August 19, 2011
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№ 6 (June 2011)

Gas Industry in Russia: International Standing, Organizational and Regional Structure

   The gas industry is one of the largest elements of the Russian economy and the global energy supply network. Russia ranks first in the world in natural gas production, reserves and resources, providing over 21 percent of global production levels (Table 1, Fig. 1) and about 25 percent of all international shipments.

By Korzhubaev A.G., Sokolova I.A., Eder L.V.

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   In 2010, gross production of natural and associated gas in Russia increased to 665.5 billion cubic meters, including about 650 billion cubic meters of the effective volume, together with commercial gas, gas for technological needs and for injection and almost 16 billion cubic meters of gas flares.

   In 2010–2011, the global economic recovery resulted in rising global demand for energy carriers, including natural gas. Rising oil prices led to a general increase in the cost of energy resources, including gas. The existing trend of natural gas production and consumption growth outran that of oil continued, with the cost of gas energy unit still being significantly underrated (Fig. 2).

   The demand for natural gas, coal and oil gained extra impetus from the major accident at Fukushima nuclear power plant in Japan in March 2011, which resulted in retirement of this nuclear generating asset and reduction of nuclear energy production. Combined with traditionally large reserve margin in all types of power generation, Japan’s reduction of nuclear energy production forced the country to buy significantly larger volumes of LNG and petroleum products for its thermal power plants.

   On the backdrop of rising energy demand in 2010, natural gas production in the CIS countries has also risen. As a result, CIS share of the global gas supply topped 28 percent. Gas production in Kazakhstan increased from 32 to 37 billion cubic meters, in Azerbaijan – from 14.8 to 16 billion cubic meters, in Ukraine – from 19 to 21 billion cubic meters, in Turkmenistan – from 64.4 to 75.1 billion cubic meters. As a result of deposit depletion, gas production in Uzbekistan continued to decline.

   In 2010, the CIS region produced 861 billion cubic meters of natural gas, a record level in the history of gas industry in the area. In the early 1990s, the USSR was producing over 800 bcm of natural gas. At the time this amounted to over 40 percent of the world production. Out of this, the Russian Federation produced 641-643 billion cubic meters a year (more than 32 percent of global production), including over 580 billion cubic meters in West Siberia.  

   Over the past two decades, there has been a sustained reduction of Russia’s share in global gas production, indicating slower development of the Russian gas industry compared to other gas-producing countries (Fig. 3).

   After the global financial crisis trimmed demand and prices for energy carriers in 2008–2009, Russia’s 2010–2011 growth of gas production was conditioned mainly on the recovery of the domestic market; such market environment was more beneficial for independent producers who are focused on direct sales to the domestic customers.

Regional Structure of Russia’s Gas Production

   Almost 90 percent of Russia’s natural gas production is focused in the West Siberian oil and gas province (Table 2), primarily in the Yamal-Nenets Autonomous District (over 80 percent). The largest gas producing regions of European Russia accounts for some 7 percent of national production. The largest producing regions are Orenburg Region (the Volga-Ural oil and gas province), Astrakhan Region (Caspian OGP) and the Komi Republic (Timano-Pechora OGP). In recent years, the development of Okhotsk province has been started.

The Organizational Structure of Gas Production in Russia.

   In organizational terms, the gas production in Russia involves four major groups of producers (Fig. 4):
Companies of the Gazprom Group is the world’s largest gas concern, owner of Russia’s unified gas supply system (UGSS) and the monopoly gas exporter;
Independent gas producers (NOVATEK, Sibneftegaz, etc.);
Vertically integrated and independent oil companies (Rosneft, Lukoil, Surgutneftegaz, TNK-BP, etc.)

PSA operators.

   Gazprom, the largest gas producer in Russia and worldwide, produced 513.9 billion cubic meters in 2010 (Fig. 5). Out of oil companies, the largest “gas producers” are LUKOIL, Rosneft, Surgutneftegaz, and TNK-BP. Key independent gas producers are NOVATEK and Sibneftegaz. Over the past 10 years, the share of the Gazprom Group in Russia’s gas production in Russia fell from 91.5 to 77.2 percent (Fig. 6), which is due to implementation of gas-producing projects by independent gas producers and oil companies, the increase in associated gas production on the background of oil production growth, gas production growth in PSA projects, and the declining position on international gas markets.

   For the better development of the gas industry, the following is required:  a proactive investment policy for major regional projects; modernization of facilities; infrastructure development; formation of procedures for non-discriminatory access of all gas producers to the UGSS; liberalization of export strategy.

   As the LNG market develops, it will increasingly resemble the oil market, while the price of the gas energy unit, which in recent years lingered at 40-60 percent of the oil energy unit, will be closing in on the price of petroleum products.

   Russia, with its largest in the world gas resources and reserves, is interested in coordinating marketing policies with major producers and consumers of natural gas.

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