Gazprom and the Uncertain Future of Russia’s Natural Gas Industry

Natural gas is a very important good in the Russian economy. In 2013 alone, natural gas exports totaled 14% of their total exports—a whopping number only surpassed by crude oil (33%) and petroleum products (21%). Interestingly, the majority of this natural gas is exported to the European market, but Russia has taken steps to increase exports elsewhere, notably through a 2014 deal that will see $400,000,000,000 in natural gas shipped to China over the next 30 years.Russian Exports

And though the natural gas export business plays such a pivotal role in the Russian economy, there is only one player in the game—Gazprom, a firm that has a government sanctioned monopoly on natural gas exports. The reasGazprom's Logoon, according to First Deputy Energy Minister Alexey Texsler: Russian gas should not “compete with itself” in foreign markets, as such competition would only lead to lower prices and decreased export revenue for the motherland.

But the Russian energy industry, and the Russian economy as a whole for that matter, have struggled in recent years. Very low crude oil prices have put a strain on the Russian budget, in turn creating problems in the natural gas sector, where export revenues have fallen 28.5% in the last year.

This graph from NASDAQ shows the fall of oil prices over the last year.

This graph from NASDAQ shows the fall of oil prices over the last year.

Rosneft, Russia’s largest exporter of crude oil, has turned towards natural gas production in the wake of oil restrictions imposed on Russia due to both their conflict with Ukraine and low global prices. To do so, they have pressured the Russian government to end Gazprom’s natural gas monopoly, a move that has reignited questions about Gazprom’s effectiveness and the solubility of the Russian natural gas industry as a whole. That begs the questions: is Gazprom’s monopoly still advantageous for Russia? And, should Russia even continue to export natural gas?

A recent paper by scholar Marina Tsygankova sheds light on some possible answers. For one, Tsygankova’s analysis of the Russian natural gas industry finds that abolishing the Gazprom monopoly would lead to more combined profits for Russian producers in both domestic and foreign markets. However, she also notes that liberation of the Russian natural gas export market would lead to firms divesting in domestic sales to instead flood the European market with their product. This would lead to an increase in domestic price and a corresponding loss in Russian consumer surplus, which she finds outweighs any producer gains realized by eliminating Gazprom’s export monopoly.

Based off of the empirical evidence Tsygankova presents, Russia certainly should not sell more natural gas by ending Gazprom’s export monopoly. Moreover, she notes that given the entrance of shale natural gas into the gas market, the export market for Russia’s natural gas could become even more uncertain should European nations that are so reliant on Russia for energy decide to diversify their gas consumption. Ultimately, the ramifications of continued political pressure by firms like Rosneft and market entrance by shale gas producers could end up dealing a huge blow to both Gazprom and Russia’s financial security, which could destabilize one of the most important players in global politics and international relations.

Sources: US Energy Information Administration (includes export graph), World Affairs, Bloomberg and Energy Economics article

Images: Wikipedia for logo and NASDAQ for prices