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Gas Trade at the Exchange as a Stage in the Liberalization of the Russian Gas Market

Sergey Vladimirovich Kozlov, student of the fourth year of law faculty of Moscow state university named after M.V. Lomonosov

In this article, the author examines the tendencies of the development of energy legislation in the sphere of stock-exchange trade of natural gas, the problem issues of stock-exchange trade of natural gas.

The Russian Federation possesses over a third of the global deposits of the natural gas, while its mining in our country amounts to 25% of the global extraction. The natural gas occupies more than 52% (with the indicator rising to over 70% in certain branches[1]) in the structure of the fuel and energy balance of Russia and remains the leading item in the structure of the fossil fuel export.

In accordance with p. 2 Art. 34 of the Constitution of the Russian Federation, the economic activity aimed at monopolization is forbidden, however, from the moment of the adoption of the Constitution for over 10 years precisely such monopolistic activity was being conducted in the Russian gas market. Besides, until the recent time, our country has had a model of the exclusive state regulation of the wholesale gas prices. With the beginning of participation in gas extraction by the so-called independent gas producers not affiliated with OAO Gazprom (e.g. OAO Novatek, OOO Itera and others) in the late 1990s – early 2000s, a competitive gas market began to appear. Every year the gas market share of the independent gas producers is growing, and in 2013 it has reached 31%. However, the access of the independent gas producers to the extraction of the natural gas alone is not enough for the formation of a competitive market of the natural gas. It is necessary to eliminate all the other multiple barriers, which are standing in the way of this process, primarily creating the propitious conditions for the sales of gas by the independent gas producers to the end-consumers and in future granting the independent gas producers access to the export of gas. The Russian gas market needs to be liberalized.

One of the currently existing barriers in the way of the liberalization is the predominance of the model of the state gas price formation and the virtual absence of the market mechanisms of price formation[2].

In the countries with developed market economies, an important role is played by the transparency of price formation in the natural gas market. As noted by the German expert Jörg Spicker, “the European Union aims for the opening of the energy and gas prices by means of gradual introduction of competition and thus improving the efficiency of the energy sector and the competitiveness of the European economy in general”[3]. The liberalization of the Russian gas market is an unavoidable process. The question is only in the degree and dynamic of the liberalization.

The Energy Strategy of Russia until the period of 2030 states among other the following as the main tasks “of achieving the strategic goal of developing the domestic energy markets”: “a gradual liberalization of the domestic markets of the main energy resources (gas, electricity, heating)”, “stimulating the conclusion of long-term contracts for supplying energy resources”, “creating a legislative basis for the transparent and non-discriminatory access for all the members of the market to the energy infrastructure (gas mains, electric and heating networks)”, “stimulating the participation of private companies in the stock trade of energy resources to create the normative legal foundations for the development of the trade in the energy “derivatives” (futures, options etc.) in rubles and via stock trades as indicators for the whole system of price formation for the Russian energy resources” etc[4].

In December 2013 the Energy Centre “Skolkolvo” published a study titled “The Approaches to the Price Formation in the Russian Gas Market: in Search of a Balance of Interests”, which concludes that the most balanced resolution of the problem of the price formation for all the members of the gas market (including the state) would be a partial liberalization, which is understood by the authors as “the cancellation of the minimum limit for the gas price [for OAO Gazprom] while simultaneously providing the export right to the independent producers of gas by supplementing the Central Asian gas, introducing the obligation for the independent producers of gas on the sales of gas to the population and the lowering of the transportation tariffs”.

One of the primary stages of liberalizing the Russian natural gas market is the creation and the development of the stock trade of gas in the Russian Federation, which is the common interest of the gas producing companies and the end-consumers. The prospective conclusion of long-term stock gas contracts will allow to secure the predictability of the development of the gas sector of the Russian economy, will create the fertile ground for investments in the gas branch, their conclusion will enable the use of the instruments of the hedging of the risks with the changing prices in the long-term period and will also offer other benefits.

