Gazprom Breakup No Longer in Cards

The government does not plan to break up natural gas monopoly Gazprom into production and distribution companies, but will seek to stimulate its performance by deregulating the gas industry.

"Radical measures are not required for the reform of Gazprom as they are for other natural monopolies like the [national power grid] Unified Energy Systems and the Railways Ministry," Economic Development and Trade Minister German Gref said Tuesday.

Government officials had previously discussed a direct split, a proposal feared by Gazprom management.

Instead, according to the government?€™s plan for Gazprom, which Vedomosti has a copy of, new conditions will be created that will promote competition from independent producers and gas traders.

An Economic Development and Trade Ministry official said that existing legislation would not allow the government to break up Gazprom.

The official said it is unlikely the government could convince 75 percent of the shareholders in the company, in which the government holds a 38 percent stake, to take such radical measures.

"The government?€™s reform plans are intended to create the economic preconditions for the future voluntary restructuring of Gazprom," he said.

The new plan, devised by the ministry, the Federal Energy Commission, which regulates gas and electricity prices supplied by monopolies, and the Anti-Monopoly Ministry, proposes that the reform of the gas sector will take place in three stages.

The first stage will involve stimulating competition on the domestic market between independent gas producers and Gazprom?€™s production subsidiaries. Suppliers are to be charged the same distribution costs and guaranteed equal access to the transport system.

Seventeen gas-transporting subsidiaries of Gazprom will merge into one company or a few large companies.

In addition, a national exchange for natural gas will be formed.

As a result of these and other measures, the plan says the share of independent producers will account for 16 percent to 18 percent of the domestic gas market by 2002.

At the same time, Gazprom?€™s production subsidiaries will be granted greater independence "for the purpose of increasing their profits and their trading on the stock exchange."

The production subsidiaries will no longer sell all of their gas through Gazprom?€™s retail arm, Mezhregiongaz. Instead, they will sell a portion of their gas directly to consumers through an exchange. As a result, the price of gas is expected to rise to $18 to $20 per 1,000 cubic meters in 2003.

During the second stage of the reform, the Federal Energy Commission will begin to remove price controls on the wholesale gas market by establishing a price range, but will continue to regulate transport tariffs.

Also in the second stage, independent producers will be permitted to export gas to the Commonwealth of Independent States, while Gazprom will retain its monopoly over exports to the West and will continue to control the bulk of domestic gas deliveries.

The wholesale price of gas on the Russian market is anticipated to rise: in 2005, to $28 to $30 per 1,000 cubic meters, in 2007 to 2008, to $43 to $45 per 1,000 cubic meters.

During the third stage, the government will practically cease all of its regulatory functions over prices on the internal market and will retain only its system of tariffs for the transport of gas.

Also during this stage, independent producers will receive the possibility to export gas not only to the CIS, but to Gazprom?€™s export market in the West.