and Poltava in eastern Ukraine, the southern system receives about 1.7 bcfd of gas produced in this region. From Shebelinka, the major part of the flow is directed to southern Ukraine, Republic of Moldova, and for exports. This route is also supplied by the pipeline Kremenchug-Tiraspol.
- The northern route is the newest and most promising one of the Russian transmission system.
The northern system starts at the important junction of Nadym in northwest Siberia. In the section Nadym-Punga, it runs in the same corridor with the central system of pipelines.
The northern system is fed by two 36-in. pipelines from the Medvezhye field, one 56-in. line from Urengoy, as well as by smaller fields of the region. In 1992, the inlet flow of the system at Punga was 6.9 bcfd.
On the way to European Russia, the system is also fed by Pechora and Vuktyl fields. The route runs from northwest Siberia through Ukhta, Gryazovets, Torzhok to Minsk (Belarus), with an extension to St. Petersburg and Finland.
With German reunification, it became unnecessary to bypass eastern Germany on the way to the western part of the country. Actually, this was the original Soviet idea to take the shortest route to West Germany through Poland and East Germany.
Before finalizing the agreement with the West Germans, the Soviet Gas Ministry had designed a pipeline ending at Brest, Belarus, and the construction had nearly started. Now there are no political obstacles to taking the shortest (and cheapest) route to Europe.
From the political standpoint, the relations between Russia and Belarus look better than those between Russia and Ukraine, which makes the northern route safer than any other.
Recently, presidents of Russia and Poland signed an agreement on the construction of the Polish section of two pipelines running from Yamal to Germany. Poland is expected to take 1.35 bcfd (0.5 tcf/year) out of the total transit flow of 6.5 bcfd (2.3 tcf/year).
Total cost of the project is estimated at 510 billion, including the Polish share of $3.2 billion. The 416-mile Polish section will be owned equally by Gazprom and Polish Oil & Gas Co. Construction is to start next year and to end by 2000.
Gazprom's plan anticipates the Yamal gas to be transported through the northern route.
The Russian gas-transmission system, as well as that of the entire FSU, is equipped with outdated low-efficiency compressors. This is driving the fuel use by compressors to a very high level.
The 1,660-mile Soyuz pipeline, built in 1976-78 and equipped with worn-out imported compressors of Nuovo Pignone and Cooper-Bessemer (1,580 mw of total installed capacity), is consuming 25% of transported gas.
The Urengoy-Uzhgorod pipeline (2,768 miles, 2,975 mw of compressor capacity) is consuming and losing 16.5%, and the Yamburg-western border line, completed in 1988 (2,866 miles, 2,883 mw of compressor capacity), 14% of transported gas.
The average use of gas on the Russian pipeline system is about 11-12%.
Replacing the most obsolete compressors and adding exhaust-heat recovery systems to the compressors on the three export lines alone could save some 0.6 bcfd.
Russia and other successors of the Soviet Union have an underdeveloped gas-distribution network for such a large territory. The total length of distribution pipelines in the FSU is about 164,900 miles, including 103,000 miles of urban and 61,900 of rural grid.
Natural gas is supplied mainly to large industrial consumers and power plants. Small rural consumers and the housing and municipal sector represent only a marginal share in the total use (10.4% in Russia).
Observing the fast decline in oil production and trying to provide both crude and petroleum products for exports, the Soviet, and then Russian, authorities were trying to substitute gas for oil as fast as possible by shifting major power plants and industrial consumers for gas.
This process was started some 15 years ago when the oil industry was still growing. From 1980 to 1990, the use of natural gas for electricity generation grew by 280%. In this period, the share of fuel oil in power plants' fuel input dropped from 35% to approximately 16%, while gas increased from 25 to 53%.
Somehow, the electricity production in the former U.S.S.R. is declining more slowly than the economy in general: it was showing only a 1-2% of annual economic decline during the previous 2 years. Natural-gas consumption in this sector, therefore, is even growing.
Gas consumption for 1992 in the FSU republics is shown in Table 6.
GAS EXPORTS
The stable production and slow increase in the use of natural gas in Russia provide a relatively stable amount of gas for exports to both the FSU republics and other countries.
In 1990, Russia was exporting to the rest of the FSU 8.7 bcfd and 9.2 bcfd to other eastern and western European countries and Turkey. The 1992 figures were, respectively, 8.72 and 8.35 bcfd.
Table 6 gives the breakdown of internal exports and imports of the FSU.
Geopolitical issues have started to be important in both external and internal FSU gas exports.
The Soviet natural-gas pipeline system was built without any consideration of the borders of the FSU republics and autonomous republics inside Russia, not to mention provinces. Actually, there was no need to do so under the strict Moscow rule, and the shortest route from one point to another was a logical route for a pipeline to take.
As a result, the only gas supply route to the southern provinces of Russia covers only a few miles into and then out of Ukraine. But Russia must pay transit fees for its own gas directed to itself.
Last October, Russian gas exports to Germany were cut by 75% for a week because of the Russian-Ukrainian dispute over gas payments. Russia was not receiving payments for its gas supplied to Ukraine for many months, and the Russian authorities decided to reduce the flow directed to Ukrainian consumers.
In fact, the Ukrainian consumption did not decrease. Some 95% of Russian gas exports out of the FSU runs through Ukrainian territory, and Ukrainian pipeline operators simply reduced the flow to Germany keeping domestic users satisfied.
