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Further Reading

Russian Natural Gas

Russia holds the world's largest natural gas reserves, with 1,680 trillion cubic feet, more than twice the next-largest reserves, in Iran, according to the Energy Information Agency of the United States Energy Department. Russia's proven natural gas reserves amount to 47 trillion cubic meters, 26% of the world's total. In 2004, Gazprom held licenses to fields accounting for 60% of these reserves; 21% is held by other producers, with the remaining 19% unallocated.

Gas prices are pegged to oil and refined products prices but change with a lag of six to nine months.

Russia holds the world's largest natural gas reserves, with 1,680 trillion cubic feet (Tcf) -- nearly twice the reserves in the next largest country, Iran. In 2004 Russia was the world's largest natural gas producer (22.4 Tcf), as well as the world's largest exporter (7.1 Tcf). According to official Russian statistics, production during 2005 and 2006 is predicted to be about the same with around 1 percent growth rate per year.

Open Joint Stock Company (OAO) Gazprom is the legal successor of the proprietary rights and obligations of State Gas Concern Gazprom, including the rights to use land, subsurface reserves, natural resources as well as the rights and commitments under the agreements concluded by the Concern. The sales of shares commenced in 1993 and ended in 1995 with the results as follows: 41% of the shares remained under the state ownership. The old nomenklatura grabbed state property. Prime minister Victor Chernomyrdin, for example, controlled Gazprom. On 30 June 2000 shareholders of Gazprom elected Dimitry Medvedev, a former senior government official, to take over as Chairman. Medvedev replaced former Prime Minister Victor Chernomyrdin in the post. In the middle of 2005, after state-run OAO Rosneftegaz acquired a 10.74% stake in OAO Gazprom, the share of the Russian Federation in OAO Gazprom grew to a controlling stake (50.002%). The move enabled to reinforce the state's control over the Company being of strategic significance for the national economy. There are no legislative restrictions on foreign ownership of OAO Gazprom shares.

Gazprom, Russia's state-run natural gas monopoly, produces nearly 90% of Russia's natural gas, and operates the country's natural gas pipeline network. Gazprom is also Russia's largest earner of hard currency, and the company's tax payments account for around 25 percent of federal tax revenues. Despite its enormous size and significance, Gazprom is seriously encumbered by domestic regulation. By law, the company must supply the natural gas used to heat and power Russia's vast domestic market at government-regulated prices (approximately $28 per thousand cubic meters), regardless of profitability.

Gazprom's natural gas production forecast calls for modest growth of 1-2 percent per year by 2008. Russia's natural gas production growth has suffered due primarily to aging fields, state regulation, Gazprom's monopolistic control over the industry, and insufficient export pipelines. Three major fields (called the 'Big Three') in Western Siberia -- Urengoy, Yamburg, and Medvezh'ye comprise more than 70 percent of Gazprom's total natural gas production, but these fields are now in decline. Although the company projects increases in its natural gas output between 2008 and 2030, most of Russia's natural gas production growth will come from independent gas companies such as Novatek, Itera, and Northgaz.

In 2005 Gazprom opened up the US LNG market. In September 2005 the first LNG carrier arrived at the Cove Point re-gasification terminal (Maryland) in the USA. LNG was delivered as per contracts signed with British Gas and Shell. Also in 1995, the "ring-fence" -- the cap on foreign share ownership in Gazprom -- was eliminated. Removal of the "ring fence" would clearly be a boon for investors (increased ability to trade in Gazprom shares) and Gazprom (improved access to capital), but the long-term significance is that it is the first step in reforming Gazprom. It is unclear, however, whether the government has the political will to follow through with reform of the company. In addition, Gazprom has been acquiring other assets in related industries (electrical generation and oil) in what appears to be an effort to create a national champion in the energy sector.

By 2006 Gazprom was worth about $260 billion and ranked as the third-largest corporation worldwide in terms of market capitalization, after ExxonMobil and General Electric.

On 08 September 2008 Gazprom again revised upwards its gas export revenue forecast for 2008, and saw sales exceeding $65 billion as European prices will hit an all-time high in the fourth quarter. Total revenues were $39.5 billion in 2007. Gazprom expected 2004 export revenue, the main source of its profits, to rise to at least US$17.5 billion from a 2003 record of $16.5 billion. Gazprom expected export revenue to rise to a record and surpass $20 billion in 2005 because of increased supplies to Europe and higher prices.

Whenever Gazprom does have extra revenue it fritters it away in higher operating costs. Lack of profitability is likely to remain an issue so long as domestic gas prices remain so low in comparison to world prices. But if Russia raised its domestic prices to the prices it charges in Europe, Russian industry would incur very large investment adjustment and unemployment costs in the short run - adjustment costs that cannot be justified on the basis of comparative advantage.