Russian Energy Sector: Entering New Era

Transcription

1 Russian Energy Sector: Entering New Era Dr. Tatiana Mitrova Head of Oil and Gas Department Energy Research Institute of the Russian Academy of Sciences Washington October 14, 2014

2 1 CHANGING GLOBAL ENVIRONMENT 2 CHANGING DOMESTIC SITUATION 3 IMPLICATIONS: RUSSIAN OIL INDUSTRY 4 IMPLICATIONS: RUSSIAN GAS INDUSTRY 1

3 New cycle of the global energy markets transformations is unfavorable for Russia Energy demand is stagnating (crises, structural changes, energy efficiency). Energy supply is growing, accompanied by increasing competition with Australia, Brazil, East Africa and North American unconventional hydrocarbons, which will target Russian core markets in Europe and Asia. Stagnant or even falling energy (and commodities) 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 $/bbl, gas prices stay at the current levels. Russian energy export market niches start to shrink, as well as energy export revenues. Energy resource export economic model is threatened. 2

4 2010 Europe Developed Asia North America CIS South and Central America Middle East Africa Developing Asia 2010 Conventional oil CTL GTL&CNG Heavy oil Biofuels Oil sands Shale and tight oil Gas condensate Huge shifts are taking place on the liquid fuels market mt 5400 Liquid fuel supply and demand balance by 2040 Demand Supply Level Source: Global and Russian Energy Outlook up to ERI RAS-AC

5 On the supply side the role of unconventional oil is increasing significantly while conventional oil has just reached its peak Oil production by type, Baseline Scenario ( ) Source: Global and Russian Energy Outlook up to ERI RAS-AC

6 By 2040, the supply of oil will increase by 1 bn tons There are no fundamental reasons for significant growth of oil prices at the forecasted levels of demand Oil supply curve (cost of production) Demand Growth Source: ERI RAS 5

7 If Iraq, Iran and Brazil will enter the markets with new huge supply volumes, they will be able to squeeze an additional part of more expensive production volumes in Europe and CIS Changes in the oil supply curve in 2020 in the New Producers Scenario Source: Global and Russian Energy Outlook up to ERI RAS-AC

8 No significant oil price growth expected: annual average equilibrium oil prices will remain within $/bbl price range Projected price range of annual average equilibrium oil prices Source: Global and Russian Energy Outlook up to ERI RAS-AC

9 Demand growth for petroleum products is also concentrated in non-oecd countries Demand for oil products by region, Baseline Scenario Source: Global and Russian Energy Outlook up to ERI RAS-AC

10 Non-OECD countries prefer to build up their own refineries Current and predicted capacities of oil refineries (million tonnes) and their level of utilization (%) Source: Global and Russian Energy Outlook up to ERI RAS-AC

11 Consumption in 2010 OECD China India Middle East Africa Other non-oecd Production in 2010 Operational fields New fields Shale gas CBM Offshore (USA) Coal-to-gas (China) Associated gas Biogas Gas demand growth in all OECD countries together is less than in India bcm Demand Gas supply and demand balance in 2040 Supply 2040 Level 2000 Source: Global and Russian Energy Outlook up to ERI RAS-AC

12 Jan2001 Apr2001 Jul2001 Oct2001 Jan2002 Apr2002 Jul2002 Oct2002 Jan2003 Apr2003 Jul2003 Oct2003 Jan2004 Apr2004 Jul2004 Oct2004 Jan2005 Apr2005 Jul2005 Oct2005 Jan2006 Apr2006 Jul2006 Oct2006 Jan2007 Apr2007 Jul2007 Oct2007 Jan2008 Apr2008 Jul2008 Oct2008 Jan2009 Apr2009 Jul2009 Oct2009 Jan2010 Apr2010 Jul2010 Oct2010 Jan2011 Apr2011 Jul2011 Oct2011 Jan2012 Apr2012 Jul2012 Oct2012 Jan2013 Apr2013 Jul2013 Oct2013 Jan2014 European gas market: seasonally adjusted figures show that demand started to stagnate several years before the crisis bcm/month OECD-Europe gas demand dynamics Gross Inland Consumption 12-month moving average Source: ERI RAS calculations using IEA Monthly Gas Data Service Database 11

13 EU energy policy is promoting renewables and energy efficiency and targets at the reduction of gas consumption Source: EU Energy Roadmap until

