Export interests above all?

MOSCOW, (Igor Tomberg for RIA Novosti) - The Kremlin administration is devising a new fuel strategy for Russian energy generation. The main concept is to convert generating facilities to coal and fuel oil to save natural gas, which is running out.

Currently, natural gas accounts for more than 50% in the national energy balance, but the country needs about 30% more.

The administration is spotlighting this critical problem. On September 18, chief of the Kremlin staff Sergei Sobyanin held a conference on the fuel balance in Russian energy generation in the immediate future. It was the first in a series of consultations planned for the next several months. President Vladimir Putin is expected to sum up their work at the October conference on a fuel strategy for the national energy generating industry until 2015.

In a nutshell, electricity producers lack natural gas.

In 2006, Russian gas monopoly Gazprom supplied 100.5 billion cubic meters of gas to electricity producers, 11 billion less year-on-year. Electricity holding RAO UES of Russia, which spent 90 billion from January to August, claims that it lacks gas and has to use fuel oil (its fuel oil spending exceeded the plan by 34% in 2005) and coal (it has increased coal consumption by 8.4%).

Electricity producers claim that inflation will accelerate if they convert to more expensive fuels. UES says it must have enough gas, or else the electricity rates for consumers will grow.

Electricity producers currently buy gas at $45-$55 per 1,000 cubic meters. If they convert to fuel oil, they will have to pay an equivalent of $185, according to RAO UES CEO Anatoly Chubais. Raising electricity rates to make up for the shortage of natural gas will definitely be discussed at one of the conference. In short, we can expect higher electricity rates in Russia.

But this will not solve the problem of gas shortages, because Gazprom is not in a hurry to increase deliveries to electricity producers even at commercial prices. Its stand is logical: if gas can be replaced with coal and fuel oil, why increase gas supply to electricity producers when the monopoly has export commitments?

If the current growth rates of internal gas consumption persist, it can reach 630 billion cubic meters by 2020, increasing gas shortage on the domestic market to about 200 billion cubic meters. Gazprom has contracts until 2020 for the export of 2.2 trillion cubic meters for more than $250 billion. By 2008, it is to deliver about 180 billion cubic meters of natural gas to Europe annually. It also has agreements on the delivery of 70-80 billion cubic meters of gas to China from 2010, and is negotiating deliveries to South Korea, Japan and the United States.

The Russian leadership supports Gazprom's export expansion. Given the current prices, growing exports are becoming a crucial revenue item and ensure low domestic prices. It is better to sell gas at $250 per 1,000 cubic meters than burn it in Russia at $40.

The financial benefits are complemented with geopolitical advantages: the advance of Gazprom to the European markets and to Asia and the U.S. gives Russia additional levers of influence.

Unfortunately, Gazprom's expansion to new markets is not accompanied by an increase in domestic resources. So far, a balance is being maintained owing to the acquisition of Central Asian gas, but the growing consumption in Russia and gas demand in Europe, as well as the aspiration of Central Asian countries to establish their own export routes may create problems.

According to the Institute of Natural Monopolies, the shortage of gas is primarily due to the declining resource base. Exploration has fallen more than fourfold and the commissioning of new wells fivefold in the past 10 years.

There are solutions that could alleviate the dangers of the shortage of gas, if not remove them altogether. For example, Gapzrom's spending on the acquisition of assets (not all of them core ones) could be channelled into gas exploration, production and transportation. Alternatively, independent gas producers and oil companies could supply generating companies.

UES's complaints about falling profitability sound surprising. Did electricity producers think that gas will always cost $40-$50 per 1,000 cubic meters?

The problem has not been addressed for decades. Indeed, it is better to burn cheap gas without thinking of conversion to coal. Neither did UES try to develop nuclear power generation. It is simpler to pay fines (50% of state gas price) for burning gas in excess of plans than buy more expensive fuel oil, or monitor global trends, which show that growing gas prices have spurred the demand for coal.

In fact, coal is the dominant fuel in the world. It ensures 39% of electricity production, and the demand for it is growing at a priority rate. The share of coal in electricity generation is 40-60% in Europe, 51.9% in the U.S., 75% in Australia, 78% in China, 77% in India, 92.4% in South Africa, and 94.7% in Poland. Moreover, it keeps increasing across the world.

But Russian electricity producers ignore coal and modern technologies of coal-based electricity generation. This is why Russia, which has the world's second largest prospected coal reserves, has a negative dynamics of coal in electricity generation: 19.5% in 2003, 18.4% in 2004, and 16.8% in 2005.

Russian coal producers have forwarded to the Kremlin administration data showing that coal reserves would suffice to produce enough electricity to make up for the potential growth of consumption until 2030.

There are about 20 coal/gas burning power plants in Russia. According to the Institute of Natural Monopolies, the conversion of gas/coal burning power plants solely to coal would save up to 27 billion cubic meters of gas a year.

Sergei Mironosetsky, deputy director general of Siberian Coal Energy Company (SUEK), says gas can be replaced with coal in all Russian regions. The prime cost of a coal-burning power plant is comparable to the cost of a gas-fuelled plant: $800-$1,200 per 1 KW.

The Kremlin administration has started searching for ways to secure the supply of fuel to electricity generating companies without curbing the ambition to maintain and increase energy (primarily gas) exports. It has apparently made some plans, or else Putin would not have promised to increase gas supplies to Europe at the recent meeting with the French and German leaders.

Dr. Igor Tomberg is a senior research fellow at the Center for Energy Studies, the Institute of World Economy and International Relations, Russian Academy of Sciences.

The opinions expressed in this article are those of the author and may not necessarily represent those of the editorial board.

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