The Independent Gas Producers in Russia

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Release Date: March 2006;
Volume: 135 pages;
Price: 3495 Euro

Independent gas companies are playing an increasingly significant part in the production and supply of gas in Russia. Today the suppliers of one- fifth of the gas deliveries in the federation, the independent sector possesses the greatest potential for growth: a solid resource base, superior technology and management hardened by obstacles and political forces to Russian-style market realities. RPI has studied in depth the factors affecting supply and demand in the Russian gas market and used these factors to forecast scenarios for the independent sector through 2010 and in some cases, 2015. Our findings combine analyses of information from governmental agencies and leading analytical companies with independent research. Actual events may differ from our prognoses. Nonetheless, we are confident of the reliability of the data we have used and the soundness of our assumptions.

Introduction

Independent gas companies are playing an increasingly significant part in the production and supply of gas in Russia. Today the suppliers of one fifth of the gas deliveries in the federation, the independ ent sector possesses the greatest potential for growth: a solid resource base, superior technology and management hardened by obstacles and political forces to Russian style market realities. No one is better suited for this next phase of gas industry development.

RPI has prepared this report in order to elucidate the more important aspects of the Russian inde pendent gas producing sector within a large, complex setting. The study provides:

• a description of the independent sector within the gas industry as a whole, including the regulato ry environment and the role of Gazprom
• analysis of the resource base on which the Russian gas market rests with details of regional hold ings and licenses
• domestic and foreign demands for gas, including Central Asian gas suppliers and former Soviet Union purchasers and the geography of deliveries
• recent and forecasted production, pricing, sales and delivery of gas
• advances in technology and the opportunities they afford the independent sector

RPI has studied in depth the factors affecting supply and demand in the Russian gas market and used these factors to forecast scenarios for the independent sector through 2010 and in some cases, 2015. Our findings combine analyses of information from governmental agencies and leading analytical companies with independent research. Actual events may differ from our prog noses. Nonetheless, we are confident of the reliability of the data we have used and the sound ness of our assumptions.

While we offer considerable information on the gas industry as a whole, we focus in depth analyses on six independent producers: gas companies NOVATEK and Northgas and vertically integrated oil companies Surgutneftegaz, TNK BP, Rosneft and LUKOIL. We review performance data for these companies from 2002 through 2004 or 2005, examine impediments and opportunities for each and forecast the companies' growth through 2010 or 2015.

The Independent Gas Producing Sector

The study has been divided into blocks mirroring the gas production process from the resource base, to production, to delivery of commodity gas to customers.

Independent producers

The independent gas producing sector comprises companies that are not part of state controlled Gazprom and that have access to the unified gas supply system. The number of such companies whose annual gas production exceeded 10 million cubic meters at the beginning of 2006 is more than 30. It encompasses VIOCs and independent oil and gas companies.

Eight large independent companies produce more than 80 percent of the output of all independents: VIOCs Surgutneftegaz, TNK , Rosneft and LUKOIL and gas companies NOVATEK, Itera's share in Purgaz, Northgas and Rospan.

The environment

Russia lacks true market mechanisms. A government controlled monopoly, Gazprom, dominates the market. System quirks give the monopoly leverage to determine, directly or indirectly, the independ ents' production levels and rates of growth.

Governmental regulation of domestic gas prices, limited access to the gas transportation system, lack of infrastructure to export products to the most promising foreign markets are the principal difficul ties independents face.

Resource base

Russian independent producers hold licenses for approximately 23 percent of the federation's explored (++1) free gas reserves. This is 11.1 trillion cubic meters of gas. The gas within this resource base is predominantly "fat" gas, C3+ content of 50 grams per cubic meter or greater, attrib utable to Valanzhin and Achimov gas condensate and oil gas condensate deposits.

Gas production

From 1999 through 2005, the share of independents in total gas production in Russia grew from 6.4 percent, to 13.6 percent. Companies NOVATEK and Rosneft lead in production growth.

In the mix of gas production by independent producers, natural gas outweighs APG. In 2005 natural gas constituted 54 percent of production. Independents produce 94 percent of the country's APG output.

