In 2010–2015, domestic gas consumption in Russia fell by 4%, and ACRA’s baseline forecast does not anticipate the growth trend to resume until the year 2020 (Figure 1).
The forecasted medium-term stagnation of domestic gas consumption is determined by conservative growth expectations with regards to the Russian economy as a whole, which is still adjusting to the oil price shock of 2014–2015. The "initial wave" of this adjustment translated into an inflation outburst and was over by the onset of 2016. The convergent chain reaction of income reduction is stretched out over time, and the impact of cost cutting by one set of economic entities on costs of other economic entities continues to tighten domestic demand. The end-date of this process will depend on consumer borrowing intensity and budget consolidation rate. The Russian economy is not likely to return to a stable growth phase until late 2017 or early 2018. In 2018–2020, we anticipate the annual rate of Russia’s economic growth to reach 0.5–1%, although even high oil prices will not help the potential five-year GDP gain to rise above 1–1.5%. The country’s economic growth will be hampered by unfavorable demographic trends (shrinkage of gainfully employed population) and high costs of investment imports following the devaluation of the RUB.
In a sluggish economy, extensive growth of demand for natural gas is unlikely. Economic growth dynamics directly correlates with that of power consumption, and the electric power industry is the country’s largest natural gas consumer. Moreover, lack of incentives for extensive economic growth stimulates intensive business growth, i.e. encourages businesses to invest in efficiency. Inefficient gas consumption amounts to 50–60 bln cubic meters; however, unlocking this potential would require investments, and we should not be too hopeful that this process will be quick. Nevertheless, we have reasons to believe that increased gas efficiency will become an important mid- and long-term gas consumption trend.
Capacities of gas-fired CHPs were significantly enhanced, but gas generator load went down due to the power system surplus.
In the framework of projected gas consumption decline through the year 2020, the power sector acts as its key negative contributor. Electric power generation accounts for 24% of domestic gas consumption in Russia, and we expect that gas consumption by the power sector will drop by as much as 10%. The paradox lies in the fact that gas-fired power plants account for the bulk of recently commissioned facilities (Figure 3).
Russia’s current power system is characterized by a 10–12% surplus formed back during the time of the RAO UES of Russia reform when the investors that took part in the privatization of its state-owned energy assets committed to the construction of new facilities by signing Power Supply Agreements (PSAs). These commitments became vital following a number of accidents and power delivery failures that the Russian power industry had to deal with in several regions in 2005–2006. As a result, the growing supply in 2008–2016 amounted to 11%, while demand went up by a mere 1%. Gas-fired power generation was put into service in the European part of Russia, where a number of new nuclear power plants (NPPs) had also been commissioned. NPP load is not demand-driven, and unless an NPP is undergoing repairs it tends to always operate at full capacity. Thus, given the capacity surplus, it was gas-fired power generation that was rendered the hardest blow: similar to Europe, although there it was caused by surplus and growth of plants fueled by renewable energy sources (RESOP). Under construction in Russia currently are 10 GW NPPs, and given the sluggish economic growth and power consumption, this will have a dampening effect on the load of gas-fired CHPs.
The other factor that has been freezing gas consumption by the power sector over the recent years (and will continue to affect it in the long run) is increased gas consumption efficiency. New Russian gas-fueled power plants are 30% more efficient than the industry average. In the course of power system modernization, the growth potential of gas consumption efficiency in the power sector, estimated at 30 bln cubic meters, will eventually be unleashed, but not without sizable capital investments. The current power market regulation fails to offer clear incentives that would encourage investors to upgrade their facilities, therefore we can hardly expect the potential to be fully unlocked even within the next 10–15 years.
Heat generation is the largest consumer of natural gas, and heat market reforms may also affect the gas market.
Heat generation in Russia accounts for 29% of total domestic gas consumption, i. e. even more than power generation. Gas takes up 3/4 of Russia’s heat generation fuel basket. Unlike power generation, in whose fuel basket the share of gas is inferior to the other energy sources (primarily nuclear energy), the share of gas used for heat generation will grow (primarily through petroleum product substitution). The growth potential of gas consumption in heat generation through substitution of other fuels is estimated at RUB 10 bln.
The growing demand for gas is expected with regards to the chemical industry, households, and the transportation sector.
The Russian heat market is on the brink of reform, which will become the key priority of the fuel and energy sector development. Heat is one of the few sectors of the Russian economy, which had been “trapped” in the 1990s and have not experienced the economic renaissance of the 2000s. The reform of RAO UES had led to growing investments in the power sector. However, while those investments grew threefold between 2005 and 2015, investments in the heat generation sector gained only 30%. Fuel consumption efficiency in power generation increased by 2.5% over the same period, and showed zero growth with regards to heat generation.
The heat generation sector reform is gaining priority for the energy industry. Among various scenarios, the dominant one is the introduction of a new quasi-market tool — alternative boiler plants, which according to preliminary estimates, will result in a surge of heat prices by 30%, on average. That would be practically an unmanageable issue: the heat sector is unprofitable as it is, and therefore manufacturers will have to raise tariffs, which in turn will lead to higher consumer prices. Heat prices cannot be allowed to grow: they make up the main portion of utility payments. Nonetheless, resolving the insufficient investment issue can no longer be postponed. Without a doubt, it could be accomplished solely through efficient fuel management and rational consumption. Just by heat saving, heat expenses can be reduced by 40%. But this effect cannot be achieved without additional investments; therefore, success of the heat market reform would be impossible without increased efficiency, which includes efficiency of fuel consumption. The growth potential of heat consumption equals 30–40%, thus we can hardly expect the heat sector to up its demand for gas.
A large gas consumer group are households (12% of total domestic consumption). The level of unmet demand of household for gas is high; however, its further growth is hindered by the low level of gas distribution infrastructure development.
Of all industry sectors, chemical is the only one where gas demand is expected to grow. The RUB devaluation amid regulated domestic gas prices stimulates the growth of chemical exports and expansion of production capacities. Per ACRA forecasts, consumption of gas used for manufacturing nitrogen fertilizers will grow by 15% by 2020.
We also expect growth of gas demand in the transportation sector. However, the combined share of these sectors is smaller than the share of the power and utilities sector, and according to our forecasts, the dynamics of domestic gas consumption will be determined by investments aimed at boosting efficiency.
The Russian Gas Society’s Gas Business periodical (#3, 2016)
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