Could Gazprom Lose Its Monopoly on Russian Gas Exports?

What If…?

Reports in the Russian media yesterday said that the country's Federal Anti-Monopoly Service (FAS) is working on a proposal that would allow independent gas producers to access Gazprom's export pipelines, a move that would end the state-owned gas giant's monopoly. Russian business daily Vedomosti reported that the proposals are part of the amendments to the law on gas exports and are due to be submitted to the Duma, the lower house of parliament, in May. Kommersant reported that the FAS proposals also may ask Gazprom to share some of its export revenues with independent gas producers for using their gas in fulfilling export contracts.

Gazprom exports around 150 bcm of gas to Europe each year, supplying the continent with 25% of its gas supplies, while earning approximately US$40 billion in revenues, so the importance of these proposals can hardly be overstated. Since the January 2006 Russia-Ukraine gas dispute, European governments and policymakers have ratcheted up their rhetoric accusing Gazprom of being an unreliable supplier and not investing fast enough upstream to bring new gas onstream and meet Europe's growing import needs. Although Gazprom has long had a de facto monopoly on Russian gas exports, a May 2004 Russia-European Union (EU) deal saw the EU consent to Russia maintaining Gazprom as the country's single gas exporter, and in 2006—partly in response to the criticism levelled against Gazprom by Europe—the Russian government went ahead and legalised Gazprom's gas export monopoly (see "Related Articles").

European officials have had little success in trying to push Gazprom to invest more in new fields and bring more gas to market according to Europe's own timetable, but the prospect of an end to the Russian gas firm's export monopoly is surely enticing. If other gas producers such as Novatek and LUKoil only had access to the Gazprom-owned export pipeline network, in theory, Russia could deliver more gas to European consumers, alleviating concerns about Gazprom's ability to meet its export commitments, as its own production remains relatively flat. LUKoil and Novatek, among others, would surely opt to send their gas to Europe, taking advantage of the ability to secure far higher prices for their gas than on the regulated Russian market. Indeed, whereas European gas prices in 2007 averaged around US$300 per 1,000 cm, the average price on the Russian market was a paltry US$47 per 1,000 cm.

In addition to making Russian gas exports to Europe more reliable, a decision to end Gazprom's export monopoly would permit more gas-to-gas competition in Europe, putting downward pressure on prices that have more than doubled in the past year and could rise to as much as US$400 per 1,000 cm this year. An end to Gazprom's monopoly on gas exports to Europe would also likely ensure that the state-owned firm is unable to establish a similar position in supplying gas to Asia. ExxonMobil, which is keen to market its own gas from the Sakhalin-1 project but is under significant pressure from Gazprom to sell it all of the Sakhalin-1 gas output, would surely welcome such an outcome.

Probably Too Good to Be True

Alas, unless Russia's presidential administration (the Kremlin) has suddenly had a major change of heart under president-elect Dmitry Medvedev, the prospect of an end to Gazprom's gas export monopoly looks quite dim. After all, rather than weaken Gazprom's dominant position in the Russian gas sector, the Kremlin under current President Vladimir Putin has spent the past several years strengthening Gazprom's role, from acquiring a 10.7% stake in the firm to solidify the state's direct control of Gazprom to aiding in the company's establishment of control over key gas projects in Eastern Siberia and the Far East. Medvedev, as Putin's deputy prime minister and—more importantly—as Gazprom's board chairman during this time, seems highly unlikely to permit such a drastic change in Russia's energy policy so soon after taking the reins of the Kremlin, even if he could.

Indeed, Medvedev may not be the liberal economic reformer that optimists wish him to be—in some ways, he is the "champion" of the liberal reformers only as a result of the absence of other like-minded policymakers and in comparison to the prevalence of Kremlin aides with a more statist approach. Furthermore, Gazprom itself is likely to fight the FAS proposals tooth and nail, as the gas giant is loath to cede its dominant position. Monopolies naturally seek to accumulate additional power, so any move to dilute this power elicits a negative reaction. Gazprom, frequently described as a "state within a state", is sure to pull out all of the stops to block the FAS proposals, including throwing its political weight around in lobbying legislators to oppose the changes as well as persuading the government to drop the FAS proposals altogether.

Outlook and Implications

The chances that Medvedev oversees an abrupt change in Russia's energy policy (and indeed, its foreign policy) by ending Gazprom's monopoly over Russian gas exports are slim. The decision in 2006 to codify Gazprom's de facto gas export monopoly was not done merely so that Russia could thumb its nose at Europe; rather, by legalising Gazprom's monopoly, Russian policymakers have ensured that the country has a single export channel for its gas, thereby avoiding a situation in which Russian gas is competing for markets in Europe with other Russian gas. The notion of gas-to-gas competition is certainly beneficial for Europe, as it would help drive down rising prices, but with Russia still heavily dependent on revenues from gas exports, the emergence of such a scenario is not in the Kremlin's interest.

The potential that Gazprom could be asked to pay independent producers for their gas that the monopoly uses to fulfil its export contracts is a more interesting—and potentially more likely to be realised—proposition. How these payments would be determined is somewhat questionable, but the FAS proposal could help build support in the Russian government for another idea whose time may be near; namely, a decision to offer true third-party access (TPA) to Gazprom's domestic pipeline system. With Russian gas prices (at least for the industrial sector) gradually being liberalised, the implementation of real TPA—with an independent regulator ensuring open access to the Gazprom system for independent producers and oil companies—could provide additional incentives for independents to produce more gas, thereby making more gas supplies available for the domestic market and freeing up more of Gazprom's own gas output to be sent for export.

This, in turn, would help ensure Gazprom meets its future export commitments and (at least in theory) reduce European concern over the "reliability" of Russian gas exports. Although an end to Gazprom's export monopoly would be a dream outcome for Europe, this looks unlikely to occur any time soon, but a "second-best" outcome in which Russia ensures true TPA for independent gas producers to the Gazprom domestic pipeline network would still have positive ramifications for Russian gas exports to Europe. Now the EU just needs to hope that Russian policymakers think likewise—and that Gazprom is willing to cede market share in Russia in order to protect its export monopoly and shore up its credentials as a reliable supplier to Europe. This may be a tall order, indeed, but certainly not impossible.

Related Articles

Russia: 18 March 2008: Gazprom Expects Higher Gas Production, Prices, and Exports This Year

Russia: 13 March 2008: Gazprom, Naftogaz Reach Deal on 2008 Gas Deliveries, Prices

CIS: 12 March 2008: Gazprom Agrees to Pay European Prices for Central Asian Gas from 2009

Russia: 20 December 2007: How Russia Can Make More Gas Available to Europe 

Russia: 2 July 2007: "Trust Us", Says Gazprom Management to European Policymakers

Russia: 20 June 2007: Gazprom Launches Bid for Control of Marketing of Sakhalin-1 Gas

Russia: 15 June 2007: Gazprom Touts Gas Supply Potential, Raises Long-Term Output Forecast 

Russia: 5 December 2007: Government Approves 25% Wholesale Gas Price Hike for Russian Market in 2008

Russia: 1 December 2006: Cabinet Approves Plan to Gradually Increase Russian Domestic Gas Prices

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