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Thursday, February 15, 2007

A new Russian energy monopoly: for better or for worse?

02–15–2007 – MOSCOW. (RIA Novosti economic commentator Vasily Zubkov) - What should we make of the recently announced decision by Gazprom and Siberian Coal Energy Company (SUEK) to set up a new power generation champion? The authorities have both endorsed the transaction and hurried to forecast a bright outlook for it on the Russian energy market. The reaction of the business community, however, was more equivocal. On the one hand, this seems to be a logical final stage in the consolidation of the industry. On the other hand, a new super giant, especially one supported by the government, could put an end to all hopes for the emergence of a competitive environment in the sector, and monopolizing it instead. Gazprom and SUEK, which are both large investors in domestic power generation, have announced plans to merge their generating assets in a joint venture in which the gas giant will have 50% plus 1 share and the coal giant 50% minus 1 share. The transaction is expected to be completed before July. The value of the new company is estimated at $11 billion. This merger will allow Gazprom to save on gas supply to thermal power plants by using its "own" coal instead, making it possible to increase or at least sustain exports. It is no secret that the current Russian gas output can hardly meet growing domestic demand and honor export commitments. The new coal business and power generation will be especially profitable for Gazprom in the next few years, while domestic gas prices - still regulated by the government - stay far below those of exports. The Industry and Energy Ministry estimates Russia's gas shortage this year (given international commitments) at 4.2 billion cu m. By 2010 it could reach 27.7 billion cu m and by 2015 - 46.6 billion cu m. Meanwhile, Russia has the world's second largest coal reserves and produces almost 300 million metric tons annually, with a possibility to boost production to 400 million metric tons by 2010 (it produced 426 million metric tons annually in the late 1980s). Given all that, the "coal instead of gas" strategy is a logical move intended to reduce power-generation tensions during the "gas break." First Deputy Prime Minister Dmitry Medvedev confirmed as much, saying "The new company will allow us to balance the use of coal and gas in power generation." Yet many are concerned about the government's overly enthusiastic endorsement of the new giant and, at times, its direct management. After all, it is all about the emergence of a new large monopoly with advantages that render all talk of fair competition irrelevant. What is domestic power generators' attitude to the initiative? RAO UES is also striving for diversification. The holding confirms that at present, coal accounts for 25.9% of its energy and gas for 70.6%. By 2010, the ratio is set to change drastically: 65.6% from coal and 31.1% from gas. It turns out that electricity produced from coal is cheaper, although coal power plants are more expensive to build. The company's CEO, Anatoly Chubais, has repeatedly confirmed the strategy of moving toward the use of coal. In the last six years, RAO UES has put into operation only one coal unit, at the Khoronor power plant, with a capacity of 215 MW. However, in the next five years it intends to put into operation 2,000 MW worth of coal generation units and another 20,000 MW in 2011-2015. Obviously, the government, Gazprom and RAO UES agree on the best way out of the current difficulties: diversification. Why then did Chubais describe the planned merger as a "big mistake" on the part of the government? That is a harsh assessment, even if a preliminary one. Perhaps, he does not like how Gazprom is managed and developed. That is natural: a liberal and market reformer cannot like the authorities' growing protection of the gas giant, its management, lack of transparency, aggressiveness, lack of competition and many other things. At the same time, RAO UES's fears could be assuaged by the possibility that its multibillion-dollar investment burden to develop Russian power generation could become significantly lighter as the new company emerges. It does not just have rich "parents," but also serious ambitions, planning to become a global major. That's an expensive, but worthy, goal. The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.

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