Nevertheless, the issue of the formation of the stock trade in the natural gas is a complicated one. As noted in his statement at the conference “The Stock Market of the Energy Sources: Stable Development instead of Stagnation”, which was held as part of the National Oil and Gas Forum of 21 March 2013, the president of the Russian Gas Community V. A. Yazev: “The issue of the development of the stock gas trade resembles an iceberg. The hidden part is huge and ploughs the very bottom of the structure of our system of gas supply. Thus we should approach this issue very carefully, especially under the conditions of the unfavorable competition at the external markets”[5].

In the continental Europe, the spot trade in the natural gas has long been conducted at the seven “hubs” (the joints of the gas transportation system where the producers deliver the extracted gas from the deposits), the main ones being NBP, TTF, Henry Hub. However, in the last ten years the stock trade in the energy products has been actively developing in Europe in the last decades. In 2002, as a result of the merger of the Leipzig Energy Exchange (LPX) and the European Energy Exchange (EEX) situation in Frankfurt, a single European Energy Stock Exchange (European Energy Exchange AG[6]) was created in Germany. The stock conducts the trades with futures and options for the electrical energy, the certificates for the CO2 emissions and coal. Starting in July 2007, the EEX started to trade in the natural gas. At the time both the futures and the spot trades for the supply of the natural gas are being concluded at the exchange[7].

The Formation and Development of the Market Mechanisms in the Gas Price Formation in the Russian Federation. The beginnings of the process of the formation of the exchange gas trade in the Russian Federation dates back to 2002, when the Government of the Russian Federation adopted the Resolution No. 328 of 22 May 2002 “On Introducing Changes and Additions into the Resolution of the Government of the Russian Federation No. 1021 of 29 December 2000”. In accordance with the p. “c” of the current resolution in its new significantly amended edition, the Main Clauses of the Formation and the State Regulation of Gas Prices and Service Tariffs for its Transportation in the territory of the Russian Federation were laid down.

In the late 2002, OOO Mezhregiongaz began to conduct the electronic trade in gas extracted by independent producers. However, at that stage the share of the independent gas producers in the overall production of the natural gas was very small, thus the gas market as such was not impacted by the introduction of the electronic trade. The gas market was fully identified with the OAO Gazprom, whose gas sales prices were single-handedly regulated by the state.

In 2006, after the adoption of Federal Law “On the Export of Gas”, which granted the exclusive right of natural gas export to the organization owning the unified gas supply system or its affiliate fully owned by this organization (i.e. for the OAO Gazprom), the government adopted the suggestion of the Ministry of Industry and Energy, the Ministry of the Economic Development and Trade, Federal Customs Bureau, Federal Anti-Monopoly Bureau and the OAO Gazprom on the beginning of an experiment in 2006-2007 on the sales by Gazprom and its affiliated persons of gas at the electronic trade platform (ETP). The legal basis for that was the adoption of the Resolution of the Government of the Russian Federation No. 534 of 2 September 2006 “On Conducting Experiment on the Sales of Gas at the Electronic Trade Platform”. In accordance with the p. 1 of the Resolution, the experiment on the implementation by the OAO Gazprom and its affiliated persons of the sales of the natural gas was conducted at the ETP of the organization determined by the Ministry of Industry and Energy of the Russian Federation (this platform became OOO Mezhregiongaz). However, a stringent quota was set. Namely, the yearly limit for the sales of the natural gas at the prices non-regulated by the state was set at 5 billion cubic meters[8].

