Russian Minister Revises Domestic Gas Tariff Increases Citing Slow Economic Growth

By Ben Priddy, May 3, 2013

WEB EXCLUSIVE, Moscow. Russia's Minister of Economic Development, Andrey Belousov, stated April 29 that the government could limit it's annual gas price increases for industrial customers starting in 2014. In a report released mid-April, the Ministry of Economic Development had proposed increasing domestic gas tariffs for all end-users by an average of 15 percent annually through 2016. Yet, in light of slower than expected first quarter economic growth, Belousov Monday proposed a downward revision in annual tariff hikes to 5 percent for industrial customers starting in 2014. "Today it is very important to break the trend of [economic] growth slowdown," Dow Jones quotes Belousov. "It is very important to send a positive signal to business [to show] that we are really working on supporting economic growth," Belousov said.

The ministry predicted in it's April report that average wholesale prices for gas sold to industrial consumers in Russia, excluding taxes, could reach $136-137 per thousand cubic meters by 2015, near the same price level as in the U.S. By 2016, average gas prices for industrial end-users could reach, according to estimates, $148-150 per thousand cubic meters, which is approximately 87 percent of the netback cost of Russian gas sold in Europe (currently $170 per thousand cubic meters).

Annual gas price increases for household consumers will remain at 15 percent. By the end of 2016, the ministry hopes that domestic gas prices will be "on a trajectory towards the price dynamics of gas sold in international markets." Yet, at the same time as gas prices rise at home, Gazprom will have to decrease it's export price by 2016.

The ministry predicts that export prices for Russian gas in "far abroad" markets will decline from an average of $399.9 per thousand cubic meters in 2012 to $329 per thousand cubic meters in 2016 in light of increased competition in global gas markets. According to the ministry's estimates, Gazprom's export prices are expected to rise until 2014 (to $411 per thousand cubic meters), after which the cost of producing unconventional gas in the United States and elsewhere is expected to decline and production volumes increase, leading to lower global gas prices (to $381 per thousand cubic meters in 2016) as new volumes of LNG enter global markets.

As a result, the ministry expects that by 2016 Gazprom export contracts will be subject to discounts, reflecting the influence of gas sold in international markets and trading hubs, including in the United States, and the effects of the government initiative to raise gas prices on Russia's domestic market.

Monday's proposal to decrease annual gas price hikes for industrial customers could have come at the request of Russia's central bank, which is trying to maintain the domestic inflation rate at 5-6 percent. The bank has blamed yearly gas price hikes for higher inflation rates, according to Dow Jones. Last month, the consumer inflation rate in Russia was measured at 7 percent, Dow Jones reports.

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