Pressure Builds for Liberalization of Russian Gas Exports

19-01-2017 | 09:15

The Russian gas industry is waiting for key regulatory changes that would see further liberalization of the domestic market, after which the right to export gas by pipeline, staterun Gazprom's sacred cow, might also be granted to independent producers. In the first part of an interview with Nefte Compass, Anatoly Golomolzin, deputy head of Russia's Federal Antimonopoly Service (FAS), explains why pipeline gas export liberalization could be part of the evolution of the changing energy world and talks about the domestic market reforms the key precondition for free exports.


Q: Russia is preparing for a reform of the domestic natural gas market. Will it create the groundwork for the liberalization of pipeline gas exports, which is often called for by independent producers?

A: The legislation now stipulates a single export channel, according to which gas is exported by Gazprom Export. Independent gas producers have repeatedly raised the question of pipeline gas export liberalization. Liberalization of pipeline gas exports is a matter of creating equal conditions of work for all producers, which involves both exports and domestic sales. Last year's decision of the presidential commission for the energy complex stipulates generally the need to create such equal conditions. We believe that when conditions on the domestic market will be leveled to a large extent, liberalization of exports will also be on the agenda. The situation [on the market] is changing, partly because of the changes in external factors influencing the gas market. It would be wrong to say that exports are now a significantly more attractive segment than domestic sales. So, it is becoming less urgent [to keep the export monopoly as a privilege]. The current price environment is favorable for the liberalization of the domestic market on the one hand and for creating the groundwork for the liberalization of exports.

Q: So do you think that the pipeline gas export monopoly could be canceled?

A: I believe that a precondition for further discussion of making amendments to the legislation is the creation of equal conditions on the domestic market. Gazprom now must ensure a stable gas supply and deliver gas to the majority of domestic consumers, which causes certain losses amid the more complex economics of working with socalled "social consumers." We need to level the conditions of work on the domestic market, after which we can easily discuss the liberalization of pipeline gas exports.

Q: The logic behind keeping a single export channel, according to the advocates of the idea, is that it helps avoid competition between Russian gas suppliers on foreign markets.

A: Since the times when such logic worked, significant changes have occurred on the world's gas markets. There are less countrywide or regionwide markets. The market has become global. The pipeline gas market is starting to feel the pressure from LNG, LPG, oil and other energy markets. The situation on the energy market is changing, both on global and local markets. There are less and less reasons to say that some activities have some technological peculiarity which justifies application of some special policy. The world is changing and changes are becoming its dominant characteristics. Flexibility the flexibility of development and flexibility of operations should be a response to the changes. This means that in this big changing global energy market all participants should have the ability to change. Areas for liberalization are constantly being expanded. This applies to LPG, LNG, where export possibilities are [also] being expanded. On the oil and oil products markets there are no restrictions regarding exports, which doesn't result in less efficiency.

Q: Apart from export liberalization, the idea of splitting Gazprom into producing and transportation companies has long been discussed. What are the prospects for such a reform?

A: There are several ways to split [a large company], ranging from soft separate accounting to tough separate property. As for Gazprom, it has made significant progress in terms of restructuring. Only slightly more than 50% of the head company is owned by the state, while the remaining part is held by Russian and foreign private investors. There is a division by the areas of operation within the Gazprom group of companies. In each area upstream, gas transportation, distribution, sales and exports Gazprom works via separate legal entities. A more tough division of property is not now crucial for the further development of the market. In the past 15 years, the share of independent producers on the domestic market has grown from nearly zero to 46%, which means that the market is developing rapidly. Conditions are forming for new market players to emerge, which favors the balance of interests between suppliers and buyers. So splitting Gazprom is not something necessary for us to move forward. This issue can be discussed, but it is not crucial for the market liberalization.

Q: What measures does FAS plan in terms of liberalizing the domestic gas market?

A: The prices for gas of independent producers are already unregulated. The next stage of liberalization is to deregulate the wholesale prices of Gazprom. There are conditions for that, because the market share of the independents is constantly growing. The government's ruling on the principles of pricesetting stipulates that in 2018 a shift to deregulated gas tariffs and [simultaneous shift to] regulated gas transportation tariffs can be made. Independent producers pay Gazprom for transportation services, while Gazprom's cost of transportation are included in its wholesale gas prices. In order to deregulate wholesale gas prices, we should ensure that all market participants pay an equal price for gas transportation. Another key issue is the need for market indicators for the price of gas. For this purpose we are developing a gas exchange trade.

Q: Will all these changes the deregulation of wholesale gas prices, introduction of the single tariff for gas transportation and the emergence of a market price indicator happen in 2018?

A: In order to switch to deregulated wholesale gas prices we need to test the new model in pilot regions. We cannot introduce such serious changes across the entire country at once, if they have not been tested in a regime that provides us with a foreseeable result. We have signed agreements on a pilot project with two regions Tyumen region and KhantyMansiysk autonomous districts where the pilot project will be held in 2017.

Q: Does the pilot project require any new legal norms to be issued?

A: We have prepared amendments to the rules of gas supply, where we describe the terms of the pilot project, in the same way as we amended them when making a decision to organize the gas exchange trade. We will need amendments to the rules and procedure of pricing, as well as adjustments to the rules of nondiscriminatory access [to infrastructure] and disclosure standards along with a number of other documents.

Q: Do you expect that by the beginning of 2018, the results of a new model of market regulation will be

seen in these three regions?

