On the results of the conference "Prospects for the Development of the Domestic Gas Market in Russia"

Sergey TROFIMENKO, Managing Director for Gas and Electricity Markets, Saint Petersburg International Mercantile Exchange

Boris CHERNY, Deputy Managing Director for Gas and Electricity Markets, Saint Petersburg International Mercantile Exchange

Scientific article metadata

On the results of the conference "Russian Natural Gas Market Prospects of Development"

Sergey TROFIMENKO, Managing Director for Gas and Electricity Markets, Saint Petersburg International Mercantile Exchange

Boris CHERNY, Deputy Managing Director for Gas and Electricity Markets, Saint Petersburg International Mercantile Exchange

Sergei TROFIMENKOManaging director – natural gas and electricity markets, SPIMEX

Boris CHERNIYDeputy managing director – natural gas and electricity markets, SPIMEX

Abstract. This article analyzes the results of the conference held in St. Petersburg in May 2025, concerning the problems and prospects for the development of the Russian gas market. Delays in the implementation of gas industry reforms have caused a decrease in analytical activity, which naturally does not lead to the elimination of existing problems and contradictions. In our opinion, under these conditions, the discussion should not cease, but rather, should become clearer and more professional, providing substantiated answers to fundamental questions. Among the main ones are: how to improve the efficiency of the gas industry? Can raising regulated prices contribute to solving this problem? What criteria should be chosen for monitoring the state of market development efficiency, and in what form should they be presented in the Energy Strategy of the Russian Federation? The article provides answers from scientists and practitioners to these questions. Abstract. This article analyzes the results of the conference held in St. Petersburg in May 2025, concerning the problems and prospects for the development of the Russian gas market. Existing delays in the implementation of gas industry reforms have caused a decrease in analytical activity, which naturally may not lead to the elimination of existing problems and contradictions. In our opinion, under these conditions, the discussion should not cease, but on the contrary, it should become clearer, more professional, and provide justified answers to the key questions. Among them are: How to increase the efficiency of the Russian gas industry? Can an increase in regulated prices contribute to solving this problem? What criteria should be chosen for monitoring the pace of market development, and in what form should they be presented in the Energy Strategy of the Russian Federation? The article provides the researcher's opinions on these questions. Keywords: natural gas market, pricing in the natural gas market, natural gas exchange trading, Energy Strategy of the Russian Federation.

natural gas market, natural gas market pricing approaches, Commodity Exchange trading of natural gas, Energy strategy of the Russian Federation.

DOI 10.46920/2409‑5516_2025_09212_44

On May 15–16 of this year, the St. Petersburg State University of Economics hosted the 2nd annual conference, "Prospects for the Development of the Domestic Gas Market in Russia," organized by the St. Petersburg Exchange. Participants included specialists from Gazprom, the Russian Ministry of Energy, Lomonosov Moscow State University, and representatives of the professional and expert community. Preparations for the conference revealed a shift in the academic community's views over the past year: many cited the lack of significant market changes over the past period, which could have led to a pointless repetition of last year's reports. Partly because of this, it was impossible to hear presentations from some prominent energy market researchers, including researchers from IMEMO, the authors of a series of articles on crises in the EU gas and electricity markets. However, even assuming a lack of change over the past year, this effectively means a lack of progress and the persistence of existing problems in the domestic gas market, which need to be more clearly articulated, and the measures to address them reviewed and strengthened.

To be fair, it should be acknowledged that there have been significant changes in the market. This can begin with the entry into force of the Energy Strategy of the Russian Federation through 2050, approved by Russian Government Order No. 903-r of April 12, 2025 (hereinafter, Energy Strategy-2050), which has been the focus of much of the theoretical discussion. A representative of Gazprom's Department 623, which developed and coordinated Energy Strategy-2050, speaking at the conference, urged participants to carefully review its contents, as the document contains answers to all the questions raised at the conference.

