It would appear that GAZP agrees with the analysis. Two caveats; first its an article by RFE/RL which means that it has a point to make. Secondly, it is in GAZP's interest to point out that domestic pricing is too low to stimulate demand. What both this article, and the GAZP study, and the UBS analysis show is that Russia's Energy Strategy is already outdated 3 years after it was published.
Despite my snide remarks about Claude Mandil's concerns about lack of investment in the Russian gas industry, it would appear that 2008-2015 could be a worrying period for one of European or Russian domestic gas supplies.
UBS' Russia gas analyst published 12th July a long (125 page) analysis of the Russian gas supply demand dynamic. He says little that is new to anyone that is familiar with the Russian/FSU gas industry. What he has added are a raft of statistics around which proper discussions can be held.
I don't believe that I am fundamentally breaking the terms of my agreement with UBS by quoting the second para of the executive summary:
“Russia's gas market and export supplies are at an inflection point, headed for dramatic change with far reaching consequences. The scale at which these trends are developing and affecting the sector are being largely underestimated, in our view.”
Their conclusion is that the supply/demand equation is just in balance (“tightness means ”crisis risk“ is real”). They believe that domestic demand, and hence domestic pricing, is and has been under-estimated (which is definitely my view). In order to stimulate supply from independents (i.e. not GAZP) the regulated domestic price needs to rise faster than currently forecast. As they point out UES already purchases 1/3 of its gas on the (quasi)-open non-regulated market. In the Volga Region, for example, FOB well-head gas prices are about 40% higher than the regulated price. I can confirm that this is stimulating investment. UBS forecasts that non-GAZP producers will account for a 27% share in total production in 2015, up from 15% today, and will account for 43% of domestic sales. 2015 is an unimaginably long time frame in a Russian context, but the trend is clear even if forecasting that far out is fairly meaningless. Their forecast for domestic price rises are the most aggressive of any Russia-based investment bank; forecasting netback parity (i.e. it's equally attractive to sell domestically vs export) by 2011.
Importantly, in analyzing the the sensitivities substantially all the risks are on the downside; supply/demand is “tight” and meeting the expected 90BCM increase in demand will require “100% of Gazprom's targeted 560BCM of output, 100% of Central Asian 70BCM of export potential and just below 90% of what we estimate Russian independent producers can technically produce by the end of the decade - 148BCM.” That's tight.
The upside to this scenario is as yet undiscovered reserves or lower demand. To be clear they are not saying that there is not a lot of gas in Russia - they are saying that it's not market ready. The downside risks include the risk that C. Asian gas heads anywhere but through Russia in the next 5 or so years.
Their conclusions regarding supply to China put the EU/Russia energy spat this year in to context - there will be no W. Siberian gas going to China (or east) in the next decade.
[composed and posted with ecto]
[composed and posted with ecto]