The Russian Gas Industry, Its Legal Structure, and Its Influence on World Markets

Article excerpt

LIST OF ACRONYMS

BCM Billion Cubic Meters

E&P Exploration and Production

FDI Foreign Direct Investment

FTS Federal Tariff Service

IMF International Monetary Fund

LNG Liquefied Natural Gas

NGO Non-Governmental Organization

PSA(s) Production Sharing Agreement(s)

RUE RosUkrEnergo AG

NEGP North European Gas Pipeline

TCM Thousand Cubic Meters

TPA Third Party Access

UGS Unified Gas Transportation System

I. introduction

Russia has the world's largest proven reserves of natural gas-at forty-eight trillion cubic meters-an amount that comprises over a quarter of the world's proven reserves. Russia provides Europe with a quarter of its gas needs. The Russian gas industry is dominated by OAO Gazprom (Gazprom), a publicly traded company in which the government holds a majority stake of fifty-one percent. Gazprom is considered a monopolist because it owns all of the high pressure interregional pipeline network as well as nearly seventy-five percent of low pressure distribution networks. It owns1 about half of Russia's proved reserves of natural gas and all the main gas processing facilities, as well as a legal export monopoly. Private companies do own reserves, but because domestic price is regulated by the state, and export is forbidden, their participation in the industry is comparatively small. As such, without foreign investment, concerns have been raised by such bodies as the International Energy Agency,2 the European Commission (EC),3 and other NGOs4 about the Russian gas industry's ability-in particular, the ability of its largest producer Gazprom-to continue current levels of production and to invest in the development of new fields. This article will look at the legal and policy issues which have affected not only the multinational investors but the end-users in Europe and beyond. Some of these issues have led to the well-publicized confrontations between Ukraine and Russia over the price of natural gas sold by Russia to Ukrainian and other European markets. Other issues may be less visible, but just as important in their effects on world energy markets.

The first section of this article looks at Production Sharing Agreements; what they are, how they came about, and their current status in the Russian gas industry. The second and third sections of the article discuss the recent developments in Russia's domestic pipeline law and the application thereof, and the future of the Soviet-era long-term contracts which are expiring in the near future. The fourth section of the article looks at the legal and policy issues likely to affect trade between Russian and Ukraine, the major transit state for transportation of Russia's gas supplies to the rest of Europe. The last section of the article looks at Russia's proposed new Subsoil Law, the major changes it makes in existing law, and their potential impact on gas industry investment.

II. PRODUCTION SHARING AGREEMENTS

The world investment community has suffered a number of setbacks in their efforts to invest in Russia with particular difficulties being encountered with the Russian political and legal system. Before the economic reform known as "Perestroika" took place in the late eighties, the Soviet Union was closed to foreign investment or indeed any foreign involvement whatsoever. The country first became open to foreign investment in 19875 through a series of directives, initially limiting foreign participation to forty-nine percent, yet subsequently this restriction was removed.6 After the end of the "Perestroika" in 1991, the West looked towards Russia as an opportunity to tap into the country's vast reserves of raw materials. Many of the industries that did open up to foreign investors have benefited from capital inflow, including the oil industry. But natural gas has been considered by the Russian government to be of great strategic importance7 and as such, closed to foreign participation. …

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