Innovations of the Energy Strategy 2050

Analysts, for their part, assessed the innovations of Energy Strategy-2050 in terms of developing the domestic gas market in a mixed manner. As is well known, the main factor in increasing energy efficiency from the mid-1990s until Energy Strategy-2030 [1] was "the formation of a rational system of domestic energy prices through their gradual, managed liberalization to stimulate the prudent use of energy in the economy and by the population," "improving the organizational structure of the gas industry in order to improve its economic performance and the formation of a liberalized gas market"; it was expected that "managed liberalization will be actively pursued in the domestic market…, and exchange trading in natural gas will develop, based on transparent and non-discriminatory conditions for access by all market participants to gas transportation infrastructure." By 2030, the task of “completing the liberalization of domestic electricity and gas markets” was expected to be resolved. Energy Strategy 2035 was more modest in this regard, more in line with the criticism of planning documents of the recent period: “...as a result, the strategy turns into a list of all sorts of general intentions with unclearly expressed and therefore difficult to control end results” [2], but it also set the task of “a phased transition from the regulation of wholesale gas prices to market pricing mechanisms,” noting the lack of a fully competitive domestic gas market as the main problem. The key measures for improving the domestic gas market outlined a gradual transition from wholesale gas price regulation to market-based pricing mechanisms, which, however, confirmed the continuity of previous objectives and goals for gas market development. In contrast, the primary objective of Energy Strategy 2050, in the current complex international situation, was, apparently out of necessity, "to address the need to accelerate growth rates and increase gas export volumes." In line with this "strategy," the domestic market is also tasked with "increasing gas consumption," but with the caveat of "ensuring the priority of economically justified supply to the domestic market." This apparent contradiction is resolved by the formula "establishing economically justified gas prices." For the first time in modern history, Russia's Energy Strategy fails to mention the development of the domestic gas market—the country's most important strategic natural resource, the only one remaining in the planned economy model. Meanwhile, the transition of gas prices from regulated to market prices was not an abstract industry task, but the key that was called upon to unravel the tangle of accumulated economic and social state problems through increasing the energy efficiency of the Russian economy, which ensured an interconnected solution to the entire complex of problems: - an increase in the share of sales of natural gas processing products abroad; - the creation of sources of financing for the development of complex fields and the renewal and expansion of the gas transmission system; - the development of domestic energy-saving mechanical engineering, intelligent gas metering systems; - an increase in the taxable base of the fuel industries due to a single market price factor - which should lead to the equalization of the mineral extraction tax. - the creation of full-fledged inter-fuel competition, a reduction in the share of gas in energy supply due to the use of alternative energy sources, including coal. In this regard, it should be noted that while in our country the entire coal industry is becoming unprofitable [3], in the USA they passed a law on comprehensive measures to expand the use of coal [4]. Coal remains the world's largest source of electricity and the second-largest energy source, accounting for 25% of the global energy balance [5]. Energy Strategy 2050, by inertia, mentioned the objective of "efficient and rational use of natural gas reserves," but the document does not address measures that could lead to its implementation. Speakers not only noted this difference from the previous pricing policy but also drew attention to the need for coordination with other government strategic development documents.

Thus, the federal project "Development of Competition" (implementation period from January 1, 2025 to December 31, 2030) sets the goal of developing transparent market indicators for natural gas in the Russian Federation. This work should be consistent with the provisions of the Energy Strategy-2050 on "economically justified pricing." The Russian Ministry of Energy, together with interested federal executive bodies, has been tasked with developing a draft action plan for implementing the Energy Strategy-2050. This draft plan assigns the task of developing models for determining the economically justified price of natural gas to PJSC Gazprom.

How can “economically justified gas prices” be justified?

Returning to gas market pricing, how can the formula for "establishing economically justified gas prices" be interpreted? Could an "economically justified price" differ from the market price, which could be formed through competitive auctions or exchange trading—that is, through the mechanism recommended by the President and Government of the Russian Federation, at least since 2017? Or, conversely, does this imply a transition to an analytically calculated tariff, as if indicating the absence of the need to search for a market value? Economic theory indicates that the equilibrium price in the economy is difficult to determine based on costs, especially in industries prone to natural monopolies. This debate has been ongoing for a long time, and various tariff calculation methods have been developed for natural monopoly activities—using "cost-plus" models, as in the gas industry, or the "regulated investment base (RAB)" model, as in the electric power industry—each with its own shortcomings. Back in 2009, the Russian Government indicated that "the current system of state regulation of natural monopoly entities, including through the establishment of tariffs using indexation and economically justified costs, does not adequately stimulate natural monopoly entities to reduce operating costs and improve investment efficiency" [6]. The methodology for setting prices in the gas industry has not changed since then; the concept of "equal-revenue prices," conceived as a substitute for domestic market pricing, has been deemed ineffective, and the imbalances in the development of the gas industry have only worsened [7].

To resolve this contradiction, some conference speakers proposed a compromise term, "controlled deregulation," that is, the administrative designation of socially significant consumer categories—households, strategically important sectors such as defense, or regions where competition is currently impossible and for which state regulation of gas prices should remain. But is continued cost-plus regulation necessary for sectors where low gas prices increase the profitability of the end product? Market participants and academics doubt it.

