RUSSIA - Local Consumption

Russian demand for the primary energy sources has fallen steadily since 1987, in parallel with the drop in production. This corresponded with the slow- motion collapse of the Russian military-industrial complex in the final years of the USSR and through the 1990s. Given the current economic situation, it is clear that the decline in demand cannot be reversed in the near future to reach levels achieved during the mid-1980s.

Oil consumption has fallen by nearly half to reach 128 mtoe in 1997, compared to 249.8 mtoe in 1987. Coal consumption has fallen by nearly 45% to reach 113 mtoe in 1997 compared to 205.1 mtoe in 1987. Gas consumption has fallen by 15% during the same time period. Hydropower consumption has remained relatively stable, fluctuating between 13.2 mtoe and 15.2 mtoe. Nuclear power output declined from 32.2 mtoe in 1987 to reach a low of 25.2 mtoe in 1994, but has since risen to 27.9 mtoe in 1997 (see table).

There are 28 oil refineries in Russia, owned mostly by the integrated oil groups in the country, and a big number of them are old. Some plants date from before the 1917 Bolshevik revolution. Some of the integrated oil combines have inviting foreign companies to invest in modernising or expanding their refineries as partners. Foreign companies have been invited to invest in gas processing ventures as well. If the projects materialise, Russia would regain a position it once held as the world's biggest oil refiner, now being the third largest. It could become a major exporter of LPG. It would also improve the domestic supply system.

                       RUSSIAN ENERGY PRODUCTION

                   (million tons of oil equivalent)

            1987     1990     1992     1994     1995     1996

1997

Oil        569.5    515.9    398.8    317.6    310.8    302.1

306.9

Gas        457.0    538.2    537.6    509.8    499.9    505.0

477.9

Coal       184.4    176.2    148.4    120.7    118.1    115.0

110.1

Nuclear     32.2     30.5     30.9     25.2     25.6     28.1

27.9

Hydro-power 14.0     14.3     14.8     15.1     15.2     13.2

13.5

Total    1,257.1  1,275.1  1,130.5    988.4    969.6    963.4

936.3

                      RUSSIAN ENERGY CONSUMPTION

                 (million tons of oil equivalent)

            1987     1990     1992     1994     1995     1996

1997

Oil        249.8    249.7    224.4    162.7    146.1    128.0

128.0

Gas        347.8    378.1    375.5    335.0    317.9    317.0

298.0

Coal       205.1    180.6    154.7    126.4    119.4    119.0

113.0

Nuclear     32.2     30.5     30.9     25.2     25.6     28.1

27.9

Hydro-power 14.0     14.3     14.8     15.1     15.2     13.2

13.5

Total      848.9    853.2    800.3    664.4    624.2    605.4

580.5

Source: BP Statistical Review of World Energy, June 1998

The domestic energy sector is beset by a range of problems, the main one being unpaid bills. This is one of the root causes of financial difficulties facing the government. Unpaid bills by consumers leave power companies unable to pay their fuel suppliers, mainly Gazprom and coal suppliers, who in turn are unable to pay tax to the government. For example, Gazprom at the end of 1997 was owed $14 bn for unpaid deliveries. The problem is compounded by the fact that energy is sold at subsidised rates. Numerous moves to inject some efficiency into the system have failed to yield results.

Yet efforts are continuing in this direction, with emphasis on eliminating the price differential between industrial and domestic users. On Oct. 1, 1997, there was an increase in the wholesale price of gas charged by Gazprom to distributors who then resell to consumers. In the main gas producing regions, the price was increased by 10% to 110 new rubles/thousand cubic metres (TCM), equivalent to $19/TCM. In adjacent regions, it was increased by 16% to Rbs116/TCM. In all other areas of Russia, the price was increased by 22% to Rbs122/TCM ($21/TCM). This compared to a world price of $90/TCM. At the time the Deputy Chairman of the Federal Energy Commission (FEK), G. Ustyuzhanin, said it had been "recommended" to the Russian provinces that the retail price be set on the basis of a 20% maximum mark-up on the wholesale rate plus VAT.

Further steps have been taken in 1998 to phase out the differences in price of gas for residential and industrial users. In March, the FEK approved plans for a 15% average rise in the wholesale price of gas for household users. Under the new price scale, which came into effect on April 1, the wholesale price was raised to Rbs127/TCM ($20.93/TCM) in the main gas producing regions, while it was increased to Rbs133 in adjacent areas and Rbs140 in the rest of the country. The price hike was ordered in a government resolution which called for phased price increases "to the level of wholesale prices in industry after excises" by Jan. 1, 1999. A further 8% increase in price was to be implemented

as from June 1. 'Interfax' indicated that Rbs410 million would be raised from the price increase for residential consumers, which would help cut the price of gas supplied to power companies by 17%. That in turn would help cut electricity prices for commercial users by 5%.

In June, Premier Sergei Kiriyenko launched measures to boost revenue collections and increase efficiency in the domestic energy market. One incentive for payment was the reduction by 50% of the price of gas and electricity to end-users who would pay promptly. In addition, energy consumption by state entities, like the police and defence forces, was to be cut by 20% from the 1997 levels.