Russian Gas Market Perspective

Russian Gas Market Perspective

Alexey GROMOVPh.D, Deputy General Director

Institute for Energy Strategy

14th December 2011

1. Importance of Russian GAS for Russia and for Europe

2. Current situation in Russian Gas Industry

3. Regulation context

4. Russian gas market perspective

Source: IES

Energy sector Gas Industry

GDP

Export revenues

Budget revenues

GAS industry is not dominate in Russian Economy

Russian revenue from fossil fuel exports exceeded$255 billion in 2010 (from which only $46 billion is GAS)

…but Russian Economy strongly depends on GAS

Domestic primary energy consumption

Fuel Mix in the Electric Power Sector

Since 1990 till 2010 the gas share in domestic energy consumption has grown with 43 to 54%

Since 1990 till 2010 the gas share in fuel mix in the Electric Power Sector has grown with 55 to 69%

Source: IES

Europe depends on Russian GAS…

…but the level of dependence is declined

Source: IES

… however some European countries can’t do without Russian GAS

More than 50%

Source: IES

The share of Russian gas in national domestic gas consumption, 2010

Russian GAS also strongly depends on European gas market

The Structure of Russian Gas deliveries, 2010 The Scheme of the Unified Gas Supply System (UGSS)

• EU-27 provides almost 70% of Russian gas export deliveries in bcm• EU-27 provides more than 85% of Russian gas export revenues in $• The current Russian system of Gas pipelines (UGSS) is oriented to the Europe

1. Importance of Russian GAS for Russia and for Europe

2. Current situation in Russian Gas Industry

3. Regulation context

4. Russian gas market perspective

Structure of Russian Gas Industry: Gazprom and others…

Gas production

Gas processing

Gas transport

Gas distribution

Gas export

Gazprom (78%)Independent gas producers (70 companies – 9%)Oil companies (9%)PSA-operators (4%)Regional gas companies (less than 1%)

Sibur (95% owned by NOVATEK) – more than 50%Gazprom (25%)Oil companies (25%)

Gazprom (100%)

Gazprom Export (100%)

Gazprom (75%)Independent regional companies

Resource base : high level of concentration

The Structure of Russian gas reserves (ABC1) by companies

Distribution of balance reserves of free gas (ABC1+C2,) by territories and offshores, tcm

• Russia provide more than 23% (1st place) of proven world gas reserves (48,2 tcm)• 69% of Russian gas reserves owned by Gazprom• 60% of Russian balance (registered) reserves being located in Yamal-Nenets Autonomous Region

Natural gas production: crisis is overcome

Gas production in Russia, 2000-2010 in bcm and in % to the previous year

During the crisis 2008-2009 Russian gas production has fallen to 15% (on 81 bcm)

Independent gas producers attack Gazprom

Leading companies in the independent sector

Since 2000 the share of IGP companies has grown from 10% to 22% in 2010

Gas transport system needs renovation…

bcm\year700

600500

400

300

200100

02005 2010 2015 2020 20302025

TFC at reconstruction and new building

TFC without reconstructionTFC without reconstruction

Capacity Capacity decrease up decrease up to to 230 230 bcm bcm

Age structure of the UGSS*, 2010 The dynamics of technically feasible capacity (TFC) of UGSS, 2005-2030

Source: IES

• The average operating life of major pipelines has reached 25 years• TFС of UGSS has fallen to 7-8% compared to design specifications• Only current TFS renovation need more than $ 2 billion per year

* UGSS – Unified Gas Supply System

Domestic gas consumption slowly growing

• Since 2000 domestic gas consumption has growth to 17%• Average annual growth rate is not exceed 2,1%• Gazprom provides 75% of domestic gas deliveries

Source: CDU TEK, Gazprom

Domestic gas consumption structure is stable

Domestic gas consumption structure, 2000-2010

Contribution of main consumer groups in gas consumption growth, 2000-2010

• Electric power sector is the largest gas consumer in Russia (36%)

Russian gas export is stable too…

Russian natural gas export , bcm (2000-2010)

Europe is the main export destination for Russian GAS

Export of Russian gas to Europe by country, 2010

Export of Russian gas to the CIS by country, 2010

• Germany, Turkey, Italy, France and Poland accounted for 60% of Russian gas export to Europe• Ukraine and Belarus are dominated in the CIS region

Russian LNG: first steps to the East

1994 Start PSA Project Sakhalin-22007 Entering Gazprom in the project2009 LNG plant starts in operation2010 LNG export exceeds 10 mt

Chronology of the realization of Sakhalin-2 Project

Sakhalin -2 Project

• 6,6% LNG share in Russian gas export • 6,6% Share of Asia-Pacific in export• Fast growth of LNG export covers the export decrease to the Europe

1. Importance of Russian GAS for Russia and for Europe

2. Current situation in Russian Gas Industry

3. Regulation context

4. Russian gas market perspective

GAS export regulation: one export channel

Federal law about ONE EXPORT CHANNEL (on 20th July 2006) grants the exclusive right for gas exports to the organization that owns the UGSS or its subsidiary, i.e. Gazprom (Gazprom Export)LAW excludes the concurrence between Russian companies in the international gas market

The unified rate of the custom duties is 30% (except the gas deliveries to the countries of Custom Union – Belarus, Kazakhstan)The average level of taxes in the gas industry essentially is less than in the oil industry

Transit regulation (transit rate through territory of Ukraine is $ 2,89 per 1000 cm per 100 km in 2011)The total volume of transit payment for Ukraine exceed $ 3,6 bln

The average cost price of Russian GAS (1000 cm) to the German border, 2011

Gas extraction

Gas transport

Taxes and customduties

$15 $30 $24

Transit payment

$33 $102

Average cost price

Long term contracts and export prices

Dynamics of average export prices of Russian natural gas, 2000-2010 ($ per 1000 cm)

