A conspicuous treasure

One of the most discernible items in the budget of Gazprom is a campaign in the media focusing on the company’s image as ‘the national treasure.’ The effect of this propaganda investment, however, proves to be the opposite of the desired impact.

In the middle of June President Vladimir Putin went to the city of Chita to chair a conference devoted to social and economic situation in the area east of the Baikal Lake, and had a chance to hear what locals think about the performance of Gazprom.

One of the speakers, the CEO of a regional construction company Viktor Lopatin, said: ‘People who live in the region, frankly speaking, are getting a little bit shocked by the advertisements of Gazprom as “the national treasure” because the absence of gas supply to local households remains a very big problem.’

Another conference during the presidential voyage to the Far East of Russia convened in the Sakhalin Region, and criticism of Gazprom’s behavior was again in focus. It came from no one else but Viktor Ishayev, formerly the Envoy of the President to the Far East and now Minister for Far Eastern Development in the Russian Cabinet.

Ishayev admitted that a power station, which is being projected for the future LNG plant of Gazprom in Vladivostok, will be fueled by coal. ‘The reason,’ he explained, ‘is the stability and predictability of coal prices. The economic efficiency of coal-based generation is well-justified, to avoid “additives” of any sort.’ He reminded the audience that natural gas prices in the Far East were subsidized out of the federal budget. ‘While the subsidies last, it’s not an issue, but it will be extremely hard if there are no subsidies,’ he added.

Minister of Energy Alexander Novak in his speech added fuel to the critical fire. He admitted that the export price of gas, which Gazprom obtains from Sakhalin II to deliver to domestic consumers in the Far East, equaled $460 per 1,000 cubic meters, but this gas was sold for $140 to power generators in Vladivostok; and the government had to cover the gap.

The idea of transporting gas by pipe 2,000 kilometers from Sakhalin to Vladivostok instead of making LNG on the island was commercially unwise, the speakers at the Sakhalin conference insisted. They argued that the planned Vladivostok LNG was making it impossible to add another LNG train to Sakhalin II even though Gazprom was engaged in designing that train. There is just not enough gas around Sakhalin to feed both projects.

Alas, the voice of wisdom was not heeded when the government instructed Gazprom to build the Sakhalin-Vladivostok pipeline—without an elementary analysis of economic efficiency and without contracts with China at the far end of the pipe. Today, the ranks of Gazprom bashers are growing, and not only among industry analysts. We see that the population in provinces is ‘a little bit shocked’, and government officials start to express an unprecedentedly critical opinion, too.

Mikhail Krutikhin

Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.