RUSSIA - Upstream Gas.

About one-third of the world's natural gas reserves lie in Russia's super-giant fields and in smaller structures adjacent to them. These ensure the availability of future supply. Russia also has a range of opportunities to import natural gas on commercially attractive terms from Central Asian and Caspian countries through pipeline networks established during the Soviet era.

The main source of uncertainty for Russian gas production is the rate of decline in the output from the Urengoy, Yamburg and Medvezh'ye fields in the Nadym-Pur-Taz region of western Siberia. These fields currently account for over 75% of the national gas production. There is considerable uncertainty about how rapidly production from existing fields will decline. Projections by Gazprom and the Russian government foresee a sharp acceleration in decline rates. This may reflect damage inflicted on reservoirs through precipitate production increases during the Soviet era; but, with appropriate investment in production infra-structure, the decline in output has been staved off at the Medvezh'ye field. It is likely that the same programme can be implemented at the Urengoy and Yamburg fields. The key judgement is whether the required investments will be made. That will depend on the expectation of adequate returns on investment.

If the Urengoy and Yamburg fields do decline as projected in the government's Energy Strategy (see DT of this week), nearly 300 BCM of new production capacity would be needed in the next 20 years to meet expected demand. Future supply developments will depend on the ability and willingness of customers - domestic and foreign - to pay high enough prices needed to support new investments.

Heavy foreign investment and technology will be needed, not only for new field developments and the building of transportation infrastructure, but also to deal with exceptionally difficult geological and climatic conditions. Although Russia is widely perceived as a high-risk place to do business, the country's enormous gas potential is attracting foreign investors through production sharing agreements (PSAs) - but PSA terms are getting increasingly un-attractive.

While existing Russian gas reserves are adequate to meet domestic demand and to support higher exports, over the next two decades developing those reserves will depend on whether investors can make adequate returns. Given the current economic and business environment in Russia, the prospect for such returns is unclear. Major uncertainties surround prices, payments, terms of payment, taxation and the new regulatory framework.