ANALYSIS: The battle for Russia's gas pipelines (06/25/06)

ANALYSIS

The battle for Russia's gas pipelines

by Roman Kupchinsky
RFE/RL Newsline

Access to Russia's "unified gas-transportation system," the vast network of pipelines and compressor stations spanning 149,900 kilometers throughout the entire country, has become a crucial element in the worsening relations between the European Union and Russia. As such, it might be raised during the July summit of the Group of Eight (G-8) in St. Petersburg.

Under Russian law, only state gas monopolist Gazprom is allowed to use this pipeline system - widely considered one of Russia's most-valued possessions outside of its mineral resources - to export gas beyond the borders of the CIS. This, the EU says, prevents competition and allows Gazprom to charge high prices for its gas. If independent producers were allowed access to the pipeline, consumers would have a choice from whom to buy their supplies. Such an arrangement, the EU says, would lead to a lowering of prices.

But Gazprom argues that it is the market, not the company, that dictates the price of gas. It says that gas prices are high because they are linked to oil prices and that rising demand is outstripping supplies in the gas business.

Gazprom also points to the fact that, despite the liberalization of the European gas market in 1998, no new producers of gas, excluding Russian oil companies, have appeared on the European market and this has also contributed to high prices.

Russian oil producers are not happy either. They also produce large quantities of natural gas and have long demanded that they be given access to the pipeline to transport the gas they produce to foreign markets. But Gazprom has denied this request, preferring to buy their gas, transport it themselves and sell it abroad at a substantial profit. For example, the Russian oil company LUKoil is forced to sell 1,000 cubic meters of gas to Gazprom for $22.50. Gazprom then resells this gas in the West for approximately $230.

This has vexed many in the Russian oil industry. The Oil Of Russia quarterly in its second issue this year interviewed Yury Storozhev, the head of LUKoil's department for the coordination of gas-energy operations. "We are certain that access must be equal, as it is in the oil industry," Mr. Storozhev said. "After all, virtually all companies, both big ones and over 100 independent operators, are able to transport their crude oil by [state-owned oil pipeline company] Transneft's pipeline. The same system should apply in relation to the unified gas-transportation system."

The issue is likely to become more pressing as Russian oil companies' gas production rises.

Russian oil companies are beginning to replace independent gas companies, which were pushed out of the market by Gazprom in the early 2000s, as future competitors. Mr. Storozhev said that LUKoil plans to increase its gas production to 33 percent of its overall production in 10 years, and by 2014 gas production is expected to exceed 50 billion cubic meters (bcm) a year. In 2005 LUKoil produced 7.6 bcm of gas.

There is a political dimension that might go some way in explaining why the Russian government has been so adamant in maintaining a hard line on the pipeline debate. The Russian daily Kommersant reported on March 3 that influential people close to President Vladimir Putin are lobbying for the creation of a single, state-owned pipeline company, which would include both oil and gas pipelines and which would be under their control.

Analysts have suggested that the immediate goal could be the merger of Transneft with Transnefteprodukt, the state-owned oil-products pipeline company, and SG-Trans, the state-owned liquid-natural-gas transport company, along with the Russian government's 24 percent stake in the Caspian Pipeline Consortium, a private pipeline that transports oil from Kazakhstan to the Black Sea. The result would be a single state-owned pipeline company.

Regardless of pressure from the EU or the Russian oil industry, Russian Duma Deputies Valery Yazev and Yury Lipatov submitted a bill on June 7 to strengthen Gazprom's monopoly on exporting natural gas.

Signs are that the Kremlin will support the bill. President Putin said on June 13 that Gazprom will not give up its monopoly on gas transport. Speaking at an international economic forum in St. Petersburg, Mr. Putin said Russia does not foresee any change in this area in the near future.

Roman Kupchinsky is the organized crime and terrorism analyst for RFE/RL.

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