The Wall Street Journal: Russia to Increase Natural-Gas Prices at Home

EXTRACT: He said Russia wants Royal Dutch Shell PLC’s Sakhalin II project, which has faced unprecedented pressure in recent months from Russian environmental and other regulators, to be successful. But he said a $10 billion cost overrun in the project amounts to “a substantial change in the terms of the deal” and must be negotiated with the Russian government. Shell so far has insisted that the 1990s contract governing the deal entitles it to full cost recovery before it begins sharing the output with the Russian side.

THE ARTICLE

Russia to Increase
Natural-Gas Prices at Home
Aim Is to Cool Local Demand
And Protect Export Supply
Amid Warning of Shortage
By GREGORY L. WHITE
November 22, 2006

MOSCOW — Russia will roughly triple low domestic prices for natural gas over the next five years in an effort to cool surging local demand for the fuel and ensure adequate supplies for increasing export commitments, a top Kremlin official said.

The move by the world’s largest gas producer should help attract much-needed investment to develop new fields amid steadily rising demand for the clean-burning fuel. In an interview yesterday, Igor Shuvalov, economic aide to President Vladimir Putin, said Russia is committed to increasing gas production to meet rising domestic industrial demand and export obligations. Higher domestic prices are expected to stimulate production by smaller producers and Russia’s oil companies, which now account for a limited share of output.
 
Some officials had warned that Russia was facing a shortage of the fuel in the next few years because low domestic prices had led to over-reliance on gas and underinvestment in new production. Western officials, meanwhile, have expressed fears that state-controlled giant OAO Gazprom isn’t investing enough to develop new projects that would replace falling output at its main Siberian fields. Gazprom has long called for higher domestic prices, saying it now sells most of the gas it produces at a loss.

Mr. Shuvalov said the government will lay out a schedule of increases for the next few years to allow industry to adapt. That would also push the increases beyond parliamentary and presidential elections in the next 18 months. Rates for households are likely to remain subsidized.

Leaders from Russia and the European Union, which gets about a quarter of its gas from its eastern neighbor, are meeting in Finland on Friday to hammer out a new framework for cooperation amid fears in the West that the Kremlin is using its vast fuel reserves as a lever to build political influence.

Mr. Shuvalov said those concerns are misplaced. He said the government plans to raise domestic prices, which are now regulated, in steps over the next several years, ultimately reaching the equivalent of European prices of about $150 per thousand cubic meters now, or roughly $4 per million British thermal units. Including transportation costs, Europeans pay about $250 per thousand cubic meters.

“We are working from the premise that the price of gas should be the same for everyone, inside and outside” the country, Mr. Shuvalov said, noting that domestic prices could rise to that level by 2010-12. At the moment, regulated wholesale gas prices in Russia are about $40 to $50 per thousand cubic meters, with a 15% boost budgeted for next year.

“All the principle issues have been agreed, we’re just waiting for the government to draft the documents,” he said.

Mr. Shuvalov said the government is confident that it will be able to avert a gas shortage. He said smaller producers and oil companies will be expected to increase gas production in the next few years to meet domestic demand, which is rising much faster than government forecasts because of surging consumption of electricity.

Russia’s electric-utility network has seen little investment since the Soviet period, and the government now plans a major drive to increase nuclear, hydroelectric and coal use for power generation in an effort to meet rising demand for electricity without causing an unmanageable jump in gas consumption, Mr. Shuvalov said.

Gazprom, meanwhile, will focus on meeting rising export obligations, including for new markets in Asia, and investing in two megaprojects critical to maintaining production in the next decade — the Shtokman field in the Barents Sea and the several fields on the Yamal Peninsula in the arctic.

Even with the tens of billions of dollars of investment needed for those projects, Mr. Shuvalov defended Gazprom’s costly drive to acquire distribution and marketing assets in Europe and elsewhere.

“If they just focus on production and nothing else, they’ll wind up like the Arab oil companies and never be a global player,” Mr. Shuvalov said. Political opposition in Europe and elsewhere to Gazprom’s expansion will likely fade over time, he said. “They didn’t expect Russia to start behaving like this so soon,” he said.

Separately, a Gazprom executive said yesterday the company is looking for acquisitions in the U.S. market, Reuters reported.

Mr. Shuvalov denied charges that Russia is squeezing foreign investors out of its energy sector, noting that the government is close to approving a law that will set a limit of 50% foreign ownership on large fields that the government deems strategic.

Mr. Shuvalov noted that BP PLC’s 50%-owned TNK-BP Ltd. venture in Russia meets that standard. Gazprom has expressed interest in buying out the Russian partners in TNK-BP, but Mr. Shuvalov said he would oppose such a move and said that the current Russian shareholders have expressed no desire to sell.

He said Russia wants Royal Dutch Shell PLC’s Sakhalin II project, which has faced unprecedented pressure in recent months from Russian environmental and other regulators, to be successful. But he said a $10 billion cost overrun in the project amounts to “a substantial change in the terms of the deal” and must be negotiated with the Russian government. Shell so far has insisted that the 1990s contract governing the deal entitles it to full cost recovery before it begins sharing the output with the Russian side.

Write to Gregory L. White at [email protected]

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