A: We can have an understanding [of how the model works] in 2017. Whether there will be results by the beginning of 2018 or in 2018, is arguable. We are interested not merely in the timeline, but in the mechanisms. The task of the pilot project is to test the mechanisms of legal and tariff regulation and the state of commercial activity. We need to understand how regional authorities can take part in these processes as tariff regulators. As part of the monitoring and feedback we will analyze the feedback and see what measures we can take. This work is not easy, it is associated with the development of serious reforms on a large scale.

Q: Experts and market participants claim that the two regions of West Siberia taking part in the pilot project are too different from most other regions of Russia to show any relevant result. West Siberia is the key gas producing center, where all the large producers operate.

A: To choose a region for the pilot project, cooperation with regional authorities is needed. These two regions are peculiar [not only because of what you mentioned but] also because they have forwardthinking authorities and

companies that effectively operate under the oversight of these authorities. We are ready to expand the pilot project into other regions as well. Gazprom, for example, is ready to offer at least 10 new regions. We are ready to consider any offer, discuss it with regional authorities and sign an agreement. We can do this speedily, but web need to understand that the process is organized in a proper way. We cannot suddenly say that we are launching a pilot project in a certain region. We cannot begin to work unprepared. We do suppose that the list of pilot regions will be constantly expanding and by the end of the experiment the number of the regions will significantly increase. This will ensure that further transition to market liberalization will not be abrupt. We will gradually expand the geography.

Q: When do you expect the process of liberalization to be completed?

A: The government ruling says this should be done in 2018. You might know that there were other dates in the past, but the deadline used to be postponed. But now we assume that if there is a government decision, it must be implemented. In order to do so, we need to take some preparatory measures. We are working according to the schedule and will do our best to implement the government decision.

Q: You said the deadline used to be postponed. Why are you confident that the process will now be completed in 2018?

A: The difference is that the work that we are now doing has never been done before. Now we take concrete practical steps. In 2014, we launched gas trading on an independent commodity exchange, the St. Petersburg International Mercantile Exchange, where around 20 billion cubic meters of gas has since been sold. This is a substantial contribution, this is quite serious. There are serious changes related to tariff regulation and to further development of the market. These are quality changes, which are the result of comprehensive practical work.

Q: You mentioned the gas exchange trade as part of the liberalization process. Has exchange trading come closer over the past two years to its key goal of forming a market price indicator?

A: This project for the development of market price indicators, initiated by FAS, is implemented in accordance with the decision by the presidential commission for the energy complex. Work is coordinated by the exchange committee, set up by the regulators within the economic division of the government FAS and the Federal Tax Service together with the financial regulator, the central bank. We regard the results of the exchange trade as positive. We have six gas suppliers, two or three of which take part in trading quite regularly, and about 80 buyers. Gas sold on the exchange is supplied to 41 [out of 85] regions of the country. Over 5,000 companies and endusers can buy gas on the exchange. We now trade some 1.5 Bcm2 Bcm/month. For a price indicator to be representative, we need to reach a liquidity level of over 3 Bcm/month and the trade must work evenly and regularly so that there is enough supply on the market. Now we have an agreement with Gazprom, thanks to which we expect that in 2017 these conditions will be in place.

Q: In the last few months, Gazprom has already been the dominant seller on the exchange, with a share of 97% in November, and at the same time the largest buyer. Some experts believe that one can hardly speak of the development of a market price indicator in such a situation. Do you agree?

A: Gazprom's share changes from month to month. Yes, in the last few months, Gazprom dominated, but there were times when independent producers dominated. In general, Gazprom sells about 60%, while independent producers sell 40%, if we take the accumulated trade volume for the whole period of exchange trading. In terms of buyers, the proportion is quite the opposite independent companies purchase about 60% and Gazprom's regional distribution subsidiaries buy 40%. This means consumers have the possibility of using this instrument, which is obviously good for the market. Even now, when we are only getting close to the liquidity parameters, it is already clear that the results of exchange trading reflect the real value of gas for consumers. In winter, the gas price is higher, and in periods of lower demand the price is lower. The real market environment has already been seen during the whole period of trade starting from 2014.

Q: What measures do you take, apart from agreeing with Gazprom on trade volumes, to reach the liquidity target?

A: We discuss various options on how to ensure liquidity. One option is that there should be direct gas supply contracts and divergences should be traded on the exchange. This is what is called commercial balancing of gas. We also need to lift a number of restrictions imposed earlier. These include the parity rule, under which Gazprom must sell the same amount of gas on the exchange, as independent companies sell jointly 17.5 Bcm/yr. Gazprom is coming close to this level, but is selling more gas than independent producers. That is why each month we explain to all the market participants that Gazprom might in any month sell the volumes that it considers appropriate and the parity rule doesn't impose any additional restrictions on it. We also discuss the feasibility of making the [17.5 Bcm/yr] figure a minimal allowed level instead of the upper limit, or cancel the limit whatsoever.

Q: When do you plan to make these amendments to the rules of exchange trading to meet the liquidity requirements?

A: This is a question of the pilot project. Within the exchange committee we together with market participants discuss how this mechanism could be ensured, what can be done in terms of exchange trade rules, what can be done in terms of agent agreements between market participants, and what could and should be done in terms of rules of gas supply or other legal norms. We are now preparing draft amendments to the legislation. As a result we should have a joint ruling by FAS and the energy ministry on liquidity parameters for the gas exchange trade.

Источник: Energy Intelligence

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