Gas sales and distribution

Independent gas producers sold 74 billion cubic meters of gas in the domestic market during 2005. This was an increase of five percent over the previous year. Independents accounted for more than 18 percent of the gas delivered for domestic consumption in 2004, and by 2005 its share had risen to 19 percent. Independently produced gas is distributed to customers in approximately 50 subjects of the Russian Federation.

Exports by independent producers are limited to countries of the former Soviet Union. Belarus, Kazakhstan and the Baltic states are the principle importers of gas produced by the independent sector. In 2004 independents exported eight billion cubic meters of gas to neighboring countries. This was 13 percent of Russia's exports to these countries. In 2005, exports dropped to a mere1.3 billion cubic meters.

Access to UGSS, transmission tariffs

Independent gas producers have had access to the Gazprom controlled gas transportation system, the UGSS, since 1998. Law and regulations perpetuate "leftover" and "permit" principles of access, while providing no mechanism for ensuring fair access.

The government does not regulate prices of independent gas producers. Nevertheless, government regulated prices set for Gazprom influence prices the independents set.

Forecast for Growth in the Independent Gas Producing Sector

Expansion by independent gas producers will depend on the supply and demand dynamics within the domestic market, access to the gas transportation system, gas prices, imports from Central Asian republics and gas prices level in the domestic market.

Russian gas market demand forecast

Gas dominates in Russia's consumption of primary fuel and energy resources, accounting in 2004 for 53 percent of fuel and energy consumption. Gas consumption runs in tandem with changes in the GDP: a one percent growth in GDP leads to an increase in gas consumption of 0.4 percent.

Demand for gas is related to price and pricing mechanism. If the government continues to regulate prices, demand will grow at 1.7 percent per year from 2006 through 2010. If the government liberal izes gas prices, it will trigger inter fuel competition and demand will decrease.

In own opinion, the most likely scenario is that of regulated prices: By 2010 domestic gas demand will increase by eight percent compared with 2004 to total 463 billion cubic meters.

Gas price forecast

Approximately 95 percent of the gas in the domestic market is consumed as fuel. Its demand is not price sensitive. Price insensitivity means that gas prices have considerable potential for increase before causing a decrease in gas consumption.

The government, Gazprom, RAO UES (power energy monopoly) and industry watchers agree that domestic gas prices ranging from $60 to $65 per 1,000 cubic meters are reasonable. This level would ensure profitable growth of gas production without triggering crises in other sectors of the economy.

We have produced a gas price forecast by linking prices to inflation rate predictions, taking into consideration gas's above inflation pattern in recent years. Our prognosis shows that gas prices for industrial customers could grow from $41.5 per 1,000 cubic meters in early 2006 to $44 to $45 in 2007 and to $63 by 2010.

