Russia’s Energy Monopoly Shoots Itself in the Foot

Despite Russia’s looming natural gas crisis and supply worries in Europe, the country’s largest producer is frivolously burning off 2 billion cubic meters of gas a day – throwing away one of the world’s most precious resources. This environmentally damaging practice of “gas flaring” has been widely condemned as the result of Gazprom’s pernicious monopoly of the processing plants and pipelines, which allows it to purchase only as much as it wants at the price it wants while investing next to nothing. Oddly, the Kremlin is really shooting itself in the foot here, as for once the main victim of this non-competitive market is state-owned Rosneft. As though we needed yet another reminder of the disastrous inefficiencies of Russian state ownership oil and gas assets, especially right before yet another round of Yukos auctions. Russia’s unnecessary flaring of natural gas shows is caused by monopoly From tomorrow’s Moscow Times:

Gazprom buys 1.5 billion cubic meters of gas per year from Yuganskneftegaz, the former Yukos unit that Rosneft scooped up at a forced state auction in December 2004. Yet Yugansk burns well over that amount, poisoning the environment and losing out on substantial revenue because there is currently nowhere for the gas to go. “In Siberia and beyond, almost all gas goes through Gazprom infrastructure,” Rosneft vice president Sergei Kudryashov said on the sidelines of a news conference in Moscow last week. “There is no point seeking out the domestic market, which is dominated by Gazprom. “Who chooses the price? The buyers do — that is, Gazprom. They have to get us interested, and all that interests us is price.” Gazprom pays just 280 rubles, or just under $11, per 1,000 cubic meters of gas from Yugansk, the production unit’s general director, Vladimir Bulba, said on a recent Rosneft-sponsored tour of the Priobskoye field. In marked contrast, Belarus recently agreed to pay Gazprom $100 per 1,000 cubic meters, while customers in Europe pay an average of $230. … If Gazprom fails to develop the fields that it has been sitting on for decades, such as Yamal and Shtokman, while continuing to squeeze out independent gas producers, the government will eventually have to choose between turning down the taps to either Europe or customers at home, analysts said. “There is plenty of gas in the ground in Russia and identifiable projects that haven’t been developed because of politics,” said Chris Weafer, chief strategist at Alfa Bank. “Oil companies could produce significantly more gas if only they could pump through Gazprom’s pipelines. At some point in the not-too-distant future, the state is going to have to step in, but this will be complicated by the fact that the respective heads of Rosneft and Gazprom sit at opposite ends of the Cabinet table.”