According to the Oil and Gas Journal’s 2008 survey, Russia holds the world’s largest natural gas reserves, with 1,680 trillion cubic feet (Tcf), which is nearly twice the reserves in the next largest country, Iran. In 2006 Russia was the world’s largest natural gas producer (23.2 Tcf), as well as the world’s largest exporter (6.6 Tcf). According to official Russian statistics, production during 2007 totaled around 23.1 Tcf, of which 85 percent (19.4 Tcf) was produced by Gazprom. Russian government forecasts expects gas production to total 31.1 Tcf by 2030.

Gazprom’s natural gas production forecast calls for modest growth of 1-2 percent per year by 2010. Russia’s natural gas production growth reflects its aging fields, state regulation, Gazprom’s monopolistic control over the industry, and insufficient export pipelines. Although the company projects increases in its natural gas output between 2008 and 2030, most of Russia’s natural gas production growth will come from independent gas companies such as Novatek, Itera, and Northgaz. A Gazprom web page discusses these projections in detail.

For Gazprom to fulfill its long-term aim of increasing European sales, it will need to boost its production, as well as to secure more reliable export routes to the region. According to recent data from IHS Energy:

•Gas production at Gazprom’s top four gas producing fields (not including the newly online Zapolyarnoye field) declined by 4% or 430 Bcf (12 billion cubic meters or Bcm) from 2005 to 2006.

•Gazprom’s newest field, Zapolyarnoye, is responsible for much of the growth in Russia’s gas industry, but only increased by about 170 Bcf (5 Bcm) in 2006. Overall, Gazprom’s production growth was flat year-on-year.

•Based on EIA analysis, Gazprom’s production from its largest four fields is expected to decline by around 1,800 Bcf in the next four years. Gazprom’s targeted production for 2011 is an increase of around 1,000 Bcf from 2007 levels. Therefore, net of increases from the Zapolyarnoye field (800 Bcf), Gazprom must increase its production by around 2,000 Bcf to meet its targets. On an annual basis, that translates to around 500 Bcf per year (or 14 Bcm).

•The average level of depletion at Russia’s five largest producing fields (not including Zapolyarnoye) was almost 50 percent in 2006, weighted by production.

During 2008 Gazprom intends to invest a total of $20.4 billion in natural gas production and transportation, including $8.7 billion in production. Of this, Gazprom will allocate a little more than $2.7 billion on construction at the Bovanenkovo field in the Yamal Peninsula including a railway extension, twice as much as in 2007. The bulk of the upstream-targeted funds will go towards maintaining pressure in the pipelines that deliver gas from the large fields in Western Siberia. Gazprom expects its investment in maintaining production to increase to around $45 billion in 2010.

Oil companies, whose natural gas is largely flared, and independent gas companies will play an important role by increasing their share of Russian total production from 11 percent in 2007 to around 17 percent by 2010. Their success, however, depends largely on gaining access to Gazprom’s transmission system.

Discovered in 1988 in the Barents Sea, the Shtokhman field contains reserves of an estimated 19 billion barrels of oil equivalent. The field’s location, roughly 340 miles northeast of the Russian mainland and 1000 feet deep, makes its development particularly challenging. International Oil Companies (IOCs) had hoped to participate in the field’s development, but in Fall 2006, Russia announced it would develop the field on its own. Originally, Gazprom planned to export all of the gas from the field via LNG, but Gazprom is now tentatively planning to pipe some of the gas via the Nord Stream pipeline (see below). In May 2008, Deputy Gazprom Chairman Alexander Medvedev announced that 50 percent of the field’s LNG exports would go towards the Rabaska LNG facility in Canada.

According to Gazprom, initial stages of the project will envisage production of around 795 Bcf of natural gas and 5,500 bbl/d of gas condensate. Gazprom has allocated $260 million in capital expenditures during 2008. The partners in the project expect first gas from Shtokman in 2013, although Norwegian experts developing the nearby Snohvit field do not expect the field to come online before 2015.

