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Last Updated: Tuesday, 27 March 2007, 22:57 GMT 23:57 UK
Investing in Russia's gas future
By Emma Simpson
BBC News, Yugorsk, Russia

In a small control room in a compressor station in Siberia, workers are staring at a mass of meters and computer screens, watching the flow of Russian gas from pipelines beneath the ground.

Plans for a Gazprom building in St Petersburg
Gazprom's investments include ambitious property assets

They are waiting for a call from Gazprom in Moscow to tell them how much gas is needed today. With the flick of a switch, they can control the flow to customers as far away as Europe.

Oleg Vasi, deputy head of Tyumentransgaz, the Gazprom subsidiary in charge, says demand is getting stronger.

"Some 20 years ago we had only seven pipelines in Yugorsk," he says. "Today there are seventeen. We're now transporting a billion and a half cubic metres every day. This is a lot. The demand has multiplied."


They have been pumping gas here for more than 40 years. But as demand soars, Gazprom is struggling to produce enough. Its three biggest fields, some way north of here, are in steep decline. Gas production is virtually flat.

"We are already short of about 10-15 billion cubic metres (bcm) of gas annually," says Vladmiir Milov, former deputy Russian energy minister and Gazprom critic.

The question is: can Gazprom deliver?
Marc Franco
EU ambassador to Moscow

"And with the decline of matured fields and increased demand it means that in a couple of years this will tremendously grow to about 40-50bcm a year. No one really knows the figure."

Gazprom's biggest customer, Russian electricity supplier UES, is already feeling the impact. Last winter was exceptionally cold, but its power stations did not have enough gas to satisfy demand, resulting in power cuts.

Foreign investors have built a new $500m power station in St Petersburg - but there's no spare gas to fire it.


So why is it that Russia, a country that portrays itself as an energy superpower, is facing gas shortages?

Mr Milov says the problem is a lack of investment.

"The fact that the big fields are in decline is expected, it's a natural geographic fact," he says. "We have large reserves in remote underdeveloped fields way up north in the Yamal Peninsula. But the problem is that during the 1990s and in recent years, even now, these reserves are underdeveloped and not enough money is being spent.

"If only these Yamal fields were developed on schedule we could already have had Yamal gas on the mainland."

Media investment

The potential shortfall is sparking concern in Europe, which relies on Gazprom for a quarter of its gas supplies amid growing demand.

"The question," says Marc Franco, the European Union's ambassador to Moscow, "is: can Gazprom deliver?

"If you look at Gazprom's own production estimates, the forecasts in the near future - the next four to five years - are not very promising.

Gas pipeline in Italy
Europe's hunger for Gazprom's gas is growing fast

"It is clear from the figures that the short-term kind of company strategy is perhaps maximising short-term profits of Gazprom, but it's certainly not contributing optimally to the development of the Russian economy."

Gazprom has been spending millions on a host of other assets, including the assembling of a Russian media empire.

These, insists Gazprom head of exports Alexander Medvedev, are "a heritage of the past".

If that is the case, however, why does Gazprom keep buying more?

"We are doing it in order that the project will be feasible," says Mr Medvedev. "What we are acquiring could bring additional value to our assets. And I believe that if you look at the quality of the assets they are good."

Capped prices

Within Russia, gas is very, very cheap, thanks to price controls imposed by the Russian government.

And that is the crux of Gazprom's problems.

It barely breaks even on domestic gas sales. It makes most of its profits by selling gas abroad.

Jonathan Stern from the Oxford Institute of Energy Studies says it simply has not made commercial sense for Gazprom to develop new fields.

"During the 1990s, the price of gas in Russia were far too low to make large-scale investments in new fields profitable," he argues. "Indeed, prices are still too low today.

All these wrong estimates that Gazprom is under-investing are groundless
Alexander Medvedev

"These new fields require investments of $25-50bn. Now you don't make those kind of investments unless you've got a pretty good expectation that you're going to get your money back."

Now, though, the Kremlin has decided to raise domestic gas prices substantially over the next few years - and Gazprom, in turn, says it is committed to making big investments in Yamal.

"We have a full-scale production plan and development plan," says Mr Medvedev.

"I am rather sure that we will be in full compliance with this schedule and that we'll see the first gas from the Yamal in 2011. That's why all these wrong estimates that Gazprom is under-investing... they are groundless."

He was not, however, prepared to put a number to the scale of the investment.

"The investment programme has not been fully approved by the Russian Government," he said. "That's why I don't want to mention the precise figure - but we have presented for approval the sufficient amount."

Crown jewels

Increasingly, though, it seems that Europe is not so sure.

Judging by the scale of Gazprom's empire, there is no doubt that Gazprom really is a global energy giant, operating in some of the most inhospitable territory in the world.

But it faces enormous challenges in developing Russia's vast fields of the future - the so-called "crown jewels".

And Gazprom's decisions about how it uses its resources in remote corners of Russia like Yugorsk will be crucial for millions of consumers living a very, very long way from here.

Gazprom's European dilemma
26 Mar 07 |  Business

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