Alexander Mikheev: Freedom is perceived need

March 24, 2011, the interview was taken by Nikolai Khrenkov
Published in corporate Gazprom Magazine Issue 3

Alexander Mikheev, First Deputy Head of Gazprom’s Gas and Liquid Hydrocarbons Marketing and Processing Department answers questions posed by the Gazprom Magazine.

Mr. Mikheev, what changes, in your opinion, have occurred in the domestic gas market over the recent two years?

Slowing down the national economy, the world economic recession of 2009 led to a considerable drop in gas demand. The last year results indicate that gas consumption in Russia showed a 25.8 per cent increase versus 2009 but the level of 2008 has not been reached yet.

Consumer dictates terms

At the same time, I would like to highlight such a market trend as the independent gas producers’ ever increasing role. They have gained marketing experience, studied the market and know how to operate in it. By the way, this is one of the main reasons for a steady decline of traders’ role in the market over the recent years. Independent producers permanently build up gas production and marketing, selling gas both under direct contracts with consumers and to subsidiary companies of Gazprom Group, first of all to Gazprom mezhregiongaz. In particular, last year Gazprom acquired over 24 billion cubic meters of gas from independent producers with NOVATEK selling over 10 billion cubic meters.

The second important factor is that the gas demand drop, triggered by the global crisis, intensified struggle among gas suppliers for large consumers in a number of Russian regions. Certainly, these are the most attractive customers acquiring large amounts of gas and in most instances accurately paying for it. One can say that it is the purchaser, to some extent, who dictates his terms now causing sellers to make considerable concessions.

What are the concessions?

A will give you several examples. Regional gas distribution companies that are currently members of Gazprom mezhregiongaz Group sometimes give away an opportunity provided by the Government Directive No.333 and sell gas at the prices exceeding those regulated by state in order to hold the customer. Alternatively, the customer may start buying gas from independent producers that are currently trying to gain a foothold in the market and sell their gas at a price close to the one set by Russia’s Federal Tariff Service.

The second issue – previously we called for a 50 per cent prepayment before the gas delivery month, but now we receive payment for consumed gas in accordance with the Russian Government Directive No.816 streamlining the payment timeframe.

In addition, we swiftly respond to consumers’ requests for changes in gas consumption modes. In particular, if it is allowed for by the GTS capacity, we balance our gas delivery dispatch schedules and daily fluctuations in consumption, thus reducing the probability of contract terms violation by consumers through incomplete or excessive gas offtake. In their turn, independent gas producers act the same way.

Does Gazprom play two roles: competes with independent producers in the gas market and owns the GTS providing them with access to the gas pipe? What are the relationships of Gazprom with independent producers in this situation?

Let us take a look at the facts and figures. The volumes of independent producers’ gas allowed for transmission grew 17 per cent. By 2013 we are planning to build up these volumes by another 9 per cent.

Stuck in a pipe

In addition, a supplier is never refused gas delivery to his mature market with regular customers. We don’t disrupt his market in other words.

According to the Government assignment, together with the relevant ministries and agencies Gazprom is currently elaborating draft regulatory documents to streamline the provision of independent producers with nondiscriminatory access to the gas transmission system (GTS).

Please, tell us about this work. What issues raise controversy?

These documents are currently being approved. I would like to note that our version of the project contains a more detailed procedure of interaction between the GTS owner and a gas transmission service receiver. Among other things, a provision is made for preferential access of dry stripped gas suppliers and simplified access of independent producers owing to shorter pendency and left out applications for mid-term services (as the definition is too ambiguous). At the same time, we suggest regarding the majority of applications as the short-term ones with a short consideration period while gas deliveries covering several years should only be qualified as the long-term ones.

For instance, we have a controversy in defining “free capacity of gas trunklines”. Our colleagues from Russia’s Federal Antimonopoly Service (FAS) and some outside experts believe that independent producers need to have free access to all of the GTS capacities while we think that all independent producers need to have equal access to free capacities. Notably, if any of them fails to determine the amount of gas to be injected into the system, preference will be given to the one who exactly knows his gas transmission plans. This is not accidental, in fact.