In 2007, a decision was made on the prolongation of the experiment until 2008, and in December 2007 the Government of the Russian Federation adopted the Resolution No. 851 “On the Prolongation of the Experiment on the Implementation of the Sales of Gas at the Electronic Trade Platform in 2008”, which set the quota for the ETP-facilitated sales at 7,5 billion cubic meters. It was mentioned that “with respect to the given volumes of gas the principles of the regulation of the export gas prices foreseen by the p. 15.1 – 15.3 of the Main Clauses on the Formation and the State Regulation of the Gas Prices and Service Tariffs for the Transportation of Gas in the Territory of the Russian Federation Adopted by the Resolution of the Government of the Russian Federation No. 1021 of 29 December 2000[9] do not apply. The p. 2 of the above-mentioned resolution has allowed the exceeding of the sales of gas at the non-regulated prices of no more than 15% from the volume of gas sold by the independent gas producer at the ETP. It should be noted that the Resolution of the Government of the Russian Federation No. 851 of 10 December 2007 contained another, although not such an important step towards the creation of the competitive market of the natural gas. For the first time, the government legally recommended Gazprom to provide the independent gas producers “access to the gas transportation system of the company for the transportation of the volumes of gas, which are foreseen in the contracts concluded by these organizations at the electronic trade platform with consideration of the terms and specific of conducting the trading”[10].

The volumes of sales of the natural gas at the ETP in 2006-2008 were not high. In 2006 they amounted to 10 billion cubic meters, decreasing in 2008 to 6,09 billion[11]. The number of contacts concluded in the period of 2006-2008 amounted to 3,120. In accordance with the p. 6 of the Resolution of the Government of the Russian Federation No. 851 of 10 December 2007, in 2008 the responsible ministries and the federal bureaus should have presented to the Government of the Russian Federation their suggestions on the transfer from the experiment on the sales of natural gas by Gazprom not based on the state-regulated prices to a standing use of the stock exchange technologies. However, the transfer was delayed as a result of multiple interministerial discussions until the year 2011. From 2009 onward, the Ministry of Energy of the Russian Federation directed to the Government of the Russian Federation several versions of the Draft Resolution “On the Sales of Gas Using the Exchange Technologies”, which foresee Gazprom sales of the quota volumes of gas not only at the gas exchange, but also at the commodity exchanges and ETPs[12].

In 2011, President of the Russian Federation D. A. Medvedev authorized the resumption of the gas trade at the exchange. Foreseen was the conduction of parallel trading at the ETP and the commodity exchange. The position of the President of the Russian Federation corresponded with the position of Gazprom’s specialists, who suggested as early as in 2009 to further develop the exchange mechanisms by creating two mutually supplementing market instruments, namely ETPs. They believe that the main tasks of ETP should be the trade in the physical volumes of gas and for the exchange – the trade in futures and options with the possibility of supplying (based on the will of the participants) the physical volumes of gas when the contract is due[13]. The parallel launching of the gas trade both at the ETP and the commodity markets would be in line with the European experience. However, this position was not shared by the Federal Bureau on the Financial Markets, which demanded that ETP be terminated and the trade went on only at the exchange.

In April 2012, after prolonged discussions, the Resolution of the Government of the Russian Federation No. 323 of 16 April 2012 “On the Sales of the Natural Gas at the Commodity Exchanges and Introducing Changes into the Acts of the Government of the Russian Federation on the Issues of State Regulation of the Gas Prices and the Access to the Gas Transportation System of the OAO Gazprom” was adopted. According to p. 1 of the current Resolution of the Government of the Russian Federation, Gazprom and its affiliated persons were given a quota for the sales of the natural gas at the commodity markets in the volume of up to 15 billion cubic meters in 2012 and up to 17,5 billion cubic meters in 2013[14].

In this regulation, as in the Regulation of 2006, the Government of the Russian Federation instituted a ban on exceeding the volume of the gas sold by Gazprom at the commodity markets over the volume of the natural gas sold at the commodity markets by the independent producers themselves[15].

The given regulation has replaced the right of Gazprom to trade at the ETP Mezhregiongaz with the sales of gas at the commodity markets. Moreover, the current resolution does not contain any concrete requirements to the commodity markets, where the trading will take place.

