Russia will not end export monopoly of Gazprom

Nov 21, 2003 01:00 AM

The Russian government is not going to end the export monopoly of the gas giant Gazprom, which the EU made a condition for Russia's entry into the World Trade Organization, Deputy Economy Minister Maxim Medvedkov said. In other words, the government has taken a position of principle, refusing to change the state of things in the gas export sphere. However, the preservation of the status quo will only impede the liberalization of the internal natural gas market.
"A monopoly on the export of natural gas is allowed by WTO rules. Many countries have such a monopoly. Russia wants to use this right," Mr Medvedkov stressed. He noted that the entire world trade is based on the difference between internal and external prices. "If these prices are equalized, the entire world trade will grind to a halt," the Deputy Economy Minister said.

An export monopoly is Gazprom's dearest asset. The company sells natural gas on the domestic market at low prices, and its main profits come from foreign trade. Over the past two years, Gazprom has been lobbing the government to allow it to sell only 5 % of its light hydrocarbons on Russia's open market. But the government does not agree to this proposal, as Gazprom bears a heavy social burden, and the country's manufacturing sector needs large amounts of natural gas, which large companies buy very cheaply. The Economy Ministry wants to wait until a full restructuring of this sector has been completed.
According to Mr Medvedkov, reforms will continue in the gas sector. Economy Ministry experts say that first, Gazprom's pipeline system should be separated from gas producing companies, and Gazprom's subsidiaries should be made competitive companies; only after that can natural gas be sold at free market prices. So, liberalized prices are a long way off. At the same time, in Mr Medvedkov's opinion, talks with the European Union regarding Russia's energy issues should not affect the pace of reforms, which is currently rather low.

Gazprom's export monopoly and low domestic prices are two big problems that impede the development of the gas industry. Low domestic prices affect the investment opportunities not only of Gazprom, but also of independent producers, who are not interested in investing in gas production under the circumstances. Meanwhile, the reform of the industry is being postponed.
If the government reaches an agreement with the European Commission without de-monopolizing Gazprom, this can further impede the development of the country's gas industry. In the medium-term perspective, the company will remain the coordinator of Russia's gas exports.

With low gas prices on the Russian market, independent producers will have no impetus to expand their business. If Gazprom does not increase gas output, Russia's total gas production will be insufficient for the needs of both domestic and export markets beginning in 2005, according to the Russian Academy of Sciences' Institute for Energy Studies.
In order to avoid this, it is necessary to speed up the reform of this sector, including providing access to foreign markets for Gazprom's rivals. This would provide an impetus for independent gas producers, who could sell their gas on foreign markets at high prices, while selling part of their products inside the country at low prices. However, the government and Gazprom are not in a hurry.

Meanwhile, the EU does not contribute to the reform of the Russian gas sector. The European Union is not bent on ending Gazprom's monopoly at all costs. EU Trade Commissioner Pascal Lamy said in October that the European Union would not like to shake the position of Gazprom, as it did not correspond to Europe's interests as a gas consumer. He said the EU was a large client of Gazprom, it would be an even more important client in the future.
Mr Lamy said there were three groups affected by the gas issue in Europe, namely producers, who use energy resources and competing with Russian producers; operators and consumers. He said it was consumers who were especially interested in stability and, accordingly, long-term contracts with Gazprom.

Thus, it can be assumed that the European Union, under pressure from these consumers, will eventually allow Gazprom to retain its monopoly on gas exports. However, this will put off the reform of the Russian gas industry and the coming of independent producers. In the short term perspective, this is good for the sector. But long term prospects should be more important for such an important strategic industry.
If the reforms drag on, thanks to the position of the Russian government and the EU, independent producers will not come to the sector, and the industry could face a downturn in the future, and not a very distant future.

Source: The Russia Journal Daily
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