RUSSIA - The Gas Market.

Russia holds the world's largest natural gas reserves, with proven reserves estimated at 47 TCM (1,659.1 TCF) - more than twice the reserves in the next largest country, Iran. In 2005 Russia was the world's largest gas producer - at 640.634 BCM/year, up from 578.6 BCF/y in 2003 - as well as the world's largest exporter at 152.478 BCM/y, up from 131.77 BCM/y in 2003. But unlike the Russian oil industry, Russia's gas industry has not been booming. Both production and consumption have remained relatively flat since independence in late 1991.

Russian consumption of natural gas was 416 BCM/y in 1993 and 405.8 BCM/y in 2003, having amounted to 388.812 BCM/y in 2005. The low point during the past decade occurred in 1997, when Russia consumed 350.4 BCM/y, while total production averaged 532.6 BCM/y.

Russia's strategy for natural gas, released in May 2003, calls for only modest production growth by 2010, even under its most optimistic scenario. Growth of Russia's natural gas sector has been stunted primarily due to ageing fields, state regulation, Gazprom's monopolistic control over the industry, and insufficient export pipelines.

Gazprom, Russia's state-controlled gas monopoly, holds nearly one-third of the world's natural gas reserves, produces nearly 90% of Russia's gas, and operates the country's gas pipeline grid. Gazprom is also Russia's largest earner of hard currency, and the company's tax payments account for around 25% of federal tax revenues. But despite its terrific size and significance, Gazprom is seriously encumbered by domestic regulation (see OMT of this week).

By law, Gazprom must supply the gas used to heat and power Russia's vast domestic market at government-regulated prices - the price averaging about $35-40 per thousand cubic metres - regardless of profitability. Accordingly, roughly two-thirds of the company's revenue comes from its export sales to Europe, where Russian gas is sold for more than $250 per thousand cubic metres. Because exported Russian gas accounts for about 25% of Europe's demand for gas, Gazprom is one of Moscow's main foreign policy tools. But as Gazprom's trade relationship with European consumers grows, contentions issues have arisen.

EU trade representatives have repeatedly denounced Gazprom's monopolistic market position and two-tiered pricing system and have linked the pricing issue to Russia's intended entry into the WTO. The Russian government has recognised this problem and has been gradually increasing the price for natural gas domestically.

The WTO issue figures prominently in relations between Russia and China. Russia has to negotiate individual deals with WTO members before it enters the organisation. Having finalised a bilateral deal on this with the EU in May 2004, the Russian Economy Ministry in July of that year indicated that it had reached an understanding on this with Beijing. The understanding was then reported to be that, in return for Beijing accepting low Moscow-regulated domestic gas prices, Russia was to supply China with natural gas at mutually "acceptable prices". This gas would be pumped to the Chinese market by pipeline to be built from a huge east Siberian field to be developed by a BP-led consortium (see Gas Market Trends).

Coal, of which Russia has the world's second largest reserves (157,010m tons) next to those of the US (249,994m tons), is an important source of energy for the Russian domestic market. In 2005, Russia consumed 125m t/yoe, down from 140.8m t/yoe in 1993. But under the new domestic energy strategy, coal is to play a greater role at the expense of natural gas.

Russia is the fifth coal consumer in the world, next to China, the US, India and Japan.