Dmitri LAVRENKO, Deputy General Director, CJSC Uralsevergaz (Urals North Gas): "Availability of the resource base, rational and transparent pricing policy, commitment to bear adequate social burden are components of gas suppliers’ healthy bona fides

GAZEX announced commissioning of natural gas supply to the Sverdlovsk Region which coincided with the toughest period that is the beginning of the heating season of 2009/2010.  Because of unprecedented indebtedness this season commences in a nervous situation for all market participants: consumers and suppliers of all sorts of energy and heat. By an estimate of participants in the market, the total of indebtedness of consumers in the Sverdlovsk Region in front of suppliers of fuel and power resources amounts to Rub 8 bln.  Now that the most severe problems of heat supply have been solved, the market participants are ready to comment on the statements by GAZEX leaders at a press-conference in Yekaterinburg on September 17. Dmitri LAVRENKO, Deputy General Director, CJSC Uralsevergaz, replies to our questions.

SUMMARY.
Uralsevergaz has ITERA Oil and Gas Company and the Government of the Sverdlovsk Region as its shareholders. Uralsevergaz was established for the purpose of eliminating gas deficit and securing stable gas supply to all categories of consumers in the Sverdlovsk Region. Natural gas had been supplied there since January 1, 1999. The average annual volume of gas supply to consumers of the Sverdlovsk Region increased from 15.3 bcm in 1999 to 18.4 bcm in 2008 or by 20.3%.
Cooperation between the Sverdlovsk Region and Uralsevergaz is based on a Long-term Cooperation Agreement between the Government of the Sverdlovsk Region and ITERA Oil and Gas Company until 2015. It was on request of ITERA Oil and Gas Company that Gazprom promgaz had developed a Master Plan for Natural Gas Supply and Gasification of the Sverdlovsk Region until 2015 and for the prospective period until 2020. Presentation of the Master Plan was held in Yekaterinburg in April of 2008.
In addition to the supply of gas in the volume needed by the Region, ITERA Oil and Gas Company is implementing a Program intended to construct gas lines and gas distribution network, and to upgrade boiler houses. It is also actively involved in socially oriented and charitable projects in the Sverdlovsk Region.

— The first question to you, Dmitri Nikolayevich, is obvious: Are you ready to compete against the new supplier of gas to the Sverdlovsk Region?
— We are not only ready, we are already competing. Even though Uralsevergaz is now a dominant natural gas supplier in the Sverdlovsk Region, other companies have been supplying gas to consumers in our Region since 2009.
It is true, though, that their emergence did not result from their competitive edge, but rather from certain administrative and corporate decisions. So, GAZEX, in that sense, was not a pioneer, but one of the new suppliers. It is better to say, one of suppliers who planed to supply gas in the future.
So far, as I can see it, GAZEX is reluctant to announce many of significant terms and conditions for its supplies. First of all, the new supplier did not disclose at what price it was going to sell gas to a great many consumers. In any case, GAZEX cannot but understand it was taking up anything but simple and, at times, extremely extravagant work (for example, the indebtedness of GAZEX to Uralsevergaz for gas supplied may vary within a year between Rub 70 and 200 million). We can only wish it good luck in this difficult endeavor.
As to suppliers that had come to the Region, the experience of the past had demonstrated that under the changed conditions Uralsevergaz was performing efficiently and in a sustained manner, and in addition to its economic objectives it used to solve a variety of social issues.
We stand for realistic and healthy competition in the gas market. We have nothing against that kind of competition after GAZEX, the entity we used to have long-term and sufficiently positive relationship with, became involved in it.
— Uralsevergaz has been supplying gas to the Region for about eleven years, now, that is since January of 1999. From the viewpoint of your Company’s experience, what problems would you anticipate in the market as soon as the number of suppliers has gone up?
— The natural gas market is specific for it is not homogeneous in composition of consumers. Some consumers are effectively liquid and they fulfill in good faith all their contractual obligations related to the gas supply. Among those obligations are timely and full payments for gas supplied. Unfortunately, far from all consumers belong to the category of bona fides consumers.