Table of contents

• Introduction
• 1. Reserves, Production and Distribution of Gas in the Russian
• Federation
• 1.1. Resource Base
• 1.2. Gas Production
• 1.3. Gas Balance, Gas Distribution
• 1.4. Transportation Infrastructure
• 1.4.1. Trunk Gas Pipelines
• 1.4.2. Gas Distribution Networks
• 2. Independent Gas Producers
• 2.1. The Raw Material Base of Independent Gas Producers
• 2.2 Gas Production by Independent Oil and Gas Producers
• 2.3. Utilization of Gas by Independent Producers
• 2.4. Gas Deliveries by Independent Producers by Region and Industrial Sector
• 2.4.1. Gas Consumption by Russian Federation Subjects
• 2.4.2 Gas Deliveries to Subjects of the Russian Federation
• 2.4.3. Regions with Greatest Growth in Gas Deliveries from Independent Producers
• 2.4.4. Gas Deliveries by Economic Sector
• 3. Regulation of the Independent Gas Producers' Market
• 3.1. Access to the Gas Transportation System
• 3.1.1. Terms of Access to Gazprom's Gas Pipelines
• 3.1.2. Transmission Tariffs for Independents
• 3.1.3 Pipeline Infrastructure Belonging to Independents
• 3.2. Gas Market Pricing Structure
• 3.2.1. Deliveries of Government Allocated Gas
• 3.2.2. Deliveries of "Over the Limit" Gas from Gazprom and Independent Producers
• 3.3. Gas Prices in Individual Market Segments
• 3.3.1. Deliveries of Allocated Gas
• 3.3.2. Deliveries of OvertheLimit Gas and Gas of Independent Producers
• 3.3.3. Typical Trading Arrangements
• 4. Key Independent Gas Producers
• 4.1. Gas Reserves of the Selected Companies
• 4.1.1. Northgas
• 4.1.2. NOVATEK
• 4.1.3. Rosneft
• 4.1.4. LUKOIL
• 4.1.5. TNK BP
• 4.1.6. Surgutneftegaz
• 4.2. Gas Production and Sale
• 4.2.1. NOVATEK
• 4.2.2. Northgas
• 4.2.3. Surgutneftegaz
• 4.2.4. Rosneft
• 4.2.5. TNK BP
• 4.2.6. LUKOIL
• 4.3. Gas Strategies of the Selected Companies
• 4.3.1. NOVATEK
• 4.3.2. Northgas
• 4.3.3. Surgutneftegaz
• 4.3.4. LUKOIL
• 4.3.5. Rosneft
• 4.3.6. TNK BP
• 5. Forecasts of Supply and Demand for Gas in Domestic Market
• 5.1. Forecast of Gas Demand
• 5.1.1. Status
• 5.1.2. Forecast of Gas Prices
• 5.1.3. Forecast of Gas Consumption
• 5.2. Forecast of Gas Consumption in Key Economic Sectors
• 5.2.1. Status
• 5.2.2. Consumption Forecast by Economic Sector
• 5.3. Gas Supply Forecast
• 5.3.1. Production Forecast
• 5.3.2. Forecast of Gas Production by Independent Producers
• 5.3.3. Domestic Consumption
• 5.3.4. Forecast of Gas Exports
• 5.3.5. Forecast of Gas Balance
• 6. Advances in Natural Gas Processing for Alternative Transport
• 6.1. Alternative Methods of Transporting Unprocessed Forms of Gas
• 6.1.1. Liquefied Natural Gas
• 6.1.2. Compressed Gas
• 6.1.3. Natural Gas Hydrate
• 6.1.4. Comparison of Gas Transformation and Transportation Methods
• 6.1.5. Application of Alternative Methods of Gas Transportation in Russia
• 6.1.6. Gas Transportation Projects in Russia Today
• 6.2. Natural Gas Processing Methods
• 6.2.1. Synthetic Liquid Fuel
• 6.2.2. Technical and Economic Characteristics of SLF Technology
• 6.2.3. SLF Projects in Russia
• 6.2.4. GastoElectricity: Opportunities for SmallScale Power Generation

