Regulation of Gas Prices: Assessing Long-term Consequences for Russian Buyers

<p>Gas in Russia is the cheapest and therefore the most widely used fuel. The problem is that the regulated gas prices are artificially understated nowadays and do not allow to cover production, transportation and sales costs. Moreover, such lowered prices hinder effective development not only of the gas industry, but also of the Russian economy.</p><p>The objectives of the study are:</p><ul><li>calculation of Russian domestic gas prices from the perspective of different approaches to pricing;</li><li>&nbsp;evaluation of the long-term effects of changes in Russian domestic gas prices for customers;&nbsp;</li><li>analysis of the causal effect among the Russian domestic gas prices calculated in accordance with several alternative approaches.</li></ul><p>This paper consists of the introduction, two chapters and the conclusion. The first chapter includes four sections devoted to the theory and history of gas pricing, as well as the review of the modern mechanisms of gas pricing, both in Russia and in the world. The second chapter presents the calculation and investigation of the gas prices by the several alternative approaches on the Russian domestic market and the assessment of the long-term effects of changes in the pricing mechanism for buyers.</p><p>As the methods of the economic research, the graduation thesis uses:</p><ul><li>the pricing mechanisms of the gas industry constructed by various scientists in the world and Russian practice such as Oil Price Escalation (OPE), Gas-on-Gas Competition (GOG), Netback from Final Product (NET), Cost of Service (RCS), the prices currently in force in Russia;</li><li>&nbsp;the methods of the economic statistics;&nbsp;</li><li>the comparative analysis;&nbsp;</li><li>the econometric analysis (The Granger causality test).&nbsp;</li></ul><p>The analysis of changes in the gas pricing in Russia is exemplified by the Nizhny Novgorod region, so the empirical basis of the study includes: the gas prices in the Nizhny Novgorod region by the several different approaches to pricing; the costs of transporting gas from the Yamal-Nenets Autonomous Okrug to the Nizhny Novgorod region and to Europe; the gas prices of the Dutch gas exchange (TTF); the prices of alternative energy sources; the prices of the export contracts JSC &quot;Gazprom&quot; with France; data from the financial statements of JSC &quot;Gazprom&quot;.</p><p>During the extrapolation of the gas prices calculated according to the aforementioned methods, we arrived at the conclusion about the presence of a stable upward trend in all the price categories considered. However, it is evident that OPE- and GOG-prices will increase much more than the others.</p><p>The cancellation of the upper limit of prices means that consumers are not protected from further price increases, although the pace of growth will vary depending on the pricing mechanism. Consequently, the problem of rising gas prices in the long run turns into the constant and significant risk for the buyers of the Nizhny Novgorod region.</p><p>The findings of this study can be applied to any other region of Russia, as the price difference is determined only by the difference in the cost of transportation from the Yamal-Nenets Autonomous Okrug to the point of gas sales. Consequently, the identified trends are valid for Russia as a whole.</p>