A 2006 Deutsche Bank report estimated that the pipeline option’s capital expenditures might be twice as expensive as small-scale LNG exports. IOCs may still be involved in the giant field’s development but on a contractor basis.

Gazprom is also Russia’s largest earner of hard currency, and the company’s tax payments account for around 25 percent of federal tax revenues. Despite its enormous size and significance, Gazprom faces domestic regulation. By law, the company must supply the natural gas used to heat and power Russia's vast domestic market at government-regulated prices (approximately $28 per thousand cubic meters), regardless of profitability.

Domestic gas prices in Russia are only around 15-20 percent of the market rate at which Russia’s gas is sold to Germany, and Gazprom lost around $420 million in 2006 on domestic natural gas sales. Low prices have impacted the gas industry’s ability to finance capital spending and have hurt incentives to increase efficiency. Raising domestic prices towards parity with market rates in Europe is now a major component of the country’s energy strategy that will play a significant role in avoiding supply shortfalls in the future. Planned increases in gas prices are listed in the table below.

Estimates of gas flaring range from 390 Bcf (RosStat) to 2,400 Bcf (US National Oceanic and Atmospheric Organization), or 11-70 Bcm. Official statistics show that Russia produces roughly 2.1 Tcf of associated gas, of which around 25% is flared. It is difficult to obtain an exact number with a lack of metering equipment. The government plans to reduce associated natural gas flaring to help increase production. Rostekhadzor, a government agency, has introduced legislation to increase fines for associated flaring above 15 percent of the total associated gas output from January 2009. Russia's current limit for gas flaring is 25 percent of the total gas output, and penalties are small. The government would like to reduce flaring by 5% by 2011.

Russia exports significant amounts of natural gas to customers in the Commonwealth of Independent States (CIS). In addition, Gazprom (through its subsidiary Gazexport) has shifted much of its natural gas exports to serve the rising demand in countries of the EU, as well as Turkey, Japan, and other Asian countries. Exports to Europe are shown in Table 4 below.

According to Russia’s Federal Customs Service and Ministry of Industry and Energy data, Russia exported 6.75 Tcf (191 Bcm) of natural gas in 2007, which includes 5.4 Tcf to outside FSU and to Baltic States and 1.3 Tcf to Commonwealth of Independent States (CIS) countries. Exports to CIS states also travel through intermediaries ZMB (Switzerland) and RosUkrEnergo and are mixed with gas volumes from Central Asia. RosUkrEnergo shipped 1.9 Tcf (54.3 Bcm) in 2007, all of which went to Ukraine. Gazprom chairman Alexei Miller expects gas exports to non-CIS states to increase by 4-5% during 2008.

Due to an ongoing dispute about natural gas prices, on January 1, 2006, Gazprom shut off gas supplies to Ukraine, and as a result supplies to Europe were also affected. Gazprom resumed natural gas deliveries to Ukraine three days later. Even though Russia has used the threat of a cutoff to demand higher natural gas prices in recent years, this was the first time that a supply disruption affected flows to Europe. More recently in 2008, for no longer than a day, Gazprom cut exports by 25-35 percent after Ukraine failed to pay its debt.

Various agreements have been signed on natural gas pricing since this time. The latest, signed in March 2008, specifies that at least 1,750 Bcf (49.8 Bcm) of Central Asian gas will be delivered during March-September 2008 at a price of $6.34/Bcf or $179.50/thousand cubic meter (mcm). An additional 265 Bcf (7.5 Bcm) will be delivered by a subsidiary or affiliate of Gazprom to Ukrainian industrial consumers at a price of $11.12/Bcf or $314.70/thousand cubic meter (mcm) that would include January and February 2008 shipments. The contracts are also subject to review each year and may be adjusted to new market prices.

The role of RosUkrEnergo, the intermediary between Gazprom and Ukrainian consumers, is currently under negotiation between Russia and Ukraine. The intermediary blends some of the natural gas sent to Ukraine with less expensive natural gas from Central Asia. According to the latest data for 2007, RosUkrEnergo supplied 1,919 Bcf of Ukraine’s 2,240 Bcf in imports. Itera, an independent Russian gas company, provided a little over 120 Bcf, which leaves around 210 Bcf that was provided in-kind for transit fees.