Other changes in the market

Returning to the topic of market changes over the past year, the following can be noted. By order of the Federal Antimonopoly Service of Russia, the regulated price range between the exclusive and non-exclusive groups will be eliminated effective July 1, 2025. This essentially signifies a move away from operational regulatory measures and a return to a more stable paradigm. Corresponding tax decisions regarding the mineral extraction tax (MET) must also be implemented. Measures to improve sales margins, intensified by both PJSC Gazprom and independent suppliers, have also impacted the exchange market. Trading volume in the first half of the year reached its highest level since 2020, in part due to the increased use of balancing instruments. In turn, the success of exchange balancing, which ensures 100% contract fulfillment for both payment and gas offtake, has given the Russian Ministry of Energy confidence in the need to incorporate balancing terminology into gas supply regulations and develop and approve commercial balancing rules. All of these changes, which have shed new light on old problems, were covered in a report by Konstantin Simonov, Director General of the National Energy Security Fund and Head of the Political Science Department at the Financial University under the Government of the Russian Federation. He identified the following key imbalances in the development of the domestic gas market: - tax, which established different mineral extraction tax rates for Gazprom and independent producers, which was part of the "checks and balances" package. However, the competitive environment has recently changed significantly, requiring a fundamental revision of this approach; - transportation, which requires the determination of a fair price for gas transportation. Gazprom points to a decade-long "underindexation" of the tariff, while independent producers have also successfully argued that it is overpriced. Since the cost of transportation reaches half the regulated price in some regions, the lack of regulation negatively impacts the formation of a single gas price; – a legal requirement obliging Gazprom to ensure uninterrupted gas supply to consumers regardless of their willingness to comply with payment or supply discipline. The flip side of this problem is the advantages independent suppliers have when contracting with key solvent consumers; – a special case of the previous thesis is the problem of meeting peak consumer demand, the implementation of which requires the coordination of a complex set of processes – from ensuring flexible production at fields (de-mothballing), the formation of reserves of gas transportation capacities and gas storage facilities, to a complex system of metering and dispatching of the gas transmission system. And while the first three problems can be resolved by amending regulatory documents, the last problem has "expanded" into too complex a set of accompanying circumstances to allow analytical methods to identify all centers of additional costs and create a regulatory framework for their compensation. Global practice offers one proven method for solving this problem – a system of commercial gas balancing. The implementation of such a system in Russia is stated as a goal in the current competition development roadmap and has been partially implemented on the exchange market. However, the transition to this model on the over-the-counter market currently raises numerous questions for everyone, including regulators. To clarify technological issues, in April of this year, the exchange invited all key market participants to study the details of the balancing scheme under the specific conditions of the Turkish gas market. During the expert discussion "Modern Models for the Development of National Gas Markets: International Experience and the Possibility of Its Application in the Russian Gas Market," exchange representatives discussed the successful use of commercial gas balancing at the Istanbul Energy Exchange (EPIAŞ) under OTC gas market conditions that are largely similar to those in Russia.

It is interesting to note that in the early 2000s, analysts indicated that one of the conditions for implementing the energy and gas conservation program was providing access to additional gas transportation and the gas market for the resale of saved volumes [8]. The possibility of implementing this (in the form of exchange-based commercial balancing of gas volumes) has only emerged today.

Features of Turkish balancing

The Turkish balancing experience seemed to us, at first glance, quite simple. Market participants (consumers and gas suppliers) are given access to exchange-traded instruments with a delivery period from a week to a day on which gas is supplied. The purpose of this trading is the preventive (before the month's balance is closed) settlement of emerging imbalances. For example, a buyer may sell an expected underselection or purchase an overselection. At the same time, he is constantly informed about the net position for all his contracts. There is even a tool with a delivery time that allows you to compensate for the actual deviations of yesterday's gas day until 11 a.m. the next day. At the end of the month, the gas transportation organization summarizes meter readings and identifies the final deviations of each participant, which are conditionally “bought” or “sold” at market prices, adjusted for penalty factors. This creates a clear incentive for participation in trading, ensures their liquidity and “generates” a market price. However, from a legal point of view, this design requires not only a clear contractual “binding”, but also the obligation of participants to carry out exchange transactions, the owner of the GTS to become a counterparty under balancing exchange contracts, and the right of the exchange to issue invoices according to the appropriate algorithm and seek their payment through the retention of collateral.

The example of Turkey also turned out to be useful from the point of view of the state regulation model: the state gas company Botas sets weekly/monthly price limits for certain groups of consumers. This is a successful hybrid model in which regulation and market discipline coexist.