In fact, the entire housing and utilities sector has not been a bona fides payer for quite many years. This causes great problems. Uralsevergaz, in fact, has been crediting (or subsidizing) the housing and utilities sector. As of September 28, the indebtedness of housing and utilities enterprises in the Sverdlovsk Region to us totaled Rub 1.7 billion.
Should we suggest a realistically responsible gas-to-gas competition under such conditions, it would imply, among other things, responsibility of suppliers for observation of social justice principles in the gas supply business regardless of the price situation and trends in the domestic gas market. In other words, suppliers that come to the market of the Sverdlovsk Region, should work not just with the selected efficient consumers, but with the entire gas consumption pattern that had developed in the Region, including the housing and utilities sector, social, cultural and domestic household and enterprises that fulfill the government's defense order. We, in implementing the price formation principles, including those fixed in the Agreement with the Government of the Sverdlovsk Region, have in fact been doing it under any market conditions for over ten years, now.
— So, who is going to create and, what’s more important, to control the scheme of such equitable distribution of profitable consumers and social responsibility? How much realistic is it to organize such a scheme?
— This issue should be approached with great care. The implementation of decisions should not contradict the antitrust law. As you understand Uralsevergaz does not regulate the gas suppliers’ entry to and withdrawal from the territory of the Sverdlovsk Region. For this reason the answer to the first question definitely should not be sought with us. Obviously, it is the Government of the Region that should coordinate interaction of the gas suppliers in the Region and to arrange for proportional distribution of social burden. Building up such an interaction is not an easy thing to do for reasons of organizational, economic and technical nature.
So far, the only sustainable scheme of this kind is a "single gates" arrangement where various suppliers pursue their commercial efficiency, while handing over their gas to a sole operator for ultimate supply.
— What if a bona fides competition and equitable distribution of consumers is not achieved for whatever reason?
— If bona fides competition and equal distribution of social responsibility among all suppliers of gas is not achieved, the energy security of the Sverdlovsk Region in general might be at risk. Moreover, the success of the entire heating season, which commenced under such a strain these days, may become not obvious.
— Why?
— It is because the economics of Uralsevergaz and ITERA Oil and Gas Company won’t be able to sustain supplying gas exclusively to the housing and utilities sector and to insufficient owners (it is obvious that the indebtedness would go up during the heating season). At the same time the new suppliers will supply gas to large enterprises with good payment record (those who pay gas in good faith and in a timely manner). New suppliers, even those that declared their preparedness to work with all groups of consumers, have not fulfilled those intentions.
— What other problems would you site when discussing competition between various suppliers of gas to the Sverdlovsk Region?
— The Sverdlovsk Region is among the largest constituents of the Russian Federation in terms of gas consumption.
Uralsevergaz had supplied 18.4 bcm of gas to consumers in the Region in 2008. If not for the crisis the volume of the gas supply might be even greater. The volume of gas supplied could go up to 20 bcm within one or two years to come. It’s common knowledge that this is a very significant volume from a regional perspective.
This is why the resource base of each and every supplier of gas, the stability of gas supply not in the short-term, but in a mid-term and in a long-term perspective is important for the energy security of the Region. ITERA is currently building its resource base mainly thanks to the gas it receives from the gas fields in whose development its was involved. For that purpose, it would be good if all suppliers coming in the Region, had stable resource bases to secure their ability to provide natural gas on a long-term basis. At that, it is important that they should maintain continuous supply of gas.
There is one more important theme there. Bona fides competition is impossible without a sustainable pricing policy. It is necessary to stress that every supplier would certainly have its own pricing policy. There is no use to discuss a common or joint pricing policy: this arrangement would contradict antitrust legislation.
The rational pricing policy implies that suppliers responsible in relation to their businesses and to their consumers would hardly use a short-term damping at an initial stage of selling gas in the Sverdlovsk Region (or within a short period of time) to acquire a certain market segment.
The important thing every consumer needs to comprehend regardless which supplier he is going to give preference to is that suppliers intending to work honestly in relation to colleagues and to participate in bona fides competition would certainly base their pricing policy on quite an extended period of time. It is obvious that the pricing policy of every supplier should be absolutely transparent, stable and predictable.
The pricing policy should not be essentially dependant on the price volatility in the gas market of the country and Europe.
— Price fluctuations, no doubt, may happen, but even GAZEX suggested that competition among gas suppliers would lead to price reduction.
