Omnipresent Gazprom currently dominates the Russian energy scene: it accounts for 85 per cent (as of 2006) of gas production and has expanded its activities both domestically and abroad. Gazprom is increasingly extending its presence in the EU gas market, through joint ventures and equity positions in every part of the gas value chain. The European Union as a whole gets about a quarter of its gas from Gazprom. Besides the traditional gas business, the company has been actively acquiring assets in oil, petrochemicals, electricity generation and coal. The company’s objective is to ‘become one of the largest integrated energy companies in the world, spanning oil, gas and electricity’.
The evolution of Gazprom over the last fifteen years has been remarkable. Gazprom was created from the Soviet Ministry of the Gas Industry and has become one of the top energy utilities firms in the world. In contrast to the oil industry, it has not been divided into several companies but kept as a single unit. The company provides about 20 per cent of earnings to the federal budget and it enjoys a particularly intimate relationship with the political power. Mr Tchernomyrdine, the Chief Executive of Gazprom, became Prime Minister of Russia. Mr Medvedev, a protégé of former President Putin who served as the chairman of Gazprom’s board of directors, was elected Russian president in 2008. During the depression period, the non-payments for gas deliveries severely undermined the company’s finances and had a negative impact on its investment policy. Low domestic prices of gas were kept heavily regulated and Gazprom literally subsidised Russian customers throughout the last decade. It is natural gas that is considered to have kept the Russian economy afloat during the economic crisis. Moreover, until recently Gazprom provided the former Soviet republics with gas at prices considerably lower than those paid by EU importing countries. Accumulated debts and accusations of stealing the gas destined for the EU market became a source of growing tensions between Russia and its neighbours (notably, Ukraine).
At the end of the 1990s, Gazprom was submerged by a number of corruption scandals that seriously tarnished its reputation. By the beginning of the 2000s, sweeping changes in the top management brought the company under the control of the newly elected president Vladimir Putin. In 2004, the state increased its stake in Gazprom from 38 per cent to a controlling 50 per cent plus one share. At the same time, the restrictions on foreign investments were lifted and the company became fully open to foreign investors. Private shareholders and companies such as E.ON Rurhgas now own the other half of its shares. The federal law approved by the state Duma also granted Gazprom exclusive rights to export natural gas. The Russian gas scene could evolve in the future with the dynamic production growth coming from the so-called ‘independent gas producers’ such as Novatek and Itera, or oil majors seeking to develop the gas business. In any case, Gazprom is targeted to remain a major actor of the Russian energy scene, while fully asserting itself as a global energy player. Since Lenin’s nationwide electrification plan (GOELRO), power generation has been considered fundamental for the economic development of the country. The Soviet power generation system was highly centralised and brought about the development of the regional joint power systems with the objective of accomplishing the Nationwide Unified Power System. The vast size of the country and the remoteness of the consumption centre from the major fossil fuel deposits made it necessary to develop efficient long-distance electric power transmission technologies.
This also enabled the transfer of energy during peak loads between different time zones. The Soviet Union became a world leader in high-voltage transmission and a pioneer in Ultra High Tension (UHT) engineering. For example, a UHT (1200 kV AC) line connected the powerful coal-fired stations in Kazakhstan to the European part of Russia. In the 1980s, the USSR introduced new capacities at a pace of 5–10GW per year. Substantial reserve capacities guaranteed a high level of security and reliability of the grid. The collapse of the USSR caused a clear rupture in the development of power generation: electricity production in Russia dropped from 1082 TWh in 1990 to 827 TWh in 1998. With the rebound of the economy since then, electricity consumption is expected to achieve the 1990 level in 2008. However, the current installed capacity of 220 GW (in 2006) has practically not increased in the last fifteen years and the bulk of the power generation sector is operating on outdated and worn-out equipment.
For instance, the failed transformers that caused the most serious blackout in Moscow in 2005 were over forty years old. Russia generates 43 per cent of its electricity from natural gas, followed by hydropower (18 per cent) and nuclear (16 per cent). The accelerated development of gas production in Western Siberia and the construction of transcontinental trunk lines to the West resulted in a significant shift to natural gas in the electricity generation mix during the 1980s. This had a positive environmental impact in the European part of the country. The share of coal and oil decreased gradually. The share of coal-based electricity generation is high only in Siberia, where major Russian coal producing regions are located. Until its restructuring, the key player on the electricity market was the Unified Energy Systems of Russia (RAO UES). The state-controlled monopoly RAO UES was established in 1992. It provided about threequarters of Russia’s total electric power output and owned most of Russia’s transmission lines. Since 1998, the holding was managed by Anatoly Chubais: well respected in international financial circles, he is certainly the most controversial public figure in Russia as he was responsible for the ill-fated privatisation programme of the early 1990s. 2001 marked the beginning of the major restructuring of the Russian electricity industry, which was completed in 2008. Based on the British model, the large-scale liberal reform implies the full corporate separation of monopoly network activities (long-distance high-voltage transmission and local grids) from power generation and retail supply. The state retains control of hydro plants and the nuclear power industry. The network business remains a regulated monopoly, while the generation, sales and repair activities become competitive. The generation utilities of the monopoly have been repackaged into twenty-one generating companies (fourteen ‘Territorial Generation Companies’ (TGK), six ‘Wholesale Generation Companies’ (OGK) and one Hydro OGK).
Most of them were privatised with a series of floats on the stock exchange in 2007–8. Most of the control stakes were bought by Gazprom and other large Russian industrial groups. Some European utilities (Fortum, E.ON, Enel) also took ownership of the generating companies. The new owners have committed to a large-scale investment programme: GW of new generating capacities according to Chubais’ investment plan between 2006 and 2010. Given that very little new generating capacity has been commissioned so far (at a rate of less than 2 GW per year since 2000), this target seems unrealistic. Moreover, the deteriorating state of the economy since mid to late 2008 will certainly impact the development of the power sector. It is argued that the sell-off of the monopoly is a necessary step to attract capital that is sorely needed for the modernisation of the power industry. In contrast, opponents of the reform believe that the break-up of the unified power system is just a round-about way of redistributing the assets to enrich the happy few. Given the notorious experience of market deregulation in the past, there are risks that such restructuring may result in a speculative outburst on the electricity market with more blackouts and price hikes in the future.
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