The reasons for the stagnation of domestic gas demand – explored in the new study by VYGON Consulting

Mar 29, 2018

The untapped gas production potential in Russia amounts to around 150 bcm per year with the average annual production of 650 bcm. Limited capacity of domestic and foreign sales markets prevents this potential from being realized. The former, which in fact serves as the driver of the Russian gas industry, has been facing stagnation since 2011. Is it possible to reverse this trend and utilize the huge potential of gas production? Answers to these questions can be found in the new study by VYGON Consulting.

The study notes that gas demand peaked in 2011, and starting thereafter decreased by 20 bcm to 457 bcm in 2016. The authors attribute this trend to sluggish electricity demand growth and shrinking heat demand, in part due to the achievements in energy efficiency.

The Capacity Supply Agreements program (CSA) in the electric power sector has become the key contributor to the gas demand decline. VYGON Consulting experts calculated that the commissioning of new highly efficient NPPs and TPPs coupled with very moderate growth of electricity consumption have caused gas demand to shrink by about 14 bcm from 2011 to 2016.

Gazprom’s position in the domestic market has faltered due to stagnant demand: its monopoly power was undermined by independent gas producers that provided 43% of supply in 2016. Under the present regulatory model, Gazprom’s competitors are allowed to sell gas below the regulated price, which enables them to market all the volume they produce. This is the logic underlying the current market model. However, it was originally intended that in a growing demand environment this approach would have a minimal impact on Gazprom’s share.

Gazprom’s gas infrastructure expansion efforts have not lead to the increase of gas demand from households due to better energy efficiency of new housing. Therefore, the social function is becoming increasingly costly for the company, especially taking into account lower gas prices for households as compared with industrial tariffs.

VYGON Consulting experts consider gas-to-chemicals as the only promising sector of gas demand in Russia. Low domestic feedstock prices secure highly competitive positions of national gas-to-chemicals companies in the world markets.

Current gas demand attributed to natural gas vehicles (NGVs) amounts to 0.5 bcm or 0.1% of aggregate demand. Even a high development rate of this segment would not have a significant impact on the market, the authors conclude.

The paper also proposes two gas demand scenarios for Russia up to 2030: the Baseline and the Gas Saving, which are more pessimistic than officially published Russian estimates and forecasts of foreign analysts. They both assume the same economic growth conditions but differ in how quickly and massively energy efficient equipment will be introduced.

According to the Baseline scenario, demand for gas in Russia will be growing slowly to reach 469 bcm by 2030. The growth will be secured by electric power and gas-to-chemicals sectors while demand from other industries will not change significantly.

The Gas Saving scenario implies a sizeable improvement in fuel efficiency and decrease of consumption. According to VYGON Consulting estimates, it may fall to 411 bcm by 2030. It may be driven both by higher domestic prices and faster development of technologies.

Under the Gas Saving scenario, the key contribution to gas demand decline may come from the electric power sector (-27 bcm by 2030) in case most TPPs in Russia are transferred to CCGT operations with their average efficiency nearing 50%. This modernization can be justified with the growth of gas prices up to 8,000 rub./thous. m3 or by additional government incentives for CCGT technology application provided through targeted support to power engineering manufacturers.

Achieving targets on RES development and increasing green electricity generation to 50 bln. kWh is likely to affect gas demand with another 10 bcm per year drop.

The full version of the VYGON Consulting study “Domestic Gas Demand: a Trend towards Stagnation?” is available at: https://vygon.consulting/en/products/issue-1253/

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