— It is unlikely that any supplier would be able to supply serious volumes of gas at a price below the regulated wholesale price established by the Federal Tariffs Service (FTS). Such a strange economic behavior (to put it a soft way) is able to cause a diversity of questions from controlling authorities and the Tax Office not only to a supplier, but also to a consumer. It is very much doubtful that under the current complicated economic situation any commercial supplier of gas would consciously give up a well-founded rate of profit. As a matter of information, let me note that Uralsevergaz is currently supplying a considerable volume of gas (over 40% of its total supply) at a price set by the state (in fact, at a minimal price).
These include the supplies to the population, housing and utilities, social and household facilities and for production of heat for these groups of consumers. Moreover, we are supplying gas, and this is important, to bona fides industrial consumers (about 80 percent of the 'commercial' gas) at a state regulated price.
— One more statement by GAZEX is that it, as a new gas supplier, would be better client-oriented. May you comment on this statement?
— I do not know what is understood under the term of better 'client-oriented'.
It probably implies that certain (or privileged) most attractive clients would be offered a different and more attractive price, if compared to the price offered to all other consumers. Then a question arises: how much does such selective client-orientation correspond to the interests of the Region and consumers at large? It is clear that not being a dominant supplier of gas in the Region and, correspondingly not being bound by antitrust limitations, GAZEX, for example, theoretically may afford a luxury of supplying gas to large energy companies or to large metallurgy companies at especially attractive prices. It is difficult to imagine, though, that gas would be supplied below the regulated price level. If that is to happen, we can only feel sorry for the consumers that did not meet the GAZEX attractiveness criterion and which GAZEX would be reluctant to supply to. In its turn, Uralsevergaz, being a dominant and socially responsible supplier cannot and does not divide into more attractive and lesser attractive clients. We ensure equal access conditions to all consumers irrelevant of the ability every particular consumer has to lobby its interests. Consumers that are being supplied gas at a state regulated price (let me say it again: in fact, at a minimal price) cannot expect from another supplier an even better price. So, no discussion of client orientation would do any good.
— Would the situation that is building up at the gas supply market in the Sverdlovsk Region affect the current contractual campaign of Uralsevergaz in any way?
— No, it would not. Given the statements by our colleagues, we don’t see why we should 'bustle about the contractual campaign'. The contractual campaign of Uralsevergaz for 2010 shall commence the standard way, the way it used to commence every year, which is the middle of October. We do not see how the new contractual season may be principally different from all previous ones from the organizational perspective, from the market situation viewpoint and in other dimensions.
Traditional preparatory procedures (legal, organizational, technical) for the contractual campaign are currently underway. Uralsevergaz shall enter the contractual campaign, as it always has been the case, with a clear understanding of how much gas there is on our balance (we have enough gas to supply all consumers), and at what price we are going to supply gas. We shall preserve the social orientation of Uralsevergaz’s pricing policy. At that, a system of economic encouragement for bona fides consumers shall become stronger. Our basic principles are firm and completely correspond to the Agreement between ITERA Oil and Gas Company and the Government of the Sverdlovsk Region which is to be effective until 2015.
— In conclusion, I would like to ask about your vision of the situation with the increasing number of suppliers in the Sverdlovsk Region in the near future?
— The situation cannot develop on its own without discussion of key questions by all the interested parties. In any case, the appearance of new suppliers in the Region, at least, needs a careful negotiation process with the involvement of all suppliers of gas and, certainly, the Government of the Region, as its parties.
It is necessary to organize the process so that every supplier coming to the Region would not contradict the antitrust legislation at a level of general consciousness, while they take a proportional burden of social responsibility for provision of gas supply to all consumers, including unprofitable ones. Every consumer should contact the suppliers. The suppliers should contact each other and the Government. An accurate and constructive interaction intended to ensure the energy security of the Region and the continuity of the gas supply during the commencing heating season should be the prime objective of this process.
The summary of the above may be expressed by a formula as follows: Availability of the resource base, rational and transparent pricing policy, commitment to bear adequate social burden are components of gas suppliers’ healthy bona fides competition. I believe that the activities by gas suppliers that come to the Sverdlovsk Region should meet those principles, no matter what particular supplier we are talking about.

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