Russia Holds Onto Gazprom Export Monopoly to Prop Up Budget

  • Energy Ministry sees no sense in big changes in next 5 years
  • Competition abroad may push down prices, deputy minister says

Gazprom PJSC’s grip on Russian pipeline gas exports has made it one of Vladimir Putin’s key money-making machines -- and as the nation plunges deeper into recession, the monopoly is here to stay.

Russia’s natural gas shouldn’t “compete with itself abroad” because that risks pushing down prices and cutting export tax revenue, First Deputy Energy Minister Alexey Teksler said in an interview in Moscow. The ministry is calling for Russia to keep Gazprom’s monopoly on pipeline exports for at least five years.

Burdened by sanctions and a drop in oil prices, Russia’s economy may contract for a second year in 2016, which would be its longest recession in two decades. The government, which relies on oil and gas for about half of its budget, is forecasting a deficit of 3 percent of economic output this year and next -- the largest since 2010. The state gained $7.5 billion from taxes on natural gas supplies abroad through September this year, down 28.5 percent in dollar terms from last year on the commodities slump, Bloomberg calculations based on Russia’s Treasury data show.

Rosneft OJSC, the nation’s biggest crude producer, is seeking to develop its gas business and boost profit amid a plunge in crude prices and borrowing restrictions imposed by the U.S. and European Union over Russia’s role int the Ukraine conflict. After years of disputes about pipeline access, Rosneft in September suggested the government split Gazprom into separate companies for production and transport and cancel its export monopoly.

Export Gains

Gazprom could buy associated gas from producers with fields along the Power of Siberia pipeline to China to help them cut flaring, the practice of burning fuel extracted with oil, Teksler said. The supplies may be priced at a discount to Gazprom’s export rates excluding taxes and transportation costs, while the company would remain the sole provider of the fuel abroad, he said. No final decision has been made yet.

Gazprom, the world’s biggest natural gas producer, has held a legal monopoly on Russia’s pipeline exports for the past nine years and supplies about 30 percent of Europe’s gas. The state-run company aims to sell comparable volumes to Asia after its China link starts in 2019 to 2021. With the net price in the EU almost three times higher than in Russia, Gazprom earns about 40 percent of its annual revenue of more than $100 billion from its gas-export business.

Any moves involving westward gas exports are only possible when Russia approves its strategy for the industry, Teksler said, without elaborating on timing.

Trial Exports

Rosneft asked the government to approve trial gas supplies to Europe as early as next year after scoring a victory two years ago when the government chipped away at Gazprom’s hold on exports by allowing it and competitor Novatek OJSC to export liquefied natural gas after they build plants.

“Gas consumption in Europe has been falling in recent years, and this is a problem, while new estimates on China demand differ manifoldly,” he said. Gazprom has capacity to boost its annual output by more than 100 billion cubic meters, which is more than 20 percent of the current production, but it’s “limited by demand -- in the external markets and very much domestically as independent production is booming,” the official said.

On another long-term dispute in the government, Teksler said fully liberalizing the domestic gas market could hurt investments in the industry. “If we cancel state regulation of prices right now, the rates will fall” given the domestic supply glut and restricted exports, he said.

The ministry proposes tariff planning, state regulation of rates for using Gazprom’s underground storage sites and equal gas transportation rates for Gazprom units and other producers over the next five years, he said. “But there’s no way Gazprom should be completely split.”

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