The authorities of some new states are exercising their transit rights more simply: they cut off the flow. In this way, Azerbaijan has cut natural-gas supplies to Armenia because of the two countries are fighting over the Nagorno-Karabakh region.
Last June, Russia halted gas supply to Estonia the day after the Estonian parliament issued a new immigration law making life harder for ethnic Russians. According to Gazprom's explanation, the timing was only coincidence , and flow was cut because Estonia had not paid its gas bills for more than 2 months.
It looks more like a political decision, however, especially in the context of the 1992 report "Oil and Gas in Russian Foreign Policy," written by two deputy ministers, for Energy and for Defense, and other top decision makers of Russia.
The report clearly says that Russia is going to use oil and gas supplies as a tool for economic and political pressure on "bad" neighbors.
The FSU republics of Ukraine, Belarus, Moldova, Armenia, Georgia, and the three Baltic states are receiving 100% of their gas supplies either from or through Russia. The threat, therefore, is very serious.
Inside Russia, the emerging new "sovereign" states, former autonomous republics and provinces, may start charging transit fees for gas pipelines running through their territories. The number of such republics is growing, but so far, much like the FSU republics 1989-1991, they are concentrating on the fight over control of oil and gas reserves.
Finally, there is an increasing danger of terrorist attacks on pipelines. Since October 1992, a gas pipeline from Mozdok in southern Russia to Vladikavkaz in the Republic of Chechnya to Tbilisi in Georgia (the last link supplying gas to Georgia and Armenia) has been blown up four times.
The internal gas trade in the FSU is being converted to hard currency. The Baltic states are already paying in foreign exchange the same price as Finland, about $2.10/Mcf. Other countries are paying rubles, but the price is nearing the West European market price of gas.
Ukraine now buys Russian gas at about $1.09/Mcf compared with $0.17 a year ago, in the exchange rates of the corresponding periods.
COSTS OF RUSSIAN GAS
Western economists have always had difficulty estimating in hard currency terms the costs of different Soviet gas projects.
The usual solution was to convert rubles into dollars at the Soviet official exchange rate. Now with no U.S.S.R., the ruble has been dramatically devalued, leaving no chance for an accurate ruble-based cost analysis.
Another approach, based on extrapolating North Canadian and Alaskan cost performance to Siberia, has lead to an overestimation of Russian costs.
The method employed here is based on a more rigorous approach. A detailed examination of Soviet natural-gas pipeline projects completed in 1987-89 has helped to reveal the amounts of steel pipe, cement, workman-days, energy, and so forth, used to construct a mile of 48-in. and 56-in. pipeline in different regions of the country.
Using the world market price of materials and based on certain assumptions about the cost of the Russian labor force, the marginal cost of a pipeline in Russia and other parts of the former U.S.S.R. can be now calculated.
Table 7 gives a sample calculation of the construction cost of an Urengoy-Torzhok-Brest pipeline to run in the northern corridor.
The production cost at the Urengoy field is estimated at a maximum of $0.10/Mcf and operational cost at $0.14/Mcf, which (with $0.57/Mcf annualized cost of the pipe cited in Table 7) makes the delivery cost of gas at the Belarussian/Polish border $0.81/Mcf. The figure does not include a transit fee Belarus would charge Gazprom.
According to the Russian Ministry for Foreign Economic Relations, Russia in January-April 1993 was selling gas to eastern and western Europe at the average price of $2.21/Mcf.
In 1992, the former Czechoslovakia was charging $0.0592/Mcf/100 miles of transit, or about $0.28[Mcf for the entire route from Uzhgorod to the German border.
According to a Russian-Ukrainian agreement, from June 1, the Ukrainian gas transit tariff jumped from $0.008/Mcf/100 miles to $0.05, and starting in 1994, the tariff will be $0.079/Mcf/ 100 miles, or about $0.55/ Mcf for the entire route through Ukrainian territory.
Adequate space is nonetheless available for Gazprom's profit.
GAZPROM'S PROSPECTS
To the end of the U.S.S.R., the Soviet natural gas industry was the only part of the energy sector still keeping afloat.
Up to 1988, the industry was consistently over-fulfilling its production targets. In 1988, the 4.2-bcfd increase in gas production was 0.9 bcfd greater than the plan, but both the 1989 target of 79.3 bcfd and the last Five-Year Plan target of 82.2 bcfd in 1990 were missed by wide margins.
At present, the Russian gas industry, the main successor of the Soviet, is in initial decline. The less than 0.8% drop in production in 1992, however, can be considered a success in the context of much more significant declines in other sectors of Russian economy.
MAJOR OBSTACLE
The governmental pricing policy is probably the major obstacle to a normal development of the energy sector in general and the gas industry specifically.
The domestic prices fixed by the state are always behind the rate of ruble devaluation. When the Russian government introduced new gas prices on June 1, 1992, residential consumers started to pay 256 rubles/1,000 cu m, or $6.053/Mcf (at the exchange rate of the day of $1 = 136 rubles), and all other users 1,200 rubles or $0.25.
At the time of the next increase, Feb. 1, the dollar-to-ruble exchange rate was 1:572, and the new price for residential consumers of 450 rubles meant a mere $0.022/Mcf and 3,600 rubles for other users, only $0.178/Mcf.
With nearly all other goods and services free, Gazprom is having a hard time balancing its domestic sales and purchases.
It looks like the Russian government is going to give up its control over energy prices soon. Then the internal gas price in central European Russia would climb to an estimated level of $0.750.85/Mcf, and Gazprom's total sales of natural gas would be in the range of $23-25 billion annually.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