Gazprom will increase the price of gas sold to Belarus from $100 to $200 per thousand cubic metres starting in 2009.

The Yamal-Europe I pipeline (1 Tcf), which carries natural gas from Russia to Poland and Germany via Belarus, would be expanded another 1 Tcf under this proposal. Gazprom and Poland currently disagree on the exact route of the second branch as it travels through Poland. Gazprom is seeking a route via southeastern Poland to Slovakia and on to Central Europe, while Poland wants the branch to travel through its own country and then on to Germany. Expansion is expected to be completed by 2010 at a cost of around $10 billion.

In June of 2007 Italy’s Eni and Gazprom signed a memorandum of understanding (MoU) on a feasibility study for the underground and first component of the South Stream project. The first component of the South Stream project plans to send natural gas from the same starting point as the Blue Stream pipeline at Beregovaya for 560 miles under the Black Sea, achieving a maximum water depth of over 6,500 feet. The second, onshore component will cross Bulgaria with two alternatives: one directed towards the northwest, crossing Serbia and Hungary and linking with existing gas pipelines from Russia; and the other directed to the southwest through Greece and Albania, linking directly to the Italian network. Russia and Bulgaria signed an intergovernmental agreement on the pipeline in January 2008. Gazprom expects the project to be completed in 2013.

The Blue Stream natural gas pipeline connects the Russian system to Turkey through a 750-mile pipeline, 246 miles of which extends underneath the Black Sea (see Eni’s map). Natural gas began flowing through the pipeline in December 2002, under an initial schedule of 71 Bcf per year, which was to increase by 71 Bcf annually. Even though flows through the pipeline totaled only 113 Bcf during 2004, the launch of a new gas compressor station in Russia will allow the pipeline to run at its design capacity of 565 Bcf per year. During 2007, roughly 330 Bcf of natural gas was transported via Blue Stream, a 10 percent increase from 2006.

A northern pipeline extending over 2,000 miles from Russia to Finland and the United Kingdom via the Baltic Sea, was proposed in June 2003 by Russia and the UK, and was renamed Nord Stream by the stakeholders in 2006. About 700 miles of the pipeline will pass under the Baltic Sea. In November 2006, Gazprom (51% shareholder), and Germany’s BASF and E.ON (24.5% each) submitted project information to Baltic Sea countries for the start of an environmental impact assessment. Offshore pipe laying is expected to begin between 2008 and 2010. The project is expected to cost more than $11 billion (or 7.4 billion euros, two times as much as originally planned) and to transport approximately 0.9-1.0 Tcf of natural gas via two parallel pipelines. Project sponsors currently expect test deliveries by spring of 2011.

The main advantage of this pipeline is Russia will no longer have to negotiate transit fees with nearly half a dozen countries or pay them in natural gas. A possible spur connection to Sweden has also been considered. Polish and Latvian leaders have expressed frustration that they were not included in the negotiations.

IHS Energy estimates that Eastern Siberia contains around 135 Tcf of proven plus probable natural gas reserves. The Kovykta natural gas field could provide China with natural gas in the next decade via a proposed pipeline (see Maps section). The field is believed to have reserves of around 81 Tcf and 920 million barrels of condensate. The project is producing small volumes of gas for local markets after the completion of an 80-mile pipeline to Irkutsk. China has stated it is ready to import up to 700 Bcf per year from the project; but since the natural gas would not arrive until 2012 at the earliest and since China is pursuing other natural gas import plans in the meantime, it is possible that Kovykta natural gas will not have a buyer. A comprehensive, independent analysis of the transportation options from the field is available from TNK-BP’s website.

The Kovykta field is operated by RUSIA Petroleum, which is 63 percent owned by TNK-BP. The finalization of a June 2007 “heads of terms” agreement stipulates that TNK-BP will be selling its stake in RUSIA Petroleum to Gazprom for $700-$900 million. A final agreement is expected during 2008.