14 The factors leading to low gas plant utilization are largely irreversible Source: IEA 13

15 New geopolitics: EU energy policy is targeted at gas supply diversification and moderating energy demand The Strategy sets out areas where decisions need to be taken or concrete actions implemented in the short, medium and longer term to respond to energy security concerns: 1. Immediate actions aimed at increasing the EU's capacity to overcome a major disruption during the winter 2014/2015; 2. Strengthening emergency/solidarity mechanisms including coordination of risk assessments and contingency plans; and protecting strategic infrastructure; 3. Moderating energy demand; 4. Building a well-functioning and fully integrated internal market; 5. Increasing energy production in the European Union; 6. Further developing energy technologies; 7. Diversifying external supplies and related infrastructure; 8. Improving coordination of national energy policies and speaking with one voice in external energy policy. 14

16 Global gas market: unconventional gas production is increasing Gas Production by Source Source: Global and Russian Energy Outlook up to ERI RAS-AC

17 Shale gas expands global gas supply curve, making more gas available to the world at lower prices Gas supply curve (cost of production) Source: Global and Russian Energy Outlook up to ERI RAS-AC

18 In the short-term US shale gas boom has already strongly affected global energy markets - 1 Unprecedented drop in the North American gas prices and their decoupling from the European and Asian price trends: gas markets are now more regionalized than ever (despite globalization theory). US domestic gas consumption increased, gas squeezed partially coal from the power generation, leading to CO 2 emissions reduction in North America. Significant LNG volumes were redirected to the other markets Europe and Asia. In Europe they lead to spot price drop, in Asia helped to dampen the consequences of Fukushima (otherwise prices could go even higher). European gas pricing model changed dramatically in just 5 years with the share of spotindexed gas supplies increasing from 20% in 2007 up to 50% in Gazprom`s contracts are renegotiated under extreme consumers pressure, oil linkage is already regarded by the European Commission as market power abuse. Coal exports from the US undermined gas competitiveness in the European power sector and lead to stagnant gas demand for electricity generation (which means actually stagnant total demand for gas), low utilization rates and even closure of gas-fired power plants in Europe. 17

19 In the short-term US shale gas boom has already strongly affected global energy markets - 2 Several large-scale projects, targeted initially at the US gas market, had to look urgently for the other buyers, others were postponed for unclear period of time (for example, Shtokman). The US targets Japan, Korea, Taiwan and new small Asian LNG consumers. US producers have already portfolio of about 40 mln. tonnes contracts targeted at Asian buyers (during just 1,5 years!), so the US is already conquering the market niche in Asia. It has already impacted (not physically, but more psychologically) price negotiating position for all its new contracts not only in Europe, but also in Asia - now any proposal is compared to the Sabine Pass contracts. Shale boom has strong impact on the industries: it is reducing both Europe s competitiveness vis-à-vis the US and China s overall manufacturing competitiveness. Generally, there was a huge reassessment of the national energy policies in many countries (like Poland, Ukraine, Argenita, China, etc.) they got a new hope. It is also bringing shifts in global politics changing America s role in the EU-Russia gas relationship, as well as in the Middle East. 18

20 In the medium-term global LNG supply is expected to boom, partially due to the shale gas revolution, leading to stronger competition in European and Asian markets Mln. tonnes 600 Global liquefaction capacities (existing and planed) Other East Africa 300 US Canada Australia Existing Source: ERI RAS 19

21 For North American LNG Asia seems to be much more attractive market, US and Canada are actively contracting LNG /MBtu 16 Cost comparison for the US LNG sales to Europe and Asia Mln. tonnes 60 Signed contracts for LNG supply from North America ,55 Margin 50 Europe ,55 Regasification Transportation Liquifaction Asia Portfolio buyers 2 Henry Hub price 10 0 Europe -2 Source: ERI RAS Asia

22 World gas war? US will compete with Russia in all its export markets 21

23 US might become swing LNG producer on the global gas market, creating downward pressure on the gas prices All traditional suppliers feel the urgency to develop new export projects ahead of the competition from US LNG. US will have very flexible LNG production volumes (first of all due to the flexibility of shale gas production) and completely new contractual system US might become a swing supplier, reacting on a short notice, while the other producers will operate on higher capacity utilization rates. Such swing gas producer position is something completely new for the gas market and more reminds of the Saudi Arabia position in the global oil market. As a result US LNG will set the floor price both in Atlantic and in Pacific basins. Global LNG market oversupply will lead to increasing pressure on prices. We witnessed already the change of the pricing system in Europe (due partially to the impact of the redivertion of the LNG, targeted initially to the US). Henry Hub indexed contracts in Asia (despite their small volumes) started the new era of the "hybrid pricing system" in Pacific. Negotiations to sell new gas are becoming tough now that the buyers are refusing full oilindexation due to the expectations of the US Henry Hub based LNG. First Henry Hub indexed contracts in Asia (despite their small volumes) started the new era of the "hybrid pricing system" in Pacific. 22

