A recent report by the institute – obtained exclusively by ET – says that rising domestic gas demand and Gazprom’s rapidly decreasing production mean that Russia will likely have a gas shortage of at least 100 billion cubic meters (3.5 Tcf) per year by 2010. The report confirms rumors that we at ET have been hearing from inside Russia: that Gazprom will not be able to meet its future gas obligations.

If the institute’s estimates are correct, then the situation may sabotage the highly publicized gas pipeline projects planned to carry Russian gas west to Europe and east to China and Japan. Further, it could force Europeans to seek LNG supplies from Africa and the Persian Gulf. These predictions are also worrisome for Russian citizens. If the institute is correct, and Russia decides to meet its foreign obligations ahead of its domestic ones, there could be a devastating energy crisis inside the country.

In early November, the institute released a sanitized version of the report we had obtained. That report, by the institute’s president, Vladimir Milov, did not contain the projection that Gazprom would have the shortfall. Nevertheless, both the public version and the version we obtained read like an indictment of Gazprom, particularly with regard to its investment decisions. The report states that between 2000 and 2006, Gazprom invested $12.5 billion in gas production, $17.9 billion in acquisitions (which includes the purchase of Sibneft), and $30.6 billion for “investment in other spheres not related to gas production.” The report doesn’t say what those “other spheres” are, but it clearly offers a scathing criticism of Gazprom’s stewardship of Russia’s natural gas. The reports also make it abundantly clear that Gazprom needs capital for gas reserves development. For instance, developing the vast gas fields of the Yamal Peninsula will require at least $70 billion.

The report dispels claims by some Russian government and Gazprom officials that the internal market is overly dependent on natural gas and questions the motives of any argument suggesting Russia should use less gas, just to increase its exports. It states that since Russia has more reserves than any other country, and one of the largest reserves-to-production ratios (81.5, compared to Algeria’s 55.4 and Canada’s 8.8), natural gas’ share of the country’s energy mix should, if anything, be increasing.

Since 2003, Gazprom’s production has been essentially flat – at about 450 billion cubic meters per year. Its inability to increase output is largely the result of declines at three of the country’s largest gas fields: Urengoy, Yamburg, and Medvezhye. The report estimates that annual output from those fields will fall to about 165 billion cubic meters by 2014 – a decline of nearly 50 percent from their 2004 output of 315 billion cubic meters. The report goes on to say that future projects that might increase Gazprom’s output have “stagnated” because the country is not investing enough in big new fields, and that production from the giant gas fields at Yamal and Shtokman will likely be postponed to sometime after 2012.

Russia should be able to rely on independent producers like Rosneft, Surgutneftgas, and TNK-BP. But their gas output has slowed, largely because of barriers created by Gazprom. The gas monopoly has asked Russia’s Federal Tariff Service to increase by some 25 percent the transportation charges on gas produced by the independents. There are currently no plans to review internal gas price regulations, which are linked to the price for gas supplied by the independents. As a result, the report obtained by ET concluded, gas from the independents is not competitive in “two-thirds of the Russian gas market.”

The report also discusses oil, pointing out that given the country’s huge reserves, production should be rising. Instead it says that there is “no room for optimism on future crude output.” Since mid-2004, crude production has been essentially flat. The reason, says the institute, is a lack of foreign investment and delays in development of new fields like Timan Pechora due to “uncertain state’s [sic] policies.” The report also attacks the Kremlin’s use of environmental pretexts to stall the development of projects like Sakhalin, asking why the government was “silent on environmental problems” and only became interested in the issue “when Gazprom became interested in entering the project at lowest possible cost.”

The report ends with a startling list of recommendations. The first one: a “complete reverse [sic] of policies as compared to what Vladimir Putin’s government is doing.” It continues, saying that Putin’s regime should be privatizing the energy sector, encouraging foreign investment, and increasing transparency. In short, the report says that virtually everything Putin and his cronies have done in the energy sector has hurt its future viability.