Russian Energy Sector At The Crossroad:
New Challenges
Washington
13 September, 2013
Dr. Tatiana Mitrova
Head of Oil and Gas Department
Energy Research Institute of the Russian Academy of Sciences
The role of oil and gas for the Russian Federal budget is huge
Oil and gas taxes and duties in the Federal budget
2
38%
43%
33%
42%
35%
39%
41%
41%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
1000
2000
3000
4000
5000
6000
2005 2006 2007 2008 2009 2010 2011 2012
Gas export duty
Gas MET
Oil export duty
Oil MET
Share of oil&gas MET andexport duties in theFederal budget incomes
Source: http://www.roskazna.ru/reports/fb.html
Not only energy sector, but the whole Russian GDP growth is based on the oil prices
3
0,00
20,00
40,00
60,00
80,00
100,00
120,00
0
200
400
600
800
1000
1200
1400
1600
1800
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
ВВП, млрд. долл.
Brent, долл./барр.
Sources: ERI RAS, BP Statistical Review of the World Energy 2013.
Oil price and Russian GDP dynamics$ Bln. $/bbl
GDP, $ bln.
$/bbl
Russian economy is facing recession
4Source: Rosstat
GDP and industrial value added growth (as % to the corresponding quarter of the previous year)
-25
-20
-15
-10
-5
0
5
10
15
IQ IIQ IIIQ IVQ IQ IIQ IIIQ IVQ IQ IIQ IIIQ IVQ IQ IIQ IIIQ IVQ IQ IIQ IIIQ IVQ IQ IIQ IIIQ IVQ IQ IIQ
2007 2008 2009 2010 2011 2012 2013
GDP (in marketprices)
Mining
Manufacturing
Global markets transformations are unfavorable for Russia
5
Slowing demand (crises, structural changes, energy efficiency) and
shrinking market niches for the traditional suppliers (shale revolution, new
market participants).
Growing supply and increasing competition with Australia, Brazil, East
Africa and North America, which will target Russian core markets in Europe
and Asia.
Stagnant prices – shale revolution has already decreased prices in North
America and Europe, additional shale oil will limit oil prices growth. In all
scenarios oil prices do not exceed 100-130 $/bbl, gas prices stay at the current
levels.
Directions of the international energy trade are changing considerably
6
International energy trade, mtoe
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
1
2
3
CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS
AND DOMESTIC GAS MARKET
HOW TO BREAK THE DEADLOCK?
CHANGING GLOBAL OIL MARKETS: IMPLICATIONS FOR THE RUSSIAN OIL EXPORTS AND
ECONOMIC GROWTH
7
Global gas market development: incremental demand will be concentrated in the non-OECD countries
8
The balance of gas supply and demand in 2040
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
In the long-term average weighted regional gas prices are not expected to increase significantly on the Russian main export markets
9
Equilibrium gas prices in the three scenarios
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
Russian gas export might be 70 bcma lower if there would be new breakthroughs in the shale technologies
10
Changes of gas net export and import volumes in 2040 relative to 2010, Baseline and ‘Shale
Breakthrough’ Scenarios
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
Global LNG supply is expected to boom by the end of this decade with Australia, USA and Canada becoming the largest market players
Mln. tonnes
Global liquefaction capacities (existing and planed)
0
100
200
300
400
500
600
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Other
East Africa
US
Canada
Australia
Existing
Source: ERI RAS11
Situation on the European gas market during the last years did not favor Russian exports…
12
• Unbundling
• Gas Target Model requires all gas to be supplied at the virtual hubs
• Spot volumes are increasing very fast(30-40% p.a.)
• Majority of the European stakeholders support transition to the spot pricing
• Lower than contracted volumes
• Recovers very slowly
• In the power sector gas is strongly competing with coal
• Growing supplies of LNG
• Diversification of pipeline supply sources
Supply Demand
RegulationPricing
12
…but European gas market is going to be tight until 2015-2016
as LNG is diverted to Asia; post 2016 very limited new supplies will become
available and there will be an additional call on the over-take-or-pay
volumes: good opportunity for Russia to enhance its position
Source: WEO2011, IEA; Cedigaz; ERI RAS.
