Recently Announced Reforms in the Russian Domestic Gas Market: Impact on the Market Players' Value in New Realities of International Gas Trading

Abstract

Over the past two years, the Federal Antimonopoly Service of the Russian Federation (from now on referred to as FAS) raised the issue of the internal gas market's efficiency, as well as possible scenarios for its partial or complete deregulation. Previously several times settled task has been discussed in the context of the transition to market pricing of wholesale gas volumes and the preservation of state regulation regarding tariffs for the transportation of gas through the Unified Gas Supply System (from now referred to as UGSS). However, to date, the regulation of the domestic gas market, pricing rules and tariffs for transportation have not changed significantly, except for somehow development of the gas exchange trading (SPIMEX), which nevertheless also has some problems and constraints to the development of open market trade. The main criticism in this issue is the currently applied pricing regime, which consists in the presence on the over-the-counter (OTC) market of monopolistically regulated prices and the so-called open pricing mechanism, and exchange prices on the Saint Petersburg International Mercantile Exchange (SPIMEX) gas exchange, respectively. Experts agree that such a system leads to an asymmetry of the market, and, as a consequence, its inefficiency, unequal position of players in the market, as well as risks of a serious shift of the balance towards one player in case of a significant change in gas market regulation. In this regard, each separate proposal of the FAS on reforming the domestic gas market, whether it relates to the division of the dominant seller into production and transportation or the abolition of price regulation, faces severe contradictions on the each player's side. Thus, the pilot project in three subjects of the Russian Federation (Tyumen Region, Yamal-Nenets, and Khanty-Mansiysk Regions) was discussed to be settled in 2016 on the abolition of the lower boundary of the monopolistic regulated gas price for industrial consumers. The project, however, has not been implemented due to the reason mentioned above for the disagreements of all interested parties. Such aspects further exacerbate this problem as the share of the gas industry in exports, and, in particular, the export of liquefied natural gas (from now on LNG). The role of LNG in the transformation of global, regional gas markets has been noted over the past decade by the IEA and Russia, as one of the players in this industry, is also setting strengthening rules the positions of Russian gas companies in LNG markets as one of the country's developments priorities. The paper briefly examines the proposed reforms on the abolition of the gas price lower limit for industrial consumers in the context of the impact on independent gas producers, their market position, market value and credit rating. Also, the work considers the development of exchange trade in natural gas, as an indicator of open pricing and related problems.