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Pipe at Full Capacity
// Natural gas pipelines are working at full capacity
Almost all natural gas in Russia is pumped from Nadym-Pur-Tazorsky Region of Yakutia. The pipeline system from the gas deposits in 2004 reached the limit of its capacity—522.2 billion cubic meters. By 2007, the pipeline’s capacity will drop to 495 billion cubic meters of natural gas. Can Gazprom overcome the capacity deficit? It will depend on whether the Russian natural gas giant can establish relationships with independent gas producers that would be willing to participate in the United Gas Supply System (UGSS). So far, all the parties are not happy with each other.
The Pipe that is a Quarter Century Long
Russia has the biggest natural gas pipelines in the world. Their length is 222,000 kilometers. The transit pipelines have 153,800 kilometers of length. The oil transit pipelines are much shorter (49,000 kilometers) and the length of the oil byproducts pipelines 19,000 kilometers. In the pipelines and underground storage facilities, there are 247 compressor stations, which have a power output roughly equivalent to the quarter of the total power of United Electric Energy Systems of Russia. There are 3,300 gas distribution stations sending gas to all its clients.
Bodgan Bodzulyak chief of Gazprom’s Transportation, Underground Storage and Usage of Gas Department, said 57.7 percent of UGSS equipment is near the end of its lifecycle. With an average lifespan of pipeline being 25 years, the age of Russian lines can be calculated to be around 24 years. Also, the pipelines aged even more recently because of a drop in repairing and reconstructing existing routes. It is evident that pipelines are not getting any younger and that worries the Ministry of Industrial Energy as well as Gazprom. Moreover, 32,600 kilometers of gas pipelines have been extensively used over 33 years and demand immediate replacement. A third of the equipment already is reaching the end of its usefulness. (See the interview with Rudolf Ter-Sarkisov, general director of Russian Research Institute of Natural Gas).
This critical situation did not appear in one day. Oleg Tolkachev, deputy chairman of Natural Monopolies of Federation Council, notes that from 1990 to 2002 Gazprom financed reconstruction of only one-third of all transit pipelines. As a result, the capacity of lines coming from Nadym-Pur-Tazovsky Region dropped this year to 522.2 billion cubic meters (the projected capacity is 577.8 billion per year.)
If in 1991 the carrying capacity of UGSS was short 24 billion cubic meters of full projected capacity, then in 2001, then 52.4 billion was lost and in 2004 there was another drop of 7.3 billion cubic meters. The total carrying capacity of UGSS is about 600 billion cubic meters. These calculations were published in the Gazprom investment program for 2005.
Betting on Transport
The carrying capacity of USGG needs to be increased in 2007 by 37 billion cubic meters. According to Gazprom calculations, that would be enough to run through the pipes the Russian giant’s own gas as well as products of independent companies. Besides, the two large gas producers such as NOVATEK and Itera have plans to increase volumes of gas extraction in the next three years. According to the Ministry of Industrial Energy, NOVATEK promises to raise production from 22 billion cubic meters to 45 billion (see interview with Alexander Fridman, Deputy Chairman of NOVATEK, on the same page). And Itera announced its intention to pump 11.3 billion and finally reach 20.5 billion cubic meters. The oilers are also pumping out more gas from the depositories. Altogether, in 2004 UGSS received more than 60 billion cubic meters from 35 companies. It’s expected that by year of 2020 Gazprom will be getting not less than 590 billion cubic meters of natural gas per year. An independent gas producers hope to reach 170 billion.
Not surprising, Gazprom managers, with support of Ministry of Industrial Energy, decided this year that they have to develop a transportation system as a first priority. But the head of the Ministry of Economic Development, German Gref, defended the position of drastic increase of the Gazprom’s assets. For instance, from the total volume of investments (188 billion Russian rubles) more 120 billion will be used on the pipelines needs. (Only 40 billion rubles will be spent for geological exploration and drilling). Sergey Pankratov, the head of Gazprom’s Department of Economic Development, said the main effort should be applied to the widening Nadym-Pur-Tazovsky transport corridor.
Before 2020, it is necessary to reconstruct 27,500 km of natural gas pipeline and replace 25 million kilowatt of gas pumping machines. In the same time Gazprom is planning to build 28,000 km of new transit pipelines. (In 2007-2010 – North-European pipeline and 2011- 2020 –Yamal depository to Europe). Also, the company plans to increase the capacity of the underground gas storages to 75 billion cubic meters.
Because of all these factors, the development of natural gas transportation systems in Eastern Siberia and the Far East is becoming a priority. The gas industry will have to build more than 7,000 km of transit of pipelines and install 13 stations of complex gas preparation in main natural gas depositories.
Money from the outside
To build transit pipelines to the year of 2010, it will take tens of billions of dollars. The Russian Energy strategy is estimating an increase of the gas production to 655 billion cubic meters by 2010. But analysts from Troika Dialog estimate a real possibility of production increase, including the independent gas companies up to 720 billion cubic meter. And Central Asian gas will take about 80 billion from this amount. But the carrying capacity of USGG will drop to 580 billion of cubic meters. The deficit of the capacities can be about 200 billion cubic meters, considering maximum gas production volume.
If the pipelines with carrying eapacity of 60 billion cubic meters per year will be built in Russia no earlier than 2011-2013, than before 2010 it will be necessary to construct 5 or 6 new lines. With the average transport length in Russia of 2,200 km and with the cost of building of the straight meter about $2.5-3 million, NOVATEK estimates the investment at $30-40 billion.
