Rosneft Has New Discoveries

The pipes under Gazprom are burning

­There is a chance that gas might become cheaper. Russian Prime Minister Vladimir Putin foretold Gazprom’s future: if it continues working as inefficiently as it is today, it will be deprived of its monopoly access to the pipeline. As a result, oil companies, which are today burning associated gas from oil wells will be able to sell it, and fuel will drop in price, argue experts. Izvestia decided to examine how a reform of the oil and gas sector will affect consumers.    

Starting April 1, retail gas prices will rise by 10%. The tariffs are regulated by the government. But the tone is set by the monopoly itself. Gas reserves are not rising, so why should the price of gas decrease, say proponents of high prices. But their arguments are cunning. Gas flames burn over Russia. Oil companies are forced to burn about 20 billion cubic feet of associated gas from oil wells, or even more – enough to heat a medium-sized European country. Oil industry workers would be happy to sell the blue fuel, but they cannot get to the pipeline. Gazprom stands in the way.     

The government has adopted a decree, according to which, in 2012, oil industry workers will need to be processing 95% of associated gas. In the fall of last year, Deputy Prime Minister Igor Sechin warned oil companies that if they disrupt the implementation of the governmental decree, then “they will suffer economically”. It is Sechin who is the ideologist of the oil and gas sector reform, and it is he who helped the industry recover from the crisis. Now, he demands answers… But, it turns out that the oil companies are not completely at fault. They are unable to afford building their own pipelines (they are already the “milking cow” of the federal budget, not much is left for the development of new deposits), neither can they create a gas processing plant in the Taiga. In the end, the government directed its anger at the one who already has a pipeline – Gazprom.       

“If you don’t start working effectively, then we will be forced to make changes to the existing rules,” Prime Minister Vladimir Putin addressed representatives of the gas monopoly. “You are putting company interests above the interests of the industry, which becomes a hindrance to the economy, do you realize that? You need to react accordingly and put resources into development.” 

Gazprom has the pipeline and will continue owning it; this is prescribed in the law on gas supplies, which was adopted in 1999, says Professor Andrey Konoplyanik, a gas industry expert. But that does not mean that the pipeline is closed to the other companies – theoretically. And in practice, access to the pipeline is blocked by administrative obstacles, which are partially justified (for example, Gazprom may not like the quality of gas), and partially made up.  

The result is a paradox. Gazprom’s production is unlikely to grow at the current rate, say experts, we are already seeing a gas deficit, and with the current provision of gas supplies in the country (60%), it will become even more acute. It’s as if there is no gas. And at the same time, it’s everywhere.   

“Oil companies drill a well in order to find oil, and suddenly come across a gas reservoir,” Georgy Sergienko, executive director of the Russian Fuel Union, illustrated a daily example.  

Where does it go? Some of it is sold to Gazprom for next-to-nothing, with hopes that it will be bought. Some is injected back to “support the formation”, some is directed to a petrochemical plant. But these are negligible amounts. A lion’s share, as you might have guessed, is burned. Incidentally, having torches is a must. If an accident occurs on an oil well, and gas should erupt, it needs to be burned immediately, which requires having “the eternal flame”. This is only 0.3-0.5% of production, says Konoplyanik. So, the demand to process 95% – is technologically justified, even with reserves.     

Oil industry workers are happy that a real culprit for their troubles, as they believe, has been named. They hardly like always being referred to as “extreme”– especially because they are fully behind the implementation of the governmental decree.   

“The government had put pressure on oil companies, forcing them to limit prices,” says Sergienko. “Apparently, they got upset and raised the question of how they can make money. If they cannot sell gas – then they cannot make money.”  

“Putin sent Gazprom a signal that it’s time to start talking to Lukoil, Rosneft, and TNK-BP,” says Aleksey Golubovich, chairman of the Board of Directors of Arbat Capital. “Meanwhile, there are no serious reasons to change the system of access to the pipeline.”

“In order to do that, the law on gas supply will need to be amended,” says Konoplyak, there is no reason to do this, as the administrative obstacles can be lifted without this.  

“The government is receiving complaints from oil companies, and from citizens, who are unhappy with the gas prices,” says a source, familiar with the story behind the prime minister’s speech. “The government decided to show that it has heard the complaints and is ready to react. And then, everything depends on the good judgment of those toward whom the address is made.”  

“Above all else, we could expect an easing of regulations for gas fields located close to the border where foreign operators could, theoretically, be given access to facilitate exports,” says Golubovich.  

However, it would be naive to think that Gazprom won’t respond. If oil companies want to sell gas, let them pay for the construction of new pipelines, says Sergey Pravosudov, director of the National Energy Institute.  

“Independent gas producers believe that if they are paying Gazprom for transportation, then Gazprom needs to transport their gas to where they want,” he summarizes the gist of the problem. “Gazprom is saying that it is ready to transport gas to where there is spare capacity, and if the independent companies want to direct it where there are no spare capacities, then let them pay money to expand the pipeline. Theoretically, the independent companies are not against paying, but the sides cannot agree on the exact amount.” 

Perhaps, this is only the beginning of the scandal. And there is a chance the battle won’t be limited to Gazprom and the oil companies. An attack on Gazprom on behalf of the prime minister could encourage bloggers, who have long held a grudge against the monopoly. A report on how much money Gazprom is spending on pipeline construction has already surfaced in the press – the company pays $7.5 million per kilometer.