The Russian authorities want to replenish the budget by raising gas prices and taxes: what will come of it

Forbes published a column by Alexey Gromov, Principal Director on Energy Studies of the Institute for Energy and Finance on the topic "The Russian authorities want to replenish the budget by raising gas prices and taxes: what will come of it."

The Russian government is looking for ways to replenish the budget. One of them is an increase in domestic gas prices and the withdrawal through taxes of most of the proceeds from this indexation from Gazprom and other gas producing companies. These measures are expected to bring about 380 billion rubles to the budget.

It is not only Gazprom that produces gas

Many oil and gas companies produce gas in Russia. Gazprom and Novatek are the largest producers, but there are also vertically integrated oil companies (VINK), among which Rosneft is the leader in gas production. Lukoil, Surgutneftegaz and some others also produce gas in significant volumes. The volume of gas production at VINK is approximately about 100 billion cubic meters. In 2022, total gas production in Russia amounted to 674 billion cubic meters, the share of VINK accounted for about 15%.

It would seem that companies would have to sell this associated gas on the domestic market, but in fact this is not the case. Since export sales of pipeline gas are allowed only to Gazprom, and liquefied natural gas (LNG) to Gazprom and Novatek, only a number of oil companies deliver the extracted gas to the Gazprom system, selling it at state prices set by the Federal Antimonopoly Service. As a result, there are actually only three companies on the Russian gas market: Gazprom, which accounts for 63% of sales in the domestic market, Novatek with 18% and Rosneft with 15%. Their total supplies account for slightly more than 95% of the total volume of commercial gas supplies to the domestic gas market.

Until 2022, there was an unspoken agreement between Gazprom and the government: at the expense of export revenues, the gas giant implements its investment programs and at the same time prices within the country do not grow seriously.

Gazprom did this, although its domestic sales in recent years have begun to generate losses or were in the zone of zero profitability. But the situation in 2022 has been radically changed. The volume of exports to the most premium European market decreased from 140 billion cubic meters in 2021, till almost double to 76 billion cubic meters in 2022, and this year we expect a reduction to 25 billion cubic meters. It is clear that in this situation, servicing the domestic gas market for Gazprom becomes a heavy burden, and it began to push through the government to increase domestic prices.

To equalize Gazprom with independent producers

Gazprom complained that it pays an increased rate of mineral extraction tax, while independent producers pay only the base rate. The government has adjusted the tax burden in the industry as part of a package solution for a two-stage increase in gas prices for end consumers. The decisions taken are aimed at raising the rate for independent producers so that the tax conditions of Gazprom and independent producers, if not completely aligned, then at least come closer to a more equitable situation.

Who will benefit from the innovations

In fact, the only beneficiary of regulatory innovations in the coming years will be the state. The government wants to increase tax collection in the gas industry in order to improve budget replenishment. In order for Gazprom to become a plus and have a commercial interest in working in the domestic market, it is necessary to almost double gas prices for all categories of consumers. In addition, Gazprom also wanted to increase tariffs for gas transportation through main gas pipelines by 2.5 times, but received only a 10.2% increase from July next year, which is also unlikely to suit it.

In general, the current policy does not even patch holes and does not solve the problems of the domestic gas market. This problem can be solved by a gradual transition to managed liberalization and deregulation. Without this, Gazprom will always be unhappy with the low rate of tariff increases, the state will restrain these tariffs so as not to cause a wave of popular discontent, consumers will complain about price increases, and as a result, everyone will blame each other and look for the culprits.