OREANDA-NEWS. July 27, 2010. The government drafted a decree to introduce a price formula for natural gas linked to refined products from 2011, reported the press-centre of OTKRITIE Financial Corporation.

According to the proposed formula, natural gas prices for industrial users would be based on European product prices, similar to Gazprom’s export contracts. However, it is assumed that the actual YoY price increases in 2011-13 should not exceed the statutory limit envisaged in the government’s plan of around 15%. The report also emphasized that growth in industrial-user prices could exceed the projected annual 15% cap by 5% in 2012 and by 7% in 2013, if the product-based price formula suggests higher gas price levels. It is assumed that residential-user prices would continue to be indexed by the government, with their annual growth strictly limited to 15% per annum.

View: We believe the proposal, if upheld, would be positive for Russian gas producers, including Gazprom and NOVATEK. It could translate into higher industrial-user prices, which in turn could help mitigate the impact of higher MET on natural gas (the government plans a 61% in the gas MET rate in 2011, 6% in 2012 and 5.4% in 2013).