Studies Eastern European Markets

Eastern European Markets


2010

Edward Hunter Christie
The Russian gas price reform and its impact on Russian gas consumption

Electronic Publications of Pan-European Institute 19/2010

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Conclusions

Taking all the results together, it is found that an economically feasible and relatively plausible range for savings in Russian gas consumption could be in the order of 82.6 to 133.7 bcm per year by 2020 as compared to the 2007 level, i.e. Russia’s total gas consumption could be in a range of 328 to 379 bcm per year by 2020 as compared to 462 bcm in 2007. These estimates account for savings in residential and industrial consumption, as well as in power generation and in transmission and distribution of natural gas. However the estimates exclude the issue of flaring of associated petroleum gas.

As a comparison, Russia’s net exports of natural gas were around 195 bcm in 2008, so the potential savings are in a range of 42% to 69% of 2008 export volumes. In value terms, the potential savings would represent a gross market value on Russia’s European export markets of roughly 25 to 40 billion US dollars per year assuming a price of 300 USD/mcm. Such savings would contribute very favourably to Russia’s overall natural gas balance and to its net export potential, provided developments in production are reasonably favourable.

The strongest channel through which gas consumption is reduced is in gas-fired generation of electricity and heat, through a combination of possible reductions of demand for electricity and heat and of thermal efficiency improvements in the generation sector. Under some strong assumptions, total savings as compared to the 2007 level could even exceed 100 bcm per year for the generation sector alone.

However this would require strong reductions in demand for electricity and heat as compared to baseline projections, as well as rapid and large-scale commissioning (and corresponding decommissioning) in Russia’s generation sector, effectively replacing a very large share of the existing gas-fired capacity in a time-frame of less than a decade. In a more moderate scenario it is assumed that Russia could close 60% of the gap between its current average thermal efficiency in gas-fired generation and a benchmark of European countries. As a result of that assumption, and assuming smaller (but still plausible) demand reductions for electricity and heat by 2020, a relatively prudent estimate for the generation sector would still amount to 52.5 bcm per year by 2020.

The main estimates found are thought to be feasible and within reach provided a number of important assumptions are met. Much will depend on upholding the commitment towards higher energy prices over the medium-run. In addition, the speed, extent and financial constraints of large-scale investment in the generation sector should be carefully analysed as well. A related policy recommendation would be to offer more clarity (and more certainty) concerning future prices. From that point of view it is not necessarily desirable to track the netback price given that it generates its own uncertain profile due to oil price and dollar exchange rate fluctuations, thus making energy-saving investments more risky and therefore less likely to occur.

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