The launching of gas trading has been delayed several times. It was largely due to the definition of the trading organizer. At the moment there is a mechanism which allows organizing the exchange trading in the “Natural Gas” section at the Saint Petersburg International Commodity and Raw Material Exchange. In order to launch the trading, the specialists of the Ministry of Energy and other bodies, jointly with the representatives of the gas mining companies and the Russian Gas Society, have worked out a Roadmap on launching the gas trading in the Russian Federation.

Up to now, there remains a large number of hurdles (apart from the mentioned above) preventing the full-scale launching of the exchange trading. Thus, for example, in order to conduct the spot trading, one should resolve the issue of the delivery of gas from the gas producing regions (which are situated in the Siberia) to the place of the conduction of the trading, the issues of the access to the gas infrastructure etc. Because of that, the mechanism of the exchange trading foreseen by the Regulation of the Government, has still not started to function in full.

The sections of the natural gas were created within the structure of both the Saint Petersburg International Commodity and Raw Material Exchange and the Moscow International Commodity and Raw Material Exchange (up until June 2012 – “Interregional Exchange of the Oil and Gas Complex”). However, neither of them is currently conducting significant gas trading[16]. After the Resolution of the Government of the Russian Federation No. 323 of 16 April 2012 came into force, the OAO Gazprom presented well-grounded claims to the Rules of the Exchange Trade adopted at the gas section of SPICaRME, which at the moment were virtually copied from the Rules of the Exchange Trade adopted for the section of oil and oil products. As a result, the given Rules were characterized by the absence “of the specification of the exchange gas contract and the description of the rules of interaction between the participants of the trading, the Exchange, the clearing organization, the system operator, the guaranteeing supplier and the clearing bank”[17]. From 1 January 2014 the new Rules on Conducting Organized Trades[18], which take into account the specificity of gas, are in place at SPICaRME’s “Natural Gas” section.

The subject of the exchange trade at SPICaRME is in accordance with the p. 2.2 of the Rules “natural and (or) dry stripped gas, which is supplied under the conditions of the Unified System of Gas Supply of the OAO Gazprom based on the contracts concluded between the sellers and the buyers as a result of the exchange trading within the section”[19]. The exchange goods is allowed for the exchange trading after the adoption and coming into force of the respective Specification of the Exchange Commodity, adopted by the president of the Exchange or his deputy.

Current there exist all the prerequisites for positively resolving the issue on restoring the trading of gas at the ETP. In this case, it will be required to introduce changes into the Regulation of the Government of the Russian Federation No. 323 of 16 April 2012. It is most likely that the government will once again chose the way of introducing quotas on the volumes of gas sold by Gazprom and its affiliate persons at the electronic trading platform. The launching of trading in the physical volumes of gas at the ETP would allow avoiding a number of the above-mentioned problems, which are currently plaguing the commodity exchanges. However, the parallel functioning of both instruments of the price formation is in full correspondence with the experience of the European states.



[1] See, Zavalny P.N. The global gas market and the Russian gas branch: Developmental trends. Gazovy biznes. Zhurnal Rossiyskogo gazovogo obshhestva, 2013, No. 4–5, p. 5 (in Russian).

[2] It should however be noted that the perspectives of the liberalization of the Russian gas market depend primarily on the political factors rather than economic or social ones. A transit towards the market mechanisms of price formation at the Russian market of the natural gas means the application of Gazprom of such mechanisms, or more precisely the authorization by the state to Gazprom to use market mechanisms.

[3] Dr. Jorg Spicker. Handbuch Energiehandel. Herausgegeben von Prof. Dr. Hans-Peter Schwintowski. 3. Auflage. Erich Schmidt Verlag, Berlin, 2014, p. 62.

[4] See p.4 ch. V of the Energy Strategy of Russia until the period of 2030 adopted by the Resolution of the Government of the RF of 13 November 2009 No. 1715-р. Code of Laws of the Russian Federation, 2009, No. 48, Art. 5836.

[5] The future of the Gas Exchange. An introductory word of the conference moderator, the president of the Russian Gas Society Valeriy Yazev. Available at: http://gb2012.ru/?p=5199.

