Competitive environment – prerequisite for further Russian gas market development

Gazprom consistently maintains its position aimed at creating equal conditions for each and every player of the Russian gas market.

The existing gas market features a number of fundamental deficiencies preventing the competition from further development: a major regulated sector of the gas market, an economically unjustified level of wholesale prices, as well as cross-subsidization in regional gas prices. In the Russian market the state-regulated sector substantially prevails over the deregulated one, which blocks the effect of market pricing variables based on supply and demand. In the total volume of gas supplied to the Russian market via the Unified Gas Supply System, Gazprom's share in 2013 reached 72 per cent, whereas that of the independent producers amounted to 28 per cent. However, wholesale prices for Gazprom's gas are fixed by the Government, while all other market players sell gas at free prices.

Cross-subsidization in gas prices for different Russian regions creates additional hindrances for the competition development. The current tariff policy implies that Gazprom should compensate for losses caused by gas supply to regions remote from production areas through higher returns from selling gas to consumers located closer to gas fields.

However, in reality these regions are occupied by the independent gas producers, who, unlike Gazprom, can offer more flexible conditions of gas supply to consumers. The independent producers mostly enjoy their advantage with regard to large and sound consumers located close to main gas production sites, which provides gas producers with the highest revenues.

Such a situation results in market discrepancies and in some cases cancels out the very concept of competition. Thus, today the Kostroma, Sverdlovsk and Chelyabinsk Regions are almost fully supplied with gas by independent companies, which also have a major share in gas supply to the Perm Territory (79 per cent), the Khanty-Mansiysk Autonomous Area (72 per cent), the southern Tyumen Region (77.1 per cent) and the Novosibirsk Region (68 per cent). But they are not interested in supplying gas to consumers in a number of regions in the Central, Northwestern and Southern Federal Districts considerably remote from the main production capacities.

Gazprom is not afraid of competition and believes that the real competition for consumers and for consumers' benefit may only exist if equal opportunities are provided for all the market players with a well-coordinated gas trade simultaneously launched in Russia as well as a commercial gas balancing system is introduced.

The Company constantly interacts with the federal authorities to improve the existing approaches to the state regulation process. Gazprom considers it necessary to achieve the equal profitability of gas supply to different regions. In addition, it was proposed to shift to regulated gas industry prices and rates on the basis of reasonable expenses as well as to adhere to an appropriate profit standard for a wholesale price.

The Management Committee was tasked to continue increasing Gazprom's competitive ability in the domestic market.

To date, Russian gas market comprises regulated and deregulated sectors. Gazprom is almost a sole supplier in the regulated sector. Among all types of fuel, the Government regulates only prices for natural gas produced and supplied to Russian consumers by Gazprom Group.

Regulated wholesale gas prices are introduced and revised by the Federal Tariff Service in compliance with the Russian Socio-Economic Development Forecast until 2030 issued by the Russian Ministry of Economic Development.