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Tuesday, May 23, 2006

Gazprom Could Be Short of Gas by 2010

May 23, 2006 - By Catherine Belton - Gazprom might be unable to meet its supply commitments by the end of the decade because of a lack of investment, the head of the International Energy Agency and a former Russian deputy energy minister said Monday.
"We are afraid that Gazprom will not have, in the coming years, enough gas to supply even their existing customers and existing contracts. This is our data," IEA executive director Claude Mandil told an energy summit in London, Reuters reported late Monday. "Gazprom is not investing enough."
His comments came amid a growing storm over energy security in Europe, which receives one-quarter of its gas from the state-controlled energy giant. Industry and Energy Minister Viktor Khristenko had called for calm in a letter to senior EU officials on the eve of a EU-Russia summit. He said there was "no reason to doubt" Russia's commitment to maintaining energy supplies.
But independent observers have started to sound alarm bells over Gazprom's ability to keep up with growing demand amid a lack of investment in new projects as production plummets at existing fields.
At a round table on energy security in Moscow on Monday hosted by former Prime Minister Mikhail Kasyanov, former deputy energy minister Vladimir Milov said inefficiency at Gazprom meant Russia could be short of about 100 billion cubic meters of gas by 2010.
Major new projects such as the vast Shtokman field in the Arctic have been repeatedly delayed, and Gazprom's policy of locking in extra supplies from Central Asia is not going to be sufficient to make up for the shortfall, Milov said. "We have nothing to cover the gap," he said on the sidelines of the round table Monday.
Europe "expects that one-third of its gas needs will be supplied by Russia. ... But there might not be enough to cover it," Kasyanov said during the round-table discussion.
Other experts contacted Monday said the main factor driving EU concerns over Russian energy policy this year was the sudden realization that production at Gazprom might not be able to meet growing demand.
Shortfalls in supplies to Europe caused by an extreme cold snap in Russia in January and February had sparked even more concern than the first shock of Russia's halting of supplies to Ukraine over the New Year, analysts said. "Complacency on European markets that they can get as much gas from Russia as they want has been blown out of the water," said Chris Weafer, chief strategist at Alfa Bank. "The main concern is that Russia is moving at too slow a pace in developing new fields."
"Unless the pace picks up, then Europe's need for gas and Russia's ability to supply it will be out of sync for several years," he said by telephone.
The IEA's Mandil told Reuters that his organization was urging the Group of Eight nations to push for a Russian energy regulator to be created ahead of the G8 summit in St. Petersburg to fend off a supply crunch. Gazprom was deterring others from investing by not paying a fair price to other producers in Russia and Central Asia, Mandil said, Reuters reported.
IEA gas supply expert Daniel Simmons said by telephone late Monday that concern was growing over "a lack of clarity" with regard to Gazprom's investment policy.
"We would like Gazprom to come forward and explain how they are going to fill the shortfall. We do not doubt their intent. They have been a reliable supplier for decades. We don't doubt their reserves. ... The only question is on investments."
Gazprom spokesman Sergei Kupriyanov said late Monday that there would be no supply crunch. "There is no such problem," he said in response to the IEA concerns.
"Extraction of gas has been growing over the last 10 years," he said, adding that production over the last five years alone had grown by 37 billion cubic meters per year, as much gas as Russia supplies to Germany. He said the Yuzhno-Russkoye field would come on line in 2010.
Energy issues are expected to be high on the agenda when President Vladimir Putin hosts European Commission president Jose Manuel Barroso at his Bocharov Ruchei residence in Sochi on Thursday as part of preparations for the G8 summit in July. Russia has made energy security the central theme of its presidency of the G8 this year.
But instead of being lauded as the world's biggest energy supplier at a time of growing demand, it is facing a barrage of criticism over its energy tactics as the state regains control of the sector and production slows.
Khristenko sent a letter to EU officials that called for calm in the energy debate. "In our view, these questions are acquiring an overly politicized tone that is misleading public opinion in European countries," Reuters quoted the letter as saying Monday. "Bearing this in mind, it would be sensible to take some joint steps that would bring calm to the energy debate as a whole, making it more objective."
A spokeswoman for Khristenko declined to provide a copy of the letter Monday, but confirmed that the contents cited by Reuters were accurate.
Khristenko's letter came in response to a letter sent earlier in May by EU Energy Commissioner Andris Piebalgs that called on Russia to break up Gazprom's monopoly on gas exports. The EU has also urged Russia to ratify the Energy Charter, which would allow third-party access to export routes, but Russian officials have ruled this out.
Milov said Monday that busting Gazprom's monopoly would be the only way to avoid the looming supply crunch. Opening the way for independent gas producers to take a role in the market would "make the problem disappear by itself," he told the round table conference.
More than a decade of mismanagement at Gazprom has slowed down the exploration of major new fields in order to replace declining assets. Even though the gas giant brought the vast Arctic Zapolyarnoye field on line in 2001, production from that field has barely compensated for plummeting production at other fields, Milov said. Other new projects designed to boost supply, such as the Siberian Yuzhno-Russkoye field, the Shtokman field and the vast fields in the Yamal peninsula, will not get off the ground until after 2010.
In the meantime, Milov said, Gazprom is spending more on paying off debts and making new acquisitions, such as its $13 billion purchase of oil major Sibneft last year, than on improving production.
Stephen O'Sullivan, co-head of research at Deutsche UFG, said independent producers such as Novatek and LUKoil could help fill the looming shortfall by taking a more active role on the domestic market, even if Gazprom did not allow them access to the export market. "The supply crunch is only coming if Gazprom wants to do everything," he said. "I think we are going to see Gazprom increasingly stepping back from the domestic market."
Milov said Monday that even though production from the independents had already done much to make up for falling production at Gazprom, the gas giant's takeover of one of the biggest independent producers, Northgaz, had slowed down the trend.
Weafer said the EU was pressing for Russia to clarify the rules of the game on foreign investments in the energy sector. A new law setting out what access foreign investors will have to strategic fields has been delayed for more than a year, he said.
If Gazprom does not act soon, then a shortfall over a brief period around 2010 could extend into a wider crisis, he said. "The EU's concern is that it might not be a transition period, it might be a void," he said.

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