Gas Tariffs: Independents on the Offensive

By Svetlana Kristalinskaya, February 10, 2014

A drop in domestic gas consumption and difficulties with filling state coffers have led to a new round of battle in Russia’s gas market between Gazprom and independent producers. Experts say the market is ripe for restructuring and reform that could ultimately result in splitting up Gazprom.

In the summer, when liberalization of LNG export became imminent, Gazprom CEO Alexei Miller, commenting on the implications for the monopolist, noted: “In fact, gas export monopoly is no preference (...) since part of our revenue from gas sales abroad is used to support the domestic market.”

Russia’s local gas prices are considered to be low. That is why in 2006 the government began to introduce a series of steps aimed at developing the domestic gas market. In particular, the Cabinet had promised that by 2011 it would establish equal netback pricing with European market tariffs (minus transportation costs and export duties). Subsequently, the move was postponed until 2014–2015, and now there’s talk about further delay until at least 2017–2018.

Meanwhile, Russia’s Federal Tariff Service (FST) has been using indicative parameters to calculate netback parity. According to those, domestically traded gas is twice as cheap as the gas traded in Europe and even slightly cheaper than the gas traded at Henry Hub in the United States.

Understanding the complexity of the gas sector, the Russian government back in 2006 decided to keep the subsoil use tax rate (NDPI) intact for gas producers. However, difficulties with providing budget revenues nudged the Finance Ministry to take a closer look at the gas industry. Since 2011, NDPI has risen from 147 rubles to 237 rubles per 1,000 cubic meters of gas, and last year Gazprom had to pay 509 rubles per 1,000 cubic meters. Meanwhile, the government took notice of the independent producers’ argument that they lack high-yield exports while domestic netbacks are still below parity with foreign sales, and eased their tax burden, setting the subsoil tax for independents in 2012 at a mere 251 rubles per 1,000 cubic meters.

This year, NDPI rose and in 2014 the government will introduce a formula-based subsoil tax with the actual rate depending on production conditions, domestic and foreign gas market prices and transportation costs. According to Finance Ministry experts, higher gas prices in the foreign market would mean a higher NDPI rate for Gazprom. Higher gas transportation tariffs also mean higher expenses for the gas giant – in that case the subsoil tax rate for independent producers would go down and Gazprom would have to fork out the difference. 

Pursuing Profitability

Тhe price of gas in Russia has been increasing steadily, aiming for netback parity in accordance with the government’s promises. In 2006-2012, the gas price for industrial consumers had been averaging a 17-percent rise annually, while the gas transportation tariff for independent producers kept going up by 16 percent per annum.

We need to note here that for Gazprom gas price is regulated while independent producers can sell their volumes at market prices. Before the crisis