Russia's Gas Crunch Looming Shortfall Poses a Tough Choice
By Nadejda M. Victor Thursday, April 6, 2006; Page A29
Three months ago the Russian energy giant Gazprom forced Ukraine to pay sharply higher prices for natural gas. At the time, the story was portrayed as a political struggle for control in Kiev. But last week Gazprom announced it was tripling gas prices in Belarus, a country that is politically close to the Kremlin. Moldova has been forced to accept a doubling of prices over the next three to four years, and the other former Soviet republics are already paying market prices for Russian gas.
The truth is that these price increases are not political. Rather, they reflect worrisome economic and geological facts about Russian gas fields. The Kremlin is not simply trying to use Gazprom to reassert authority in Belarus, Ukraine or anywhere else. There are in fact deep problems with Gazprom -- problems created by its inefficient management and a looming decline in gas production.
Russia controls over a quarter of the world's gas reserves -- more than any other country. Most of the known Russian reserves (about 80 percent) are in west Siberia and concentrated in a handful of giant and super-giant gas fields. Since the early 1970s the rate of discovery for these new fields has been declining. Moreover, output from the country's mainstay super-giant fields is also steadily falling.
Huge investments are needed to replace this dwindling supply, and all the options for new production will prove costly and difficult. New fields in the far north and east of the country are distant from most of Russia's people and export markets, requiring wholly new transport systems such as pipelines. Moreover, most of these fields are found in extremely harsh environments where it is technically and financially difficult to operate.
Gazprom controls neither the capital nor the technology that will be needed. The state-controlled company is already deeply in debt and burdened by many expensive obligations, such as supplying Russia's population and friends with cheap gas. The company has to work with foreign partners.
So far Gazprom has been able to forestall crisis. Economic stagnation across the former Soviet Union and Eastern Europe since 1990 dampened gas demand. Russia, which had a surplus at the time, sharply increased its gas exports and made contractual commitments that will remain in force for many years.
But following the long stagnation, Russia's internal gas consumption is rising again as the economy expands. And new Russian policies to promote development of the country's eastern regions will, in the next few years, require large new commitments to supply gas to that region (along with spending on railroads, airports and other infrastructure).
Even when the Russian economy was in the doldrums the country was notable as a large gas consumer because of its extremely inefficient energy system. Today Russia is the world's second-largest gas user, after the United States, although its economy is only one-twentieth the size of the U.S. economy.
Electricity in Russia is produced for the most part by gas, but the country's gas-fired electric generators work at 33 percent efficiency on average, compared with 50 to 55 percent in Europe. More than 90 percent of residential and industrial gas consumers don't have meters. Gas is even cheaper than coal -- Russia is the only large country where that is true -- so incentives to switch to an abundant fuel are weak.
In recent years Russia has boosted gas supplies by squeezing Turkmenistan to sell gas to Russia at a deep discount. But Turkmen gas production is poised to decline, and Turkmenistan's gas industry is barely functional because the country's political environment is scary for long-term investors. Other Central Asian suppliers, notably Kazakhstan, are unlikely to be able to bridge the gap.