Russ Oil-Gas

04-15-2006 Analytical department of RIA RosBusinessConsulting - RAO Unified Energy Systems of Russia and Gazprom are said to be close to signing an agreement that would define the amount of gas supplies to RAO UES's power plants. Over the past few years UES has been seeking a long-term agreement on gas, but Gazprom was against. Now, UES's dream could come true as its CEO Anatoly Chubais found support with President Vladimir Putin, who instructed the government to develop measures ensuring long term uninterrupted gas supplies for the electricity network.
The agreement for gas supplies to RAO UES's power plants until 2010 at prices regulated by the Federal Tariff Service sets fuel consumption at levels reported in 2002-2005, or about 102 billion cubic meters, a source in UES told RBC Daily. UES also demands that Gazprom ensure gas supplies from independent suppliers based on contracts between them and UES. In other words, UES insists that the new agreement set timeframes within Gazprom must issue permits to independent producers allowing them access to the pipeline network. The time limits shall be determined before December 1 of the preceding year. UES's position is justified. Recent problems with energy supplies showed power generators' dependence on the gas monopoly. When Gazprom reduced gas supplies for UES's power plants, several independent suppliers agreed to fill the gap. But the gas giant did not hurry to issue permits to them, and it only issued them in late February, when there was no need for them, the source said. Meanwhile, many of UES's power plants had to burn their reserve fuel oil and to buy it later from producers at speculative prices. As a result, fuel costs were RUR 2.5 billion more than planned. The agreement between Gazprom and UES also provides for contracts between UES, Gazprom and its sales division, Mezhregiongaz, on ensuring the needed gas supplies for new gas pipeline facilities put into service in accordance with decisions on their construction made by the federal authorities. These facilities are the Kaliningrad Thermal Power Plant-2, the North-West Thermal Power Plant and the second unit of the Combined Cycle Plant-324 at the reconstructed Ivanovo Hydroelectric Power Plant, Thermal Power Plant-5 of the St. Petersburg electricity company Lenenergo, and four units at several thermal power plants of the Moscow electricity supplier Mosenergo. Gazprom and UES are expected to develop regulations on coordinating their medium-term investment programs. The agreement drafted by UES also implies cooperation in preparing measures to optimize fuel and energy supplies to the regions of Russia, with the goal of reducing the use of gas by electricity generators. Over the past few years, UES has tried to sign such an agreement with Gazprom. "This is very important for us because the industry reform will end in two years, and our subsidiaries could remain face-to-face with the gas monopoly, which would dictate its prices and volumes of supplies to them," the source in UES told RBC Daily. Gazprom has not commented on the issue. This time, UES found support with Russian President Vladimir Putin. After meeting UES CEO Anatoly Chubais, the head-of-state told Prime Minister Mikhail Fradkov to develop, together with UES and Gazprom, a system of measures ensuring "long-term uninterrupted gas supplies for the needs of the electricity industry" by April 1, 2006. Fradkov gave necessary instructions to the Industry and Energy Ministry, the Finance Ministry, the Economy Ministry and the Federal Tariff Service. UES plans to send a draft agreement to Gazprom before the end of this month. Gazprom's reluctance to sign the agreement does not surprise analysts. "This is a very serious problem regarding the increasing imbalance between production, domestic consumption and exports. With current production levels, Russia cannot both boost exports and meet domestic needs for gas," said Natalya Porokhova, head of the Electricity Department at the Institute for Natural Monopoly Problems. If consumption growth remains the same and production drops, Russia could be short of 120 billion cubic meters of gas in 2010. The main consumer of natural gas in Russia is the electricity industry, with its growing power generation sector. "With things as they are, we will have to restrict either exports or domestic consumption," Porokhova warned. As Russia's largest consumer of natural gas, UES is interested in fixed terms of gas supplies. Stanislav Kleshchev, analyst at Financial Bridge, says this would create more certainty for UES in terms of volume and price of supplies. "Gas prices are rising twice as fast as electricity prices. With this agreement, it will be much easier for UES managers to get a permit for tariff increases," he said.