Prices at the NGC spot trading site (Germany) and the prices of Gazprom’s long term contracts at the German border, 2009-2011

• The base of Russian gas export are long term contracts (for 20-25 years) “take or pay”• The price of Gazprom’s long term contracts is linked to the world oil price with a delay of 6 months• Long term contracts are predicted and reliable, but aren't flexible

Domestic gas market is still regulated…

• The federal law of the Russian Federation «About natural monopolies» from August, 17th, 1995 №147-ФЗ;

• The federal law of the Russian Federation «About gas supply in the Russian Federation» from March, 31st, 1999 №69-ФЗ;

• The governmental order of the Russian Federation (with changes and additions) «About measures on streamlining of state regulation of the prices (tariffs)» from March, 7th, 1995 №239;

• The governmental order of the Russian Federation «About state regulation of the prices for gas and tariffs for services in its transportation for territories of the Russian Federation» from December, 29th, 2000 №1021;

•The governmental order of the Russian Federation «About an order of an establishment of special extra charges to tariffs for transportation of gas for financing of programs of gasification» from May, 3rd, 2001 №335;

•The governmental order of the Russian Federation «About carrying out of experiment on realisation of gas on an electronic trading platform» from September, 2nd, 2006 №534;

•The governmental order of the Russian Federation «About perfection of state regulation of the prices for gas» from May, 28th, 2007 №333;

•The governmental order of the Russian Federation «About perfection of state regulation of the prices for gas» from December, 31st, 2010 №1205.

Domestic gas market legislation

Domestic gas market

Regulated Sector70%

Unregulated Sector30%

Domestic gas market: regulated sector

Average wholesale gas prices for Russian consumers, 2000-2011 (roubles per 1000 cm)

• Gas prices are set by the Federal Tariff Service (FTS)• Prices are differentiated by price zone and consumers categories (industry and households)• Average prices for the industry are above than for the households

Domestic gas market: unregulated sector

Unregulated sector

Free contractual (negotiated) prices

Electronic trading floor(2007-2008)

• Independent gas producers (IGP) and oil companies• Prices are linked to the Gazprom’s prices• Contractual prices is a commercial secret

• Gazprom, IGP and oil companies• Total sales volume of gas is 13,25 bcm• Number of sellers is 14• Number of buyers is 59• Number of contracts is 3120• Average contract price for 38% above the average regulated price

Experiment with electronic trading floor will be continued in 2012-2014

1. Importance of Russian GAS for Russia and for Europe

2. Current situation in Russian Gas Industry

3. Regulation context

4. Russian gas market perspective

Program of long-term development

of the fuel and energy complex of

the Russian Far East

Eastern Gas

Program

General scheme of development of the gas industry for the year 2030 (GS-2030)

Conception of the state program for exploration and

exploitation of the continental shelf of the Russian

Federation

Energy strategy up to period 2030 (ES-2030)

Investment programs of oil&gas companies

System of strategic documents to developthe Russian gas industry

Federal Level

Industrial Level

Regional Level

Businesslevel

• ES-2030 is an ideology of development• GS-2030 is an industry roadmap of development• Investment programs are the concrete realization of development

Russian gas production up to 2030

Potential gas production is sufficient to meet any demand

Gas production up to 2030 (according to ES-2030 and GS-2030)

ES-2030 (min)ES-2030 (max)GS-2030 (min)GS-2030 (max) Source: ES-2030, GS-2030

bcm

new

ar

eas

Changes of Russian gas production map

New areas (Yamal, Eastern Siberia and Far East) will provide more than 40% of Russian gas production up to 2030

8

Targets of gas export: shift to the East

30

Nord Stream-2 (end 2012)

South Stream (projected)• Preservation of the occupied share in the European gas market (more than 30% in EU-27)

• Increase of gas export revenues (275 bln USD in 2010)

• Security of Russian gas deliveries to Europe, including transit questions

• Maintenance of status quo in Caspian Region

• Using of Russian gas infrastructure to export Caspian gas to EU-27

Western gas policy in ES-2030: key projects & goals

Eastern gas policy in ES-2030: key projects & goals

LNG Projects in Sakhalin

Natural gas Export to China

• Share of Eastern Siberia and the Far East in gas production – 14-15%

• LNG share in gas export – 14-15%

• Share of the countries of the Asia-Pacific Region in the structure of gas export – 20%

Export expectations vs. reality

368

349

234

203

300

150

175

200

225

250

275

300

325

350

375

400

2008 (факт) 2009 (факт) 2010 2015 2020 2030

bcm

Forecast 2030 max Forecast 2030 min Our expectationes

Risk of decrease in export on 15-20%

15-20%

Russian Gas Export forecast up to period 2030 Factors of decrease in export expectations

Europe: Competition growth

US: refuse of future Russian LNG (the boom of shale gas production)

Asia-Pacific: competition growth (Central Asia)

Domestic gas market: shift to net-back prices

Tariff regulation in 2011-2015 will change as follows: – Transfer to long term tariffs– Synchronisation of investment programs of the natural monopolies– Regulation of reliability and quality of services offered– Information disclosure by natural monopolies (their activities)– An increase in energy efficiency of electricity, gas, heat and water consumption– Increasing the effectiveness and transparency of the regulatory bodies activities

for gas industry

- a transfer to equal profitability prices for domestic and external consumers (net-back prices)- abolishment of cross-subsidising in the wholesale and retail gas markets- a transfer to equal profitability gas prices has a smooth transitional character, to avoid price shocks for domestic consumers

Conclusions

Thank you for your attention

www.energystrategy.ru

Alexey GROMOVDeputy General Director

Institute of Energy Strategy, Moscow

The Energy of the Future in our Hands