List of figures and tables

• Diagram 1. Companies that make up the independent gas market in Russia
• Figure 1.1.1. Explored free gas reserves in Russia as of early 2004 (trillions of cubic meters)
• Figure 1.1.2. Geographic distribution of explored reserves by region
• Figure 1.1.3. Gas production costs ($ per 1000 cubic meters)
• Table 1.1.1. Distribution of reserves by wholly owned subsidiaries and affiliated companies ofGazprom at the beginning of 2004 (billions of cubic meters)
• Table 1.1.2. Reserves by region as of the beginning of 2004 (billions of cubic meters)
• Table 1.1.3. Reserves by field as of the beginning of 2004 (trillions of cubic meters)
• Figure 1.1.4. Comparison of Gazprom production rates with additions to reserves
• Figure 1.2.1. Independent producers in Russia's total gas production
• Figure 1.2.2. Growth in gas production by independent producers and Gazprom
• Figure 1.2.3. Major gas producers among independent companies in 2005 (billions of cubic meters)
• Table 1.3.1. Gas balance of the UGSS
• Figure 1.3.1. Russia's gas distribution as of the end of 2004
• Table 1.4.1. Primary Components of Russia's UGSS as of the end of 2004
• Table 1.4.2. Operating lives of UGSS linear pipeline portion
• Map 1.4.1. Key directions of UGSS trunk gas pipelines
• Figure 1.4.1. Decrease of UGSS capacity
• Table 1.4.3. Capital investments in UGSS during 2005
• Table 2.1.1. Free gas reserves of selected companies, beginning of 2004
• Figure 2.1.1. Comparison of the selected companies by proved reserves, beginning of 2004
• Table 2.2.1. Gas production in Russia by all producers (millions of cubic meters)
• Figure 2.2.1. NG and APG production by independent producers
• Figure 2.2.2. NG and APG in aggregate gas production by independent producers
• Figure 2.2.3. Production of NG and APG by selected companies during 2005
• Figure 2.2.4. Changes in NG and APG production by independent oil and gas producers
• Figure 2.3.1. APG technical losses and gas used for internal needs by VIOCs and other oil companies
• Figure 2.3.2. NG losses and use for internal needs by independent producers
• Figure 2.3.3. Deliveries of APG to GPPs and external pipeline CSs
• Table 2.3.1. Gas balance of independent producers (billions of cubic meters)
• Figure 2.3.4. Gas balance as of the end of 2005
• Table 2.4.1. Gas deliveries by Gazprom and independent suppliers via USSG and other GTS to regions of the Russian Federation (millions of cubic meters)
• Table 2.4.2. Russian subjects consuming the largest amount of gas (millions of cubic meters)
• Table 2.4.3. Gas deliveries and rates of growth for regions with fastestgrowing demand (millions of cubic meters)
• Table 2.4.4. Regions with the highest share of independent supplies in 2004
• Figure 2.4.2. Shares of independent gas suppliers in regional supplies during 2004
• Table 2.4.5. Highest rates of growth in gas delivery from independents
• Figure 2.4.4. Consumption of gas delivered via UGSS by selected sectors of the economy in 2004
• Table 2.4.6. Gas consumption in Russia by selected sector (billions of cubic meters)
• Figure 2.4.5. Gas deliveries by independent producers to the domestic market in 2004
• Figure 3.1.1. Transmission tariffs for independent gas producers
• Figure 3.2.1. Russian gas market structure
• Figure 3.2.2. Structure of gas deliveries to Russian domestic markets in 2004
• Figure 3.3.3. Weighted average wholesale gas prices for industrial customers (exclusive of VAT)
• Table 3.3.1. Prices of independent gas producers by tariff zone at the beginning of 2005
• Table 3.3.1. Prices of independent gas producers by tariff zone at the beginning of 2005
• Table 4.1.2. Gas reserves attributed to NOVATEK fields as of the beginning of 2004
• Table 4.1.3. Rosneft's gas reserves as of the beginning of 2004
• Table 4.1.4. LUKOIL's gas reserves as of the beginning of 2004 (Continuation)
• Table 4.1.5. Gas reserves attributed to TNK BP fields as of the beginning of 2004
• Table 4.1.6. Gas reserves contained in Surgutneftegaz's fields as of the beginning of 2004
• Figure 4.2.1. Independent producers of gas and their supplies to Russian markets during 2004
• Figure 4.2.2. Gas production by NOVATEK
• Table 4.2.1. NOVATEK gas use (millions of cubic meters)
• Table 4.2.2. NOVATEK's gas supplies for processing (millions of cubic meters)
• Figure 4.2.3. Breakdown of NOVATEK's gas deliveries in 2004