24 Due to the gas oversupply, its prices in Europe and Asia will not exceed the current levels even by 2040, while North American prices will remain far below Forecasted average weighted price* of gas by regional markets, Baseline Scenario $ 2010/ mcm Europe (average weighted) China(average weighted) Japan (average weighted) USA (Henry Hub) Source: Global and Russian Energy Outlook up to ERI RAS-AC * Weighted average price between the prices of long-term contracts linked to alternative fuels, and spot prices. 23

25 1 CHANGING GLOBAL ENVIRONMENT 2 CHANGING DOMESTIC SITUATION 3 IMPLICATIONS: RUSSIAN OIL INDUSTRY 4 IMPLICATIONS: RUSSIAN GAS INDUSTRY 24

26 Russia has recovered to the pre-crises levels by 2011, but then new stagnation started % Dynamics of GDP, industry and energy sector in Russia, % Oil production Gas production Coal production Electricity Primary energy production GDP 50 Industrial output 40 Source: Global and Russian Energy Outlook up to ERI RAS-AC

27 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 Currently Russian economy is entering recession 15 GDP and industrial value added growth (as % to the corresponding quarter of the previous year) GDP (in market prices) Mining Manufacturing Source: Rosstat 26

28 The role of the energy sector has reached its maximum Shares of energy sector in Russian GDP, exports and budget Source: Global and Russian Energy Outlook up to ERI RAS-AC

29 Is there life under sanctions? Russia is now facing unprecedented challenges related to the financial availability and access to the international loans. Chinese seem to become the major source of investments (but demand equity shares in return see Vankor case). Sanctions create serious problems with access to the modern technologies. So far the sanction lists, adopted by the U.S. and EU, are not limiting significantly current operations, but they are completely undermining future development (Arctic, shale oil). New sanction could be introduced as an answer to further deterioration of the Ukrainian situation. Increasing patriotic mood promotes and supports total import replacement. Russian companies engagement in the European market is regarded as risky and thus reduced (see Lukoil case) Sanctions introduce additional pressure on the industry and population thus reducing their demand and purchasing ability (in addition to recession). 28

30 As a result of weaker economic performance, the growth of energy consumption in Russia will slow considerably mtoe 900 Primary energy consumption in Russia Consumption of main primary energy resources, 2010 and Gas Liquid fuel Coal Hydro Nuclear Other Source: Global and Russian Energy Outlook up to ERI RAS-AC

31 Natural gas will remain, in both absolute and relative terms, the most widely used energy resource in Russia Growth in energy consumption by sector and fuel type in Transport Gas Liquid fuel Residential Coal Industrial Nuclear Hydro Power Renewables mtoe Source: Global and Russian Energy Outlook up to ERI RAS-AC

32 Mtoe Russia has huge potential to use energy more efficiently: energy consumption could be decreased by 30%, but as the financing is not available it is likely to remain unutilized 700 Primary energy savings potential in Russia based on comparable OECD efficiencies, Gas 30% 400 Other fuels Russian primary energy demand Source: WEO IEA. 31

33 Investment needs of the Russian energy sector are huge bln.$ Energy saving Heat supply RES Hydro Nuclear Thermal plants and electricity networks Coal Gas Oil Source: Global and Russian Energy Outlook up to ERI RAS-AC

34 Russian net energy exports forecast by product and by destination mtoe 700 Russia s net exports by energy resource type Russia`s net energy exports by direction mtoe Pipeline gas LNG Oil Oil products Coal, electricity CIS Europe Asia Source: Global and Russian Energy Outlook up to ERI RAS-AC

35 1 CHANGING GLOBAL ENVIRONMENT 2 CHANGING DOMESTIC SITUATION 3 IMPLICATIONS: RUSSIAN OIL INDUSTRY 4 IMPLICATIONS: RUSSIAN GAS INDUSTRY 34

