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Outside View: Gazprom raises prices

By OLEG MITYAYEV, UPI Outside View Commentator

MOSCOW, July 11 (UPI) -- On July 8 Gazprom CEO Alexei Miller reported his company's plans to Prime Minister Vladimir Putin. He spoke about a steady, long-term growth of gas prices for all consumers, be they in Western Europe, next-door neighbors or at home.

Miller specified that by the end of this year the average European price for natural gas will exceed $500 per 1,000 cubic meters, compared with the current price of $410.

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Gas will become more expensive for Gazprom as well. The Russian gas monopoly is buying large amounts of gas in Central Asia (Turkmenistan, Kazakhstan and Uzbekistan) and then reselling it at a profit, mostly to Ukraine. This year its main Central Asian supplier, Turkmenistan, is selling gas to Gazprom at an average price of $140 per 1,000 cubic meters, while Gazprom is reselling it to Ukraine for $179.50.

But starting next year the Central Asian countries will want to at least double what they charge Gazprom, which will bring them closer to European prices. Next year Gazprom may have to pay $280 to $300 per 1,000 cubic meters of Turkmen gas.

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Gazprom's CEO told Putin he considers this position justified. He said it is important for Russia to keep its Central Asian partners interested in selling gas to it in order to prevent the implementation of alternative gas supply projects that could bypass Russia, like the Trans-Caspian or Nabucco gas pipelines. Miller said Gazprom is planning to buy gas from Azerbaijan and, in the future, even from Iran with a view to reselling it elsewhere.

If Gazprom comes to terms with its Central Asian partners on average European prices, it will resell gas to Ukraine for much more than it does now, maybe for $400 or even more per 1,000 cubic meters. Ukraine is still hoping for a gradual price increase to the European level over the next four years, but this is not likely to happen.

Having told the prime minister about successes at home, Miller switched to Gazprom's favorite subject of equal revenues from domestic and foreign gas supplies. Today the domestic gas prices for industrial consumers in Russia are five times less than in Europe. The government wanted to increase these prices by 25 percent a year in 2008-2010. The state-regulated price was supposed to reach the "equal-netback" level on Jan. 1, 2011. In other words, Gazprom's profits from domestic industrial consumers were supposed to match those produced from sales at average European prices.

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But last spring the Ministry of Economic Development was shocked to realize gas prices at home would double in 2011 over 2010, if the "equal-netback" principle were applied. Therefore, last April the government ruled gas prices in 2011 may grow by only 40 percent over 2010.

But during this meeting with the prime minister, Miller said, without batting an eye, the "equal-netback" principle will operate from Jan. 1, 2011. When gas prices were discussed in April, Putin was president and could not correct Miller on this point. But he emphasized right away that gas price regulation for the population will be preserved indefinitely after 2011 as well. Regardless, it is clear that prices will only be going up.

In general, such giants as Gazprom (the world's fourth-largest company in terms of capitalization -- more than $300 billion) should have several strategies for development, pursuant to the constantly changing market. They should have at least two strategies, one optimistic and one conservative.

In general, Gazprom relies exclusively on never-ending oil price increases, which inevitably will be followed by increased gas prices. Miller predicts that next year a barrel of oil will cost $250. On July 3 world oil prices skyrocketed to an incredible $146 per barrel, whereas on July 8 to 9 they were fluctuating at a much lower level -- $136 to $137 per barrel.

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Such leaps show the raw-materials markets are now dominated by profiteers who have blown prices out of proportion. But this could break up at any time, and gas prices inevitably will follow suit.

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(Oleg Mityayev is an economic commentator for RIA Novosti. This article is reprinted by permission of RIA Novosti. The opinions expressed in this article are those of the author and do not necessarily represent those of RIA Novosti.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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