0
100
200
300
400
500
600
700
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Indigenous production (IEA 2013) Pipeline contracts MCQ Russia Pipeline contracts MCQ North Africa
LNG contracts MCQ delivered LNG contracts MCQ diverted New LNG supplies
Available ACQ-TOP volumes Demand (IEA 2013)
European gas balancebcm
13
Russian position in Europe will largely depend on gas pricing: traditional “Groningen” model is questioned now, as even renegotiated oil-linked contract prices are higher than spot-based
-100
0
100
200
300
400
500
Delta
NBP
Russian gas on the German border
European spot and oil-linked gas prices
Source: Bloomberg; ERI RAS.
$/1000 m3
14
Gazprom could give further price discounts and increase its market share, but Russia’s strategic choice is in favor of the short-term profit maximization…
Alexander Medvedev, Gazprom Export
We were faced with the choice of whatever was
to maintain the supply volumes and the
market share, or make the profit our high
priority.
As a public and commercially oriented company,
Gazprom is interested in increasing profits to
provide income to shareholders. Therefore, the
choice was made, the correct one, in favor of
the revenues, and the year results confirmed
that.
«»
15
…ensured by the existing portfolio of the long-term contracts, which guarantees stable sales volumes for Russia until at least 2022
Sources: Cedigaz, Gazprom, ERI RAS.
Contractual quantities and real supply volumes of Russian gas to Europebcm
0
20
40
60
80
100
120
140
160
180
200
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
201
6
201
7
201
8
201
9
202
0
202
1
202
2
202
3
202
4
202
5
202
6
202
7
202
8
202
9
203
0
ACQ
Fact
MCQ
16
Oil indexation vs. gas indexation: "a bird in hand is worth twoin the bush” approach
Strong pressure from the customers side
Investigation of the European
Commission against Gazprom`s pricing
Gazprom could demand financial
compensation for contract review + 3rd
Package exemption for the South Stream
and NEL + transitional period for price
adjustments + European-level financial
support for its mega-projects (like EBRD
and other European financial institutions)
Gazprom could become a dominant
player manipulating the spot market by
adjusting its supply volumes
Disappearing gas glut on the European gas
market in the medium term – gap between oil-
indexed and spot prices already started to
narrow
Gazprom will face next price reopening only after
2015, and contract expiration – only by 2022
With high oil prices even lower volumes are
providing high revenue
New projects demand high prices (they have
negative margins under spot prices, given that
they have to pay export duties) and oil indexation
is more convenient for the project financing
Russian Government needs the money right now
Oil indexation Spot indexation
There are strong commercial reasons for Gazprom to protect the oil indexation at
least during the next 3-5 years
17
Everybody is expecting new opportunities on the booming Asian gas markets, but by 2020 there is already no market niche in China...
bcmChinese gas contracts and gas balance
26
0
50
100
150
200
250
300
350
400
450
2010 2015 2020 2025
Uncontracted market niche
Central Asia
Other LNG supplies
Australia
Qatar
Indigenous production
Chinese demand
Sources: IEA, Cedigaz, Enerdata, ERI RAS.18
…and OECD Asia is quickly contracting the North American LNG
Japan and South Korea contracts and gas balancebcm
Sources: IEA, Cedigaz, Enerdata, ERI RAS.
34 32
65
0
20
40
60
80
100
120
140
160
180
200
2010 2015 2020 2025
Uncontracted market niche
USA and Canada
Others
Russia
Qatar
Other Middle East
Papua New Guenia
Malasia
Indoneisa
Brunei
Australia
Indigenous production
OECD Asia demand
19
Russian “Eastern Gas Program” is moving on, but as there are still no SPAs,
the window of opportunities is becoming smaller and price negotiations
have now to take into account Henry Hub pricing of the potential US LNG
Sources: Gazprom 20
There are 7 Russian LNG projects under consideration currently,but all of them face commercial, technical and regulatory challenges
LNG export permissions might be approved only for special cases and only under very strict
control of the State. Due to the limited volumes and long lead time these LNG projects will not
significantly affect Russian and global balance during this decade. In the longer term Russian
LNG export could reach up to 50-70 bcma.
