Russia Focuses on Gas Grid Expansion in Election Year

Copyright © 2021 Energy Intelligence Group

Russia’s push to accelerate an expansion of the natural gas grid reflects Moscow’s desire to spur domestic demand while the long-term prospects of exports are dimming because of the energy transition in Europe (NC Jun.17'21). At the same time the plan is also construed as a politically motivated project ahead of parliamentary elections this year. Elections are scheduled for Sep. 19, and the Kremlin is angling to muster support for the ruling United Russia party, which is floundering. The party’s electoral rating hit a 13-year low of 27% in early August, although there is little doubt that the party will secure a majority of votes -- due mainly to a traditionally low turnout, oppression of independent candidates and Kremlin critics, and an overall reduction in electoral transparency. Still, the underlying idea appears to be that, in providing more households with access to relatively cheap gas, the Kremlin can win back some of the population's loyalty, which has been wounded by a decline in living standards. Gas prices of the country's key supplier, state-run Gazprom, are regulated by the government and are not affected by market forces either in Europe or worldwide, a fact that made Russia's domestic supplies more like a social mission, even justifying Gazprom's monopoly on midstream infrastructure and pipeline exports. But the perception changes during phases of low prices and in light of domestic sale regulations: in fact, Gazprom is no longer the dominant supplier in several regions due to the aggressive expansion of rival Novatek and Rosneft. Proliferating Grid Expanding the gas grid is now a high priority for Deputy Prime Minister Alexander Novak, who is also Russia’s chief Opec-plus negotiator. The project, assigned to Gazprom, sets an ambitious goal of attaining a 100% "technically possible" gas grid penetration rate across the country by 2030 -- which signifies the actual penetration rate will be around 83%. Remote areas in eastern Russia or the far north are generally deemed as impossible to hook up, and Moscow is looking for alternatives, including small-scale LNG, for such areas. By 2026, Gazprom plans to increase the penetration rate to 74.7%, or to 90.1% of technically possible penetration, according to a presentation by distribution subsidiary Gazprom Mezhregiongas. That is up from 71.4% as of the start of this year and 53.5% as of the end of 2005 (graph). Gazprom Mezhregiongas’ regional units will act as operators of the project, responsible for the “last mile,” or pipes inside towns and villages that it will have to lay up to the boundaries of private land plots -- something that local authorities were previously in charge. Consumers will still have to pay for connection of their houses to the “last mile” pipe and buy the necessary gas-fired equipment. Rising Investments The accelerated expansion will be fueled by significantly larger investments: in 2021-25 Gazprom will spend 526 billion rubles ($7.1 billion), compared with 451 billion rubles spent in 2005-20 (table). The gas giant will finance the project by selling perpetual bonds, which will not increase its balance-sheet debt (NC Jul.1'21). Although deemed a project of nationwide importance, the expansion will not cover the entire country. The 2021-25 program only covers 67 out of 85 regions, leaving out East Siberia and some Far East regions where the penetration rate is much lower than the national average. Gazprom declined to say whether such regions, including Murmansk in the far north, could join the 2026-30 program. It also declined to comment why it did not agree with the regions of Kostroma, Chelyabinsk and Sverdlovsk, but this might have to do with its rivalry with Novatek, the dominant supplier in the former two regions, and Rosneft, whose Uralsevergas subsidiary is the key supplier in the latter region. Currently only 11 out of 85 regions can boast a 100% technically possible penetration, including Moscow and St. Petersburg. Nine regions, excluding Moscow and Tatarstan, will still take part in the 2021-25 expansion program. Gazprom Mezhregiongas told Energy Intelligence that this was necessary in order to connect newly built households and industrial facilities, as well as overhaul the existing gas distribution stations. By 2026, 24 more regions should reach the 100% technically possible penetration, meaning that 34 regions in the project won’t reach the 100% level by 2026. Vitaly Sokolov, Moscow Russia's Gas Grid Expansion

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