[6] Available at: http://www.eex.com.

[7] Piglram/Härle, Der Handel an der EEX, in Hans-Peter Schwintowski (Hrsg.), Handbuch Energiehandel, 3. Auflage, Erich Schmidt Verlag, Berlin, 2014; Frasch, Börslicher Energiehandel in Deutschland — Darstellung und kritische Würdigung, 2010 ; Zenke/Schäfer [Hrsg.], Energiehandel in Europa, 2. Auflage, 2009, München; Horstmann/ Cieslarczyk (Hrsg.), Energiehandel, Ein Praxishandbuch, Köln, Berlin, München, 2006; Cieslarczyk/Ungemach, Liberalisierung and Energy Exchanges in Germany, in Rogenkamp/Boisseleau [Hrsg.], The Regulation of Power Exchanges in Europe, 1. Auflage, Antwerpen, 2005 ; Härle, Die Terminbörsen EUREX und WTB, Berlin, 2002; European Energy Exchange AG, Einführung in den Börsenhandel an der EEX, Release 01C. Available at: http://www.eex.com/de/document/4423/EinfuehrungBoersenhandel_Release01C.pdf ; European Energy Exchange AG, EEX Produktbroschüre Erdgas, Release 001d. Available at: http://cdn.eex.com/document/110632/ 20120614%20EEX%20Produktbrosch%C3%BCre%20Erdgas.pdf.

[8] Code of Laws of the Russian Federation, 2006, No. 37, Art. 3891.

[9] Code of Laws of the Russian Federation, 2007, No. 51, Art. 6365.

[10] Ibid.

[11] The official website of the Federal Anti-Monopoly Bureau. Available at: http://fas.gov.ru/fas-in-press/fas-inpress_36342.html

[12] See, for example, news archive at the website of the Ministry of Energy RF. Available at: http://minenergo.gov.ru/press/min_news/2731.html; http://minenergo.gov.ru/press/min_ news/4527.html

[13] See, Duhovich D.V., Lakhno P.G., Rusanov A.N. The legal aspects of increasing efficiency of sales of the natural gas. Energeticheskoe pravo. 2010, No. 1, pp. 45–55 (in Russian); Petrov A., Cherny B. The creation of exchange mechanisms for the gas market in Russia and dominant trends in the global markets Rynok cennyh bumag, 2009 No. 17 (November) (in Russian). Available at: http://www.mrg.ru/docs/media /rcb/09.17.pdf.

[14] Code of Laws of the Russian Federation, 2012, No. 17, Art. 1997.

[15] Ibid.

[16] As of the early February 2014, OAO MMTB had no exchange license, which is necessary for conducting exchange trading in accordance with the Federal Law “On the Organized Trading”, which came into force on 1 January 2014.

[17] See, E. Shesternina, Starinskaya. Gazprom promises problems to the gas exchange trade (in Russian). Available at: RBK-daily: http://www.2stocks.ru/main/invest/stocks/article/ rbc290611

[18] See the Rules for organized trading in the Natural Gas section. ZAO SPbMTSB of 12 September 2013.

SPbMTSB official website: http://spimex.com/upload/iblock/76f/76ffe9ca5dc2196509e301000ec4f712. pdf

[19] Ibid.

Bibliography:

  1. Dukhovich D.V., Lakhno P.G., Rusanov A.N. The legal aspects of increasing natural gas sales efficiency. Energeticheskoe pravo. 2010. № 1. pp. 45–55 (in Russian).
  2. Petrov A., Cherny B. The creation of the exchange mechanisms for the gas market in Russia and dominant trends in the global markets. Rynok cennyh bumag, 2009. № 17. (November) (in Russian).
  3. Zavalny P.N. The global gas market and the Russian gas branch: development trends. Gazovy biznes (Magazin of the Russian Gas Society), 2013. № 4–5. p. 5 (in Russian).