• Table 4.2.4. NOVATEK's direct gas deliveries to customers (millions of cubic meters)
• Figure 4.2.4. Gas production by Northgas
• Table 4.2.5. Gas use by Northgas (millions of cubic meters)
• Table 4.2.6. Direct deliveries of gas to customers by Northgas (millions of cubic meters)
• Figure 4.2.5. Gas production by Surgutneftegaz
• Table 4.2.7. Gas use by Surgutneftegaz (millions of cubic meters)
• Table 4.2.8. Surgutneftegaz gas deliveries for processing (millions of cubic meters)
• Table 4.2.9. Surgutneftegaz direct gas deliveries to customers, billion cubic meters
• Table 4.2.10. Rosneft's primary gas producing regions (millions of cubic meters)
• Figure 4.2.6. Gas production by Rosneft
• Table 4.2.11. Gas use by Rosneft (millions of cubic meters)
• Table 4.2.12. Rosneft's gas deliveries for processing (millions of cubic meters)
• Table 4.2.13. Rosneft direct deliveries to customers via GTS (millions of cubic meters)
• Figure 4.2.7. Breakdown of Rosneft's gas deliveries in 2004
• Figure 4.2.8. Gas production by TNK BP
• Table 4.2.14. TNK BP primary gas producing regions (millions of cubic meters)
• Table 4.2.15. Gas use by TNK BP (millions of cubic meters)
• Table 4.2.16. TNK BP gas deliveries for processing (millions of cubic meters)
• Table 4.2.17. TNK BP direct deliveries to customers via GTS (millions of cubic meters)
• Figure 4.2.9. Breakdown of TNK BP gas deliveries in 2004
• Figure 4.2.10. Gas production by LUKOIL
• Table 4.2.18. LUKOIL's primary gas producing regions (millions of cubic meters)
• Table 4.2.19. Gas use by LUKOIL (millions of cubic meters)
• Table 4.2.20. LUKOIL gas deliveries for processing (millions of cubic meters)
• Table 4.2.21. LUKOIL direct deliveries to customers via GTS (millions of cubic meters)
• Figure 4.2.11. Breakdown of LUKOIL gas deliveries in 2004
• Figure 4.3.1. Gas production forecasts for the selected companies
• Figure 4.3.2. NOVATEK's gas production, actual and forecasted
• Table 4.3.1. NOVATEK's gas production targets by largest subdivisions (billions of cubic meters)
• Figure 4.3.3. Northgas's gas production, actual and forecasted
• Figure 4.3.4. Surgutneftegaz's gas production, actual and forecasted
• Figure 4.3.5. LUKOIL's gas production, actual and forecasted
• Table 4.3.2. LUKOIL's gas production targets by region (billions of cubic meters)
• Figure 4.3.6. Rosneft's gas production, actual and projected (excluding RosneftSMNG and offshore projects)
• Table 4.3.3. Rosneft's gas production targets by region (billions of cubic meters)
• Figure 4.3.7. TNK BP's gas production, actual and forecasted
• Figure 5.1.1. Russia's primary FER consumption structure in 2004
• Figure 5.1.2. Gas consumption in Russia
• Figure 5.1.3. Historical comparison of gas, coal and heating oil prices based on fuel calorific efficiency
• Figure 5.1.4. Forecast of gas prices for industrial customers
• Figure 5.1.5. Forecast of domestic gas consumption under most likely scenario
• Figure 5.2.1. Consumption of gas delivered via UGSS by selected sectors of the economy in 2004
• Table 5.2.1. Gas consumption in Russia by economic sector (billions of cubic meters)
• Figure 5.2.2. Gas consumption in Russia by economic sector
• Figure 5.2.3. Gas consumption by the electric power industry
• Figure 5.2.4. Gas consumption by the metallurgy industry
• Figure 5.2.5. Gas consumption by the agrochemical industry
• Figure 5.2.6. Gas consumption by the petrochemical industry
• Table 5.3.1. Forecasts of gas production by Gazprom
• Table 5.3.2. Gazprom estimate of deliveries to domestic markets via UGSS (billions of cubic meters)
• Table 5.3.4. Ukraine's gas balance in 2005 (billions of cubic meters)
• Table 5.3.5. Projected deliveries of Central Asian gas to Russia (billions of cubic meters)
• Table 5.3.6. Russia's 2010 gas balance, excluding gas deliveries by independent companies (billions of cubic meters)
• Figure 5.3.1. Forecast of APG production by independent producers
• Figure 6.1.2. Tanker for carriage of compressed natural gas (design by Knutsen OAS)
• Figure 6.1.3. Flow chart for LNG, CG and NGH transformation and transportation
• Table 6.1.1. A comparison of type of gas by deposit requirements and transportation and storage limitations
• Map 6.1.5. Gas transformation methods for gasproducing regions of Russia
• Figure 6.2.1. Process flow chart for converting natural gas into SLF
• Table 6.2.1. SLF plant projects worldwide

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