Here’s the rightful question –where to get these money needed to build new and modernize existing the UGSS? Foreign projects would be financed by Western companies and banks participating in the project. But it is much more difficult with internal Russian pipe, especially in the main depository regions. Before June 10, the export group of Gazprom has to develop a plan for how to attract independent producers to enlarge the UGSS. “We already have a first experience – we’re giving three to five years for small volumes. An independent producer usually wants to supply gas for 10-15 years, so we try to design the system of long-term success,” said Alexander Ryazanov, deputy chairman of the board of directors of Gazprom.
Independence on a Short Leash
The relationship between Gazprom and the independent producers doesn’t go along too well. “We are freeing transport capacities in 2008 and 2009 and we tell independent producers, ‘Wait.’ But they don’t want to do that. Like for instance, Itera with its Beregovoy (head of the company). Itera invests $200 million and builds 100 kilometers of pipes and a couple compressor stations in Urengoy. We don’t mind. But in seven or eight years we’ll have two empty pipes,” said Ryazanov to Kommersant. At the same time, according to Kommersant sources, Gazprom promised Itera after the end of the pipeline construction to take this 100 kilometers on its balance because lower than usual UGSS transportation tariff. And then the company intends to buy out the pipeline.
Gennady Kolesnikov, executive director of Nortgaz, presents another side of the conflict. “The biggest problem is plugging in new depositories. Russian law does not provide any regulations for that. Gazprom develops are the regulating documents and appears to be a single proprietor of UGSS. Because of that it uses transportation capacity to crush the competition, saying in the meantime no access to the pipe or sale of the gas right on the well. And it cannot be competition in such conditions,” says Kolesnikov.
The representatives of independent producers disagree that all tariffs on pumping gas is established by the financial department of Gazprom. They consider this practice to be very unfair and increasing pressure on independent producers. “Documents that are supposed to be published as from the government in reality are from Gazprom and we cannot agree with the fact that the gas tariffs are regulated by the state because in real life they are established under the pressure of one company,” concludes Koesnikov.
Anatoly Golomolzin, deputy chief of Federal Anti-monopoly Service (FAS) supports the position of the independent gas producers. Currently FAS is creating a working group to research equal access to UGSS. In early April, the FAS intends to give government a project of the regulation that insists on the transparency principles in the pipe access with detailed information in access to UGSS issues.
Lawmaking Mirage
Some problems of the gas transportation can be resolved in the law “About Pipeline Transportaton” that is being readied. This law is supposed to respect different interests of all participants of the natural gas market. However, the adoption of this law is being delayed further and further so a lot of participants of the markets are discouraged.
The first attempt to reinforce in legal documents all the judicial moments of conflict resolutions in the field of transit pipeline transportation is inclusion in the federal law project “About Oil and Gas” of 1994 a separate chapter. This chapter reinforced the right “of any interested physical or judicial entities to participant with its capital in development of statewide system of pipeline transportation.” The state gives right to be majority shareholder to any subject of the pipeline system. The private proprietor had limited rights but in the final version of the documents the private proprietor regulations was completely eliminated. In 1999, the federal law “About Gas Supply” determined lawful rights of proprietor UGSS. In September of the same year, the project of the federal law “About Transit Pipeline Transportation” had a first reading and was sent for further improvements. However, since that time the project did not change much. According to Alexander Ryazanov, Gazprom participates today in finalizing this law project, especially in the part of return of investment to private investors. “It’s either going to be leasing plan with further accounting of transportation tariffs or a two tariff system, including an investment part. Overall Gazprom has a responsibility to support transportation infrastructure so it has to make investments for it. But I think that in the present condition leasing has more advantages,” commented Ryazanov.
Evgenny Zayashnikov, chairman of the subcommittee of Energy Transport and Communication of the State Duma, said that the project of the law has to be presented to the parliament in the first half of this year after a thorough discussion of it in Federation Council. He expressed hope that this law will be adopted in this year and “all the judicial problems of the private investors will be resolved.”
NOVATEK, for instance is ready to invest money to expand Nadym-Pur-Tazovsky transportation hub, but only in the clear condition of return on investment. Large independent producers also are waiting for the law “About Pipeline Transportation” and they hope that it will not become another lawmaking mirage.
| Data of Efficiency of Pipeline Projects of the Gazprom Investment Program |
| Name of the Investment Project |
Clear Discount Income (Millions of Rubles) |
Profitability (percentage) |
Payback time (Years) |
| Blue Flow (Sea Version) |
794 |
12 |
13 |
| SRTO - Torzhok |
32573 |
12 |
12.7 |
| Yamal - Europe on the part of Torzhok (Russia) - Belostok (Poland) |
6085 |
12 |
12.7 |
| Yamal - Europe on part of Belarus border-Polish border |
5021 |
12 |
12.7 |
| Pochinki - Izobilnoye - Severo-Stavropolskoye PGhK |
6813 |
12 |
13 |
| Pestsovoyoe Depository - Yamburg - Centre |
658 |
12 |
12.7 |
| KS “Sokhranovka” - KS ”Oktyabrskaya” |
1508 |
12 |
13 |
“Estimate of the future profits after expenses”
The source – Investment Program project of Gazprom |
by
Natalia Grib
All the Article in Russian as of Mar. 29, 2005
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