Arguing with us, the colleagues actually forget that Gazprom has a number of legally required obligations including gas supply to socially important consumers, which is our top priority by the way, gas deliveries under intergovernmental agreements and gas export. However, most important is that Gazprom is in charge of uninterrupted and failsafe gas supply to Russian consumers requiring an accurate and clear gas balance with gas deliveries arrangement within the Unified Gas Supply System (UGSS) to evade some kind of Brownian motion.

It is a known fact that every year some of the independent producers for a number of reasons fail to deliver the required amount of gas to their customers. In this case the Gazprom subsidiaries offset these volumes out of their stock which is one of the reasons for industrial consumers to sign contracts with independent producers so willingly since they know that Gazprom will always give a helpful hand in case of force majeure. Unfortunately, these factors are ignored by our esteemed colleagues.

Could you roughly give us the amount of the back up deliveries under the commitments of independent producers?

In the winter period, during the cold snaps triggering a significant growth in consumption these deliveries may reach 100 or even 200 million cubic meters of gas a day making 10 per cent of the overall daily gas consumption in the country. We have a very interesting situation here. In the winter period, when independent producers sometimes fail to deliver the additional amount of gas to their customers we offset it from our stock while in summer they have excessive gas and still ask us to receive it in order for it to be stored in a gas pipeline until the cold season when we would extract it for them. But this is all wrong since the gas transmission system should not operate like this. Our suggestion is as follows: independent producers may stockpile their gas in UGS facilities but not for free and this amount would increase the end-user price, but they are against it – they want to win the market. Even though the agreement defines the need for an accurate balance, the situation is still common when a certain amount of gas is stuck in a pipeline.

Therefore, we repeatedly requested introduction of a commercial gas balancing system from the FAS and last year we formed an interim working group to elaborate a system which would simply eliminate such a possibility. The Gazprom Management Committee is to consider this issue soon.

Directive No.872 on Standards for Information Disclosure by Natural Monopoly Entities Rendering Gas Transmission Services was endorsed last year. Independent producers sometimes complain to media men that Gazprom misconducts it. What is the idea of this Directive and how well-grounded are these claims?

This document obliges Gazprom to disclose information about various aspects of its activity via mass media, internet and against a written request from consumers.

Polichinelle’s secret

As for the claims, independent producers are to blame themselves in many ways. They insisted that now this document contains all and sundry, thus Gazprom’s subdivisions try to understand what information should be disclosed and who should do it. The main thing independent producers need to know is free capacity, but I don’t understand well enough why they need the information about every part of the UGSS. They must be curious. Frankly speaking, most independent producers, especially large ones, perfectly know all the bottlenecks in our system. However, as the decree has been endorsed, we will execute it.

Furthermore, I would like to dwell on another issue. Sometimes, we have free capacities but not in the areas the independent producers need. Their gas can not be conveyed because of the flow parameters and we have to say no in this case which sometimes leads to incomprehension.

Let’s take Transneft for example. Imagine that an oil company can not directly convey oil from its production field to a refinery. In this case it calls on another company that has access to an oil pipeline running to the refinery and makes an arrangement with it for oil transmission on a cross charge basis or in some other way. And everybody sticks to this rule.

Their system, by the way, is much more regulated than the one of Gazprom. There are preset requirements for the transmission volume and everyone must meet them. You may use direct contracts or exchange trading platforms to sell gas but only within the limits. Our transmission system is sophisticated as well, but at the same time it is rapidly developing and gas transmission routes are constantly changing. There are no claims to Transneft while there are a whole bunch of claims to us.

Maybe it’s because Transneft is not a fuel market player unlike Gazprom?

Maybe. But it doesn’t change the essence of the gas transmission system operation.