New market rules

Since 2021, the Russian Ministry of Energy has begun work to improve the rules for gas supply. Structural contradictions in the industry did not allow the project to come into force all these years, but every year its content moved closer to the market ideal. The inclusion in the 1901 project of more clear requirements for gas supply discipline forced the largest group of Russian consumers - electric power companies, who contribute the most significant unevenness in gas consumption, to raise the issue of maintaining the existing advantages of “flexibility” of supply contracts. In this regard, the gas industry's response is justified by gas transportation technology - exceeding the critical values of gas sampling at one connection point cannot, in general, be compensated by non-sampling at another; deviations must be calculated separately. The share of gas in Russia's energy balance is known to be uniquely high. Therefore, electric power enterprises, as the largest consumers, shape the nature of deviations from the plan and gas supply discipline for the entire gas market. And optimization of gas industry costs, obviously, should be based on increasing the discipline of all categories of consumers. The electricity sector is wary of this; the scale of non-penalized deviations reaches, according to Gazprom representatives, 40–50 billion m3 per year, and establishing basic order in this matter may somewhat worsen the economic performance of energy workers, but will add incentives to gas workers. This effect may be temporary until the procedure for working with the contract portfolio changes.

The example of Turkey demonstrates that the model of commercial balancing of all wholesale segments of consumers, including primarily electric power utilities, works successfully, serving as the initial stage of deregulation of the entire gas market.

What remains to be done?

Currently, under the leadership of the Russian Ministry of Energy, intense work is underway to agree on the provisions of the rules of commercial balancing, the entry into force of which is scheduled for March 1, 2026. The issues that require resolution are in the legal and partly in the technological plane. Firstly, the principles and procedures for the general accounting of deviations and the impact on the balance of concluded transactions for their settlement require final approval, that is, data on overruns and non-outtakes for each gas supply participant, taken into account by OTP TEK LLC under exchange contracts in daily mode on the TTS, as well as deviations under over-the-counter contracts taken into account when compiling the monthly gas balance. The complexity of resolving this issue is also due to the fact that in current balancing models (including the Turkish one), imbalances are taken into account separately for each participant in the gas supply system, that is, for its total portfolio of obligations (agreements), and the scheme proposed in PP 1901 offers an accounting of deviations in relation to each individual contract, which has been preserved in the gas supply rules since 1998. Secondly, the issue of the legal status of gas surpluses requires resolution. In the current exchange balancing model, deviations (non-sampling) are located within the perimeter of the previously concluded, “primary” gas supply contract, from which deviations are calculated. However, such a model does not fit well with the physics of enumeration, since someone’s gas was actually taken from the GTS, and the supplier - the party under the “primary” agreement - most likely delivered only the usual daily supply rate to the GTS on the corresponding day. It turns out that gas from the owner of the gas transportation system was taken from the gas transportation system? On what legal basis? The solution to this issue seems to be a model of a collective agreement between the owner of the gas transportation system and all (balanced) gas supply participants, which presupposes their agreement that all confirmed facts of excess are formalized in gas supply contracts, the price of which is determined as a pre-agreed function of the stock exchange index. It is necessary to include a provision in the regulations that such transactions can be concluded with reference to the date of identification of the imbalance, and the supply of gas resources under such a transaction will be considered a settlement of the imbalance that arose in the previous period. The next problem arising from the previous one is the price of concluding a balancing agreement. The regulator’s wish to include immediately, at the first stage of project implementation, imbalances under gas supply contracts concluded at a regulated price, raises the problem of compatibility of regional regulated prices specified in the contracts and prices at the balance points at which balancing should be carried out. Calculations carried out by specialists from Department 134 of Gazprom show that due to the almost twofold difference in the values of regulated prices - from 4255 (Yamalo-Nenets Autonomous Okrug) to 7924 (Dagestan), even taking into account their adjustment to the values of transport tariffs to “bring” them to balance points, the difference in prices per balance point can reach about 1 thousand rubles. for 1 thousand m3, which opens the way for unnecessary speculation. A solution could be the creation of 4–5 virtual balance zones with “administrative” assignment of “netback” regions close in price to each of them, or the development of a bidding project with prices presented as coefficients to regulated prices in the buyer’s region. Coordination with the regulator on this issue is required. A fundamental issue is the organization of prompt access to the gas transportation system for balanced volumes of gas, that is, those sold and purchased at auction, especially if they are recorded at the points of entry and exit from the gas transportation system, and not at the balance point, as is implemented in the exchange balancing scheme. This issue will require changes to the provision on providing access to the gas transportation system for balanced volumes of gas. These are only the main issues, but it is obvious that the launch of real operations will require solving some new, unforeseen problems, such as daily metering of suppliers’ gas, or providing access to a balancing point that is not physically linked to the consumer’s exit point. In this regard, it seems advisable to organize pilot balancing trades, perhaps according to the simplest scheme - gas under an over-the-counter agreement is sold at an exchange balance point. The launch of such a scheme will require minimal regulatory changes, but will provide a convenient testing ground for a constructive search for solutions to emerging contradictions.

The conference participants noted the importance of such meetings, professional discussions with the participation of both representatives of the scientific community and industry practitioners, as well as graduate students and students of academic universities, teachers training personnel for sectors of the national economy.