36 In order to sustain oil production, Russia needs to develop new fields mln t Russian oil production by Federal District Oil and NGL production in Russia by reserve type 550 mt Far East East Siberia From old West Siberia Southern regions and offshore Volga-Ural North-West From reserves growth Source: Global and Russian Energy Outlook up to ERI RAS-AC From new discovered Gas condensate production 35

37 Higher production estimates are justified by the vast resource base, but require completely different taxation system and market structure Mln t Forecast for the liquid hydrocarbon production in Russia Sources: CDU TEK, LUKOIL. 36

38 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 profitbased taxation, therefore all the exemptions are currently adjusted in the manual regime $/bbl 250 adjusted 200 adjusted Affordable breakeven under the current taxation Sanctions EOR Bazhenov rock Arctic Source: ERI RAS. 37

39 Oil sector is becoming more and more concentrated under the state control Oil production in Russia by company in 2003 and in 2013, mln t 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Others Surgutneftegaz LUKOIL TNK-BP (without share in Slavneft) Tatneft Bashneft Russneft YUKOS Sibneft Slavneft GazpromNeft (without share in Slavneft) Rosneft (former TNK-BP) Rosneft Source: ERI RAS. 38

40 «Oil-for-money» mega-deals: 0,8 mb/d for $70 bln. advance payments The first contract was signed between Rosneft and CNPC in 2009 for 15 mln tonnes/year (0,3 mb/d) until The deal envisaged four documents: two agreements between the Russian companies and the China Development Bank on long-term credit amounting to $25 billion (20-year loan of $15 billion for Rosneft and of $10 billion for Transneft primarily for the construction of the ESPO, including the spur to China), a 20-year contract on the delivery of oil between the CNPC and Rosneft, and also an agreement between the CNPC and Transneft on the construction and operation of a Skvorodino-Mokhe pipeline. In 2013 the first contract signed with CNPC was expanded by additional 15 mln tonnes/year (0,3 mb/d) for 25 years (to export total 360 mln tonnes for $270 bln., in return for $17 bln. advanced payment). In 2013 Rosneft signed also the second contract for oil supplies to China with Sinopec for 10 mln tonnes (0,2 mb/d) of oil supples for 10 years starting from Under the agreement, Sinopec will make an advance payment of between 25 and 30% of the total cost of the 10-year contract, starting in 2014, which continues the practice of raising Chinese money for Rosneft s corporate purposes. 39

41 The major oil export project from Russia to Asia over recent years is the construction of oil pipeline "Eastern Siberia Pacific Ocean" 40

42 China is expanding its participation in the Russian upstream In 2005 Rosneft offered Sinopec 25.1% of shares in the Veninskii block of Sakhalin-3 project. In August of 2006, Sinopec purchased from TNK-BP 96.86% of the shares of its subsidiary Udmurtneft, which produced 6.4 million tons in 2011, through the company Promleasing. In 2006 Rosneft and CNPC signed an agreement about the creation of a joint-venture "Vostok Energy" (Rosneft - 51%, CNPC - 49%). In the summer of 2007 Vostok Energy won licenses for two small deposits in Irkutsk oblast, located near the ESPO. In the course of Rosneft's IPO, CNPC acquired 0.6% of the state company's shares for $500 million. In October 2013, Rosneft and CNPC agreed to set up a joint venture for upstream developments in East Siberia, with Rosneft holding 51% and CNPC with the rest. The deal gives China access to the Srednebotuobinsk field, which has an estimated 2.05 million barrels of oil and equivalents in Siberia. Russian companies are also trying to move downstream in Asia, though so far success is very small. At the end of 2007 Rosneft (49%) and CNPC (51%) created the joint venture "Chinese-Russian Eastern Petrochemical Company" for the construction of a Chinese refinery with a capacity of 16 million tons in Tianjin, petrochemical complex and a network of 300 filling stations in the north of China. The cost of the refinery is estimated at $4.6 billion, initially it was planned to be commissioned by However, it took much longer because of disagreements on a number of issues, including the financing of the project, and the agreement was signed only in May According to the terms of the agreement signed in May 2014, CNPC and Rosneft expect the first production in In September 2014 it was announced that CNPC is to get up to 10% in Russia s Vankor oilfields, Rosneft s biggest production asset. The deal is very profitable for the Chinese since this is an already developed field, while it could allow Rosneft to raise up to 1$ billion to help manage its accumulated debt. 41

43 Oil exports to Asia are replacing European supplies 300 Crude oil exports from the Russian Federation, million tonnes CIS Europe Asia Source: Global and Russian