The International Energy Agency has urged the Russian federation to maintain its momentum in revitalizing its energy sector.
An IEA study observed that Russian energy reform is linked with reform of the economy as a whole. The Russian government asked for and cooperated with the study.
IEA said, "As in the reform of the general economy, much also remains to be done in the energy sphere."
For example:
- Some energy prices remain controlled below full cost.
- Oil and gas related taxes maximize short term revenue and do not promote economic efficiency.
- Management of many privatized energy enterprises has been shielded from accountability.
- There often is uncertain protection for consumers against privatized energy monopolies.' IEA said Russia has made progress in integrating its energy economy with the international economy and has made political commitments under the European Energy Charter Treaty.
IEA data list Russia as the second largest total energy producer in the world with a 13% share. It ranks after the U.S. with 20%.
Russia's energy sector suffered less than most other industries as a result of the country's sharp economic decline since 1990.
Gas issues
IEA said although crude oil prices were decontrolled in the domestic market in September 1993, export quotas, the export tax, and physical and administrative constraints prevented Russian producers from competing for foreign markets. Several major price distortions remain."Continuing control over natural gas prices is justified by the monopolistic structure of supply," IEA said. "Gas prices to distributors have commendably been raised but remain uniform across Russia, ignoring differences in transportation costs.
"Since gas dominates Russia's internal energy market, it is essential that gas prices fully reflect costs, including transport costs, which are a major component of gas prices. Otherwise there will be no basis on which other fuels may fairly compete."
IEA's report said Gazprom, the largest energy monopoly in the world, should allow other producers, especially of associated gas, to have nondiscriminatory access to its pipelines. What's more, Gazprom should be discouraged from using its dominance to undercut industrial markets of local gas distribution companies.
And in line with trends elsewhere in the world and in the Russian oil industry, consideration should be given to unbundling gas production from gas transmission to promote competition in production and attract private capital.
Other issues
IEA said nonpayment of energy bills is a serious problem in Russia and makes it difficult for energy producers to pay their suppliers. It urged the government not to protect nonpaying public sector customers from disconnection.It also said the government should remove limits on oil exports, whether administrative or physical, and end special prices and credit terms for oil to former Soviet Union trading partners.
"One way the government may be able to promote growth in energy sector tax revenues is by structuring taxes so energy enterprises could make profits on higher cost production that would otherwise be abandoned.
"The present royalties and export taxes based on volumes, excise taxes based mainly on revenue, and additional regional taxes do not do this. "The cumulative impact of these and other taxes can amount to more than 100% of an enterprise's revenue at the margin, leaving many unable to cover costs, let alone finance investments."
IEA pointed out that foreign investors need a stable legislative regime. The Subsoil Law provides a basic legal framework for the energy sector, but production sharing legislation could help limit uncertainties generated by Russia's frequently changing tax regime.
IEA recommended that government continue to create a competitive decentralized oil sector but warned that newly formed large, vertically integrated companies should not be allowed to hinder the access of smaller and foreign companies to the Russian oil sector. Open tenders should be issued for all new fields and exploration tracts.
The study said, "Discussions of energy transit issue within the framework of the Energy Charter Treaty should begin immediately so vital transit and related production developments may proceed in all countries concerned."
Russia has the potential for large energy efficiency gains. IEA urged it to develop private sector capabilities for energy efficient appliances and equipment, while avoiding administratively complex approaches.
IEA urged Russia to include environmental considerations in economic decision making, using cost effectiveness as a criterion in regulation, goal setting, and taxation.
The Russian oil industry also should improve its environmental performance by reducing flaring of associated gas and curtailing oil spills caused by unacceptable production and drilling practices.
IEA called for the government to accelerate its transition from centrally financed oil and gas research and development to privately funded R&D to meet user demands. Copyright 1995 Oil & Gas Journal. All Rights Reserved.
