Russia's Gazprom in the Domestic and European Markets, 1990-s early 2000s

Abstract

Currently, natural gas supplies around a quarter of the world's total commercially traded primary energy requirements. In domestic households, in industry and in power plants a continuous, steady growth of gas consumption has gradually turned natural gas into a major source of energy. The main drivers in this development are its technical and economic advantages. It is clean, versatile and easily controllable fuel, which does not need any on-site storage. Further growth in gas consumption is expected to emerge, as a consequence of its relatively low carbon contents, compared to coal and oil products. On this basis, gas is often considered the form of energy that will be a “bridging fuel” to a sustainable energy system. Unlike other main sources of energy, like oil and coal, gas is not traded on an actual world market. This is because gas is made available to its consumers by means of complex production and transport systems, through which it is moved from often remote fields to its users. The geographical reach of these pipeline transport and distribution systems is an essential precondition for supply and demand to develop. Traditionally, the development and exploitation of these systems have posed a great challenge, because of the great risks and uncertainties involved. Huge investments have to be committed to facilities that – once constructed – have only one purpose and destination and no alternative. In addition, producers, transporters and consumers are tied up into a relationship of heavy mutual dependency. In response to these characteristics and specific local setting of systems, a variety of contractual relationships and organizational structures has been established to reduce the involved risk and to establish the terms of trade for a longer time period, so that the producers' as well as the consumers' investments would not be jeopardized. This has resulted in the development of truly regional gas markets, in different parts of the United States (US) and later in continental Europe, the UK, Japan, the Soviet Union and Latin America; each market has its own market structure, its characteristic institutional framework and role for governments and local authorities and eventually its specific outcome, in terms of the economics of supply and demand. Over the 1980s, a gradual shift in economic thought began to take shape, in which it was questioned the stabilizing role of the state and the need to control markets, in general. It was argued that the state would never be able to coordinate the economy more efficiently than the market. The state could never acquire and process the necessary information to do so, while government failures would undermine the economic efficiency. Moreover, in the process of planning, government ran a serious risk of being captured by interest groups, or by political deadlocks. The arguments for restructuring were reinforced by a plea to integrate national and regional markets for goods, as international trade theory argued that economic welfare would be enhanced by allowing production to take place in the most efficient location or country. As countries widely differ in their energy resource endowments, so national (energy) markets should integrate to the extent that the process of producing and trading energy would no longer be confined to national territories. To achieve this, national trade regimes should remove existing barriers to trade, while the physical infrastructure to efficiently transport energy between and within countries, such as pipelines, ports, and railways, should be developed. Gradually, in the several gas consuming regions, processes of structural and regulatory change were undertaken. Again their evolution was influenced by local, economic and (geo) political circumstances. This is reflected in the timing of these processes, the speed with which they evolved and the structural models chosen to reform the gas supply systems into actual gas markets.