Today around 25% of the natural gas consumed in the EU comes from Russia, while gas consumption in some EU countries, including the Baltic countries and Finland, depends entirely on supplies from Russia.
Russia is however also a major consumer of natural gas. Russia's own domestic demand for natural gas is high and the share of gas in indigenous energy consumption in Russia is above 50%. In 2005, 220 billion cubic meters (bcm) out of the 598 bcm of natural gas produced in Russia was exported to the CIS and Europe with the rest being consumed domestically. Thus, it is important to realize that the continuing supply of gas to its own domestic market is a key condition for the stable and predictable delivery of Russian gas to Europe.
The European gas market is lucrative for Russia. Russian dominance in the European gas market produces high earnings for the country while also potentially remaining an important instrument of Russian foreign policy. While, on the one hand, Gazprom - the Russian gas monopoly- has repeatedly signalled its plans to boost gas exports to Europe the Russian government, on the other, has now admitted that there is a shortfall in gas production for domestic consumption.
The deficit in natural gas became a severe problem for the Russian power generating industry last winter when, in Central and Northwest parts of Russia, the temperature fell below -30°C for several weeks, while the demand for electricity significantly increased.
The Russian power generation sector consumes around 25% of all gas produced in Russia, while the share of natural gas in total fuel consumption for power generation and centralized heating is about 40%.
Hand in hand with the economic growth that Russia has experienced in recent years, its energy demand has also grown. The Russian power generation sector consequently foresees the emergence of serious challenges in respect of the provision of natural gas to the new power stations.
The challenges of Shtokman
The three giant West Siberian gas fields - Medvezhye, Urengoy and Yamburg - currently accounting for roughly 63% of Gazprom's production, have passed their production peak and are now experiencing a production decline. In order to meet growing demand both domestically and in respect of export markets, Russia is now heavily dependent on a number of new gas developments.
The giant Shtokman offshore field in the Barents Sea and the fields of Yamal Peninsula have vast deposits and are the next large-scale sources of production. Difficult mining conditions require huge investments and gas extraction from these fields has been consistently postponed. On the 9th of October 2006 Gazprom surprisingly ruled out the possibility of cooperating with foreign partners and announced that it would develop Shtokman alone.
Gazprom however lacks experience of developing Arctic offshore fields and the company may find it difficult to begin production from Shtockman in 2011 as is currently projected.
Turkemenistan is the saviour
The importation of natural gas from Turkmenistan became important for Gazprom's delivery commitments to domestic and European users. Turkmenistan is the country with the second largest gas resources in the former Soviet Union. Turkmenistan's gas production is now being actively expanded after several years of serious decline following the collapse of the Soviet Union.
According to a long-term agreement, which Russia signed with Turkmenistan in 2003, Russia will buy up to 60-80 bcm of Turkmen gas annually until 2028. For the country that produced 58bcm in 2005, this means that for the next 20 years Russia will secure to itself basically all Turkmenistan's gas left over after Turkmen domestic consumption.
The Central-Asian gas pipeline that goes to Russia through Uzbekistan and Kazakhstan is practically the only way for Turkmen gas to flow outside its own market. Turkmenistan has however tried to diminish its dependence on Russia by building pipelines to Turkey and China. Indeed Turkmenistan plans to
begin gas delivery to China by January 2009.
In the short term however it will be difficult for Turkmenistan to find excess gas for export to the Chinese market while not violating its contract with Russia.
The creation of an alternative export route for Turkmen gas will however make the import price of Turkmen gas, which is currently relatively low, higher for Russia. Turkmenistan recently demanded that the gas price for Russia be raised from 65$/mcm to 100$/mcm starting from January 2007, otherwise Turkmenistan threatened to stop delivery to Russia.
The sudden and unexpected death of Turkmen president Saparmurat Niyazov in December 2006 however raised some anxiety that the new Turkmen government might reconsider its obligations to Russia such that maintenance of control over future Turkmen gas exports suddenly became an urgent geopolitical issue for Russia.
Low gas prices in Russia
The availability of gas resources is an essential condition for Gazprom enabling it to supply all of its consumers. Russian gas pricing policy however reflects the fact that Gazprom prioritizes European consumers over and above it own domestic customers. This is not hard to understand given the economics of the situation. In 2006 the average regulated gas price for Russian industrial consumers was 40$ /mcm while to the EU Gazprom sells at a price of 240$/mcm. Low energy pricing is the main non-market feature from the Soviet era that still remains in the Russian economy.
As the Russian economy recovered the government steadily began to raise Russian gas prices. The Russian government however is still reluctant to push for significant price increases, which would restrict the domestic growth of demand for natural gas. The main reasons here are inflation and the fear that Russian products will lose their competitiveness. In 2008 Russia will undergo presidential elections to find a successor to President Putin and the current Russian government obviously wants to delay the negative consequences of a rise in the domestic price of energy beyond the election.
Although Russian gas output is expected to grow there are problems with its production and with its ability to satisfy domestic gas demand. Russia thus faces a significant challenge in maintaining its dominant position in Europe and in avoiding energy crises domestically.
By Marina Tsygankova, Senior Executive Officer, Statistics Norway - www.ssb.no