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Russia: Gazprom Seeks Investment, Promises Reforms

The Russian gas monopoly Gazprom has promised to let independent producers export by 2008, clearing the way for more investment and output from the world's largest gas reserves. Russia may now be on the verge of a new "big bang" of reforms for the energy sector, but critics are worried that all of the plans call for the government to keep control over the country's transmission networks.

Boston, 4 March 2003 (RFE/RL) -- Russia's gas giant Gazprom has pledged for the first time to open its export network to independent rivals, but it is still trying to hold on to its monopoly power for the next three to five years.

Last week, Gazprom outlined its own plans for restructuring the Russian gas sector, laying out its proposals before the government decides on long-delayed steps to achieve the same goal.

The company's recommendations may represent a bare minimum of the measures that will be taken to open the gas market to independent producers in the next several years. So far, private oil companies have had little incentive to invest in Russia's gas fields because Gazprom controls all the domestic and export pipelines.

Until now, the monopoly has opposed independent access to the high-paying European market, which relies on Russia for one-fourth of its supplies. While privatization has brought change to the oil industry and created modern firms to help lift Russia's economy, the equally vital gas industry has stayed stuck in the past.

Last year, Gazprom produced 88 percent of Russia's gas, according to the Energy Ministry. The world's biggest gas company, which is at least 38 percent state-owned, has clung to many practices and privileges it enjoyed in its earlier life as a Soviet ministry.

In some cases, gas continues to be used as a tool of CIS statecraft rather than as a commercial commodity. Most recently, heavily indebted Belarus was threatened with a shutoff in November until it agreed to sell Russia its gas company.

But details of the Gazprom plan reported by the Moscow-based United Financial Group (UFG) suggest that Russia's independent oil companies will be able to export gas by 2008 at the latest, and possibly as soon as 2006. The incentive could increase Russia's gas supplies and reduce Gazprom's power over the market. Last year, Gazprom's output rose a scant 2.3 percent after a string of annual declines. Gazprom's deputy chairman, Aleksandr Ryazanov, unveiled the plans at an annual meeting with the government last week.

In a research note, UFG called the proposals "disappointing," saying they were "both less ambitious and more drawn-out than we would like." UFG criticized Gazprom's failure to separate its production and transmission functions, as with the restructuring of the electricity sector that passed the State Duma last month. UFG's chairman, former Finance Minister Boris Fedorov, represents minority shareholders on Gazprom's board.

UFG said, "In our view, the Russian gas market is unlikely to become fully competitive if Gazprom continues to own and operate the pipeline network as well as produce the gas." The brokerage also faulted Gazprom for giving itself until 2006 to allow third-party access to its pipelines, presumably for domestic sales, and for creating an exchange that would experiment with free-market trading for limited amounts of gas. The time frame for a fully competitive gas market would be between 2008 and 2010.

But while the pace is gradual, the Gazprom commitment seems to confirm that sudden changes in personnel at the company last month were orchestrated by President Vladimir Putin to clear the way for restructuring.

Days after Putin congratulated the company on its 10th anniversary, three top managers were sacked after reportedly resisting reforms. Trade and Economic Development Minister German Gref then vowed the government would "reform the country's gas sector this year" under an agreement with Gazprom. The moves apparently allowed Gazprom chief executive Aleksei Miller to approve the company's restructuring blueprint last week.

Although it may not go far or fast enough, Gref may take it further when the cabinet meets to discuss energy issues on 13 March. In recent months, there have been conflicting reports about the source of impediments to energy reforms.

Prime Minister Mikhail Kasyanov has been seen as guarding the state's power over the energy sector by postponing earlier showdowns and insisting that companion oil pipeline monopoly Transneft must keep its hold over the oil network. But in January, he also promised that Russia would stop cross-subsidizing the domestic gas market with higher export prices in "a year or two," the Prime-TASS news agency reported. The European Union has demanded an end to the subsidies as a condition of Russia's entry into the World Trade Organization.

Taken together with the restructuring of the Unified Energy Systems electricity monopoly, the gas sector overhaul could be seen as part of Russia's new "big bang" of energy reforms. But results may depend on how much further the government is willing to push Gazprom beyond the baseline of its plan. There is already concern that independent producers will still be locked into dealing with the Gazprom export arm Gazexport for pipeline space and transit tariffs, allowing the company to control the market much as it does now.

So far, the government seems to be seeking some of the benefits of reform without easing its ultimate hold over the energy sector. The common element of the energy plans is that they call for keeping ownership over the networks that supply all the gas, oil, and electricity.

In effect, private companies will be asked to invest billions of dollars in an ostensibly free system that the government will still control. Investors may wait to see whether such plans are the government's final word.