Baltic LNG
Gazprom
15 mln t
Shtokman
Gazprom
7,5-15 mln t
Pechora LNG
ALLTECH Group
2,6 mln t
Yamal LNG
NOVATEK
15 mln t
Sakhalin-1 LNG
ROSNEFT
5+ mln t
Sakhalin-2 LNG
Gazprom
10 mln t + 5 mln t
potential expansion
Vladivostok LNG
Gazprom
10-15 mln t
21
Independents are improving their positions on the domestic market, though complete market liberalization and Gazprom`s ownership unbundling are not currently under discussion
Russian gas production structure
Sources: CDU TEK, ERI RAS
* Other producers include PSA and APG
bcm
22
But at the same time the industry is consolidating, now there are only
three major non-Gazprom players left on the market: NOVATEK,
Rosneft and LUKOIL
Natural gas production by the companies with access to the UGSSbcm
Sources: CDU TEK, ERI RAS
23
2012 2020 ∆
AGR
2012-
2020
Total consumption 428 468 40 1,12%
Power generation 188 201 14 0,88%
Centralized heating 72 64 -7 -1,36%
Industry and
feedstock79 94 15 2,17%
Residential 75 86 11 1,78%0
100
200
300
400
500
600
2000 2005 2010 2015 2020
Residential
Industry andfeedstock
Centralizedheating
Powergeneration
Russian gas demand by sector until 2020 (optimistic scenario)
GAGR
2,3%
GAGR
0,3%
GAGR
1,1%
Limited demand growth on the domestic market enforces competition
between major players for the most attractive market segments
Sources: Rosstat, ERI RAS.
24
0,00
0,50
1,00
1,50
2,00
2,50
3,00
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Netback price (forecast2011)
Netback price (forecast2013)
MED forecast up to2030
Gas price growth in linewith inflation
Sources: MED, ERI RAS.
At the same time the Government frightened by the industrial output
decline is ready to slow gas prices growth down to the rate of
inflation, which is justified by lower European prices and weak
domestic demand
Different proposed dynamics of the domestic gas price increase (compared to 2010 = 1)
25
1
2
3
CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS
AND DOMESTIC GAS MARKET
CHANGING GLOBAL OIL MARKETS: IMPLICATIONS FOR THE RUSSIAN
OIL EXPORTS AND ECONOMIC GROWTH
HOW TO BREAK THE DEADLOCK?
26
There are tremendous shifts expected on the liquid fuels market,
with declining demand in OECD and booming unconventional liquids
production
27
Liquid fuel supply and demand balance by 2040, Baseline Scenario
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
Unconventional oil will reach 16% of total liquids production by 2040
28
Dynamics of liquid fuels supply structure, Baseline Scenario
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
29
Equilibrium oil prices in the three scenarios
Equilibrium oil prices decrease up to 2020 and afterwards do not
exceed 130 $/bbl
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
30
Changes of oil net export and import volumes in 2040 relative to 2010, Baseline and ‘Shale
Breakthrough’ Scenarios
Russian oil export could decrease even stronger than expected – by additional 50 mln. tonnes per annum - if there would be new breakthroughs in the shale technologies
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
31
2010 г. 2015 г. 2020 г. 2025 г. 2030 г. 2035 г. 2040 г.
1 2 1 2 1 2 1 2 1 2 1 2
GDP
100 121 119 150 143 185 168 222 192 266 219 316 248
Share of the energy
sector in GDP
28,5 25,6 25,5 22,9 23,1 20,0 20,4 18,4 18,8 17,0 17,3 15,6 15,9
GDP energy intensity
100 87 88 74 77 64 69 56 62 49 57 43 52
Energy consumption
100 106 105 112 110 118 115 125 120 131 125 137 129
Energy export
100 103 95 103 89 105 84 104 85 104 86 100 87
Investments in the
energy sector as a
share of GDP 5,0 5,9 7,2 5,0 4,7 4,5 4,1 4,9 4,8 3,8 3,7 3,4 3,5
Official MED scenario and Outlook-2013 scenario of Russian economy and energy
development, %
1 – official MED scenario, 2 – Outlook-2013 scenario
Taking into account global environment changes dramatically
expectations for the Russian energy and economy
Source: ERI RAS.
32
Decreasing competitiveness of the Russian energy resources
due to depletion of the old fields and tax system makes Russia
most sensitive to the market changes among all the suppliers
Russian energy export by fuel in the official MED scenario and in the Outlook-2013 scenario
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
MED scenario
Outlook-2013 scenario
33
Limited export opportunities might reduce Russia`s economic growth
by 1% per annum compared to the official scenarios: the economy
cannot any longer count on the hydrocarbons-driven growth
Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013.
Russian GDP in the official MED scenario and in the Outlook-2013 scenario
1
2
3
CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN
GAS EXPORTS AND DOMESTIC GAS MARKET
CHANGING GLOBAL OIL MARKETS: IMPLICATIONS FOR THE RUSSIAN
OIL EXPORTS AND ECONOMIC GROWTH
HOW TO BREAK THE DEADLOCK?
34
Main measures to support competitiveness of the Russian energy
resources
Cost control together with a thorough evaluation of cost-effectiveness of the new projects
and their potential risks. It is advisable to rank investment projects and reject or postpone the
implementation of inefficient ones. This is confirmed by the results of work done by foreign and
Russian experts, who analysed the cost of domestic energy projects, showing that they were
typically several times more expensive compared to existing analogous projects found elsewhere,
while those projects that were completed were underutilized for years.
Taxation system reform: currently an efficient break-even point for the Russian upstream oil
projects is fixed at 25 $/bbl due to outdated volume-based taxation.
International consortia development – attracting foreign partners into the consortia engaged in
resource development (this refers especially to the eastern part of the country, the coastal shelf,
and deposits of unconventional hydrocarbons). If properly managed, it would enable the country to:
• attract foreign investment and apply advanced technology;
• develop types of business activities with potential, under new conditions;
• ensure tight control over costs and other business results;
• obtain additional assurances for product sales; and
• facilitate access to logistics and adapt to the rules of international markets.
Energy saving. Russia has a huge potential, but it is limited by inappropriate regulatory framework
and lack of access to financing 35
Main part of the Russian conventional oil is concentrated
in the declining Soviet-time fields
* According to the Energy Strategy-2030 and Social-Economical
Development Forecast Up To 2030
Source: ERI RAS.
Structure of the Russian oil production
36
59%
30%
4%3% 4%
Conventional oil
Oil deposits with lowrecovery factor
Heavy oil and bitumen
Oil from gas deposits
Other
Shale and tight oil
2012 2030
518 mln.t 512-535 mln.t*
34%
41%
8%
12%
2%3%
In order to sustain production, Russia needs to develop new fields,
which, however, are not competitive under the current tax regime.
Higher production estimates are justified by the vast resource base,
but require completely different taxation system
Sources: CDU TEK, LUKOIL.
Mln t Forecast for the liquid hydrocarbon production in Russia
37
Russia has a huge potential for Enhanced Oil Recovery: best
practices would provide additional 4 bln t without the need to build
new infrastructure, but adjustments of the tax regime are the must
Sources: Energy Ministry, LUKOIL.
Potential for increasing ORF in Russia
38
Unconventional oil and Artic: huge potential, but high costs and lack
of technologies make these projects marginal under the current
taxation
Arctic production volume forecastMln. t
Unconventional oil reserves
Sources: Energy Ministry, LUKOIL.
39
The normal Mineral Extraction Tax and export tax require much lower
breakeven costs, then all sources of new supply have;
the Government is not ready to change the system for profit-based
taxation, therefore all the exemptions are currently adjusted in the
manual regime
40
0
50
100
150
200
250
Affordable breakevenunder the current taxation
EOR Bazhenov rock Arctic
Source: ERI RAS.
$/bbl
Russia has huge potential to use energy more efficiently: energy
consumption could be decreased by 30%
Primary energy savings potential in Russia
based on comparable OECD efficiencies, 2008
Raising Russia’s energy efficiency to the levels of comparable OECD countries would save the amount of primary energy used in a year by the UK
0
100
200
300
400
500
600
700
Mto
e
30%
Gas
Other fuels
Russian primary energy demand
Source: WEO 2011. IEA.
41
Conclusions
More competitive external environment and domestic challenges are creating less
favorable conditions for the Russian oil and gas industry. It will hardly be ably to provide
the same high share of the budget incomes in the future. ERI RAS estimates show, that
unfavorable situation on the export markets could lead to lower export volumes and
slow down Russian GDP growth by 1% p.a.
Russian gas industry still has a huge potential for export growth, but without strict costs
control, cautious evaluation of the export projects and more flexible pricing system these
opportunities could be lost.
Under current conditions, oil production in Russia can be maintained through
development of the following areas:
• enhanced oil recovery at existing fields
• development of unconventional reserves
• development of the new frontiers: new provinces in the Eastern Siberia and Arctic
offshore
But to develop these areas, the Government has to change the whole taxation system,
not just to give few exemptions. 42
43
Contacts
Nagornaya st., 31, k.2, 117186, Moscow,
Russian Federation
phone: +7 985 368 39 75
fax: +7 499 135 88 70
web: www.eriras.ru
e-mail: [email protected]
Energy Research Institute of the Russian Academy of Sciences
"Global and Russian Energy Outlook up to 2040"
http://www.eriras.ru/files/Global_and_Russian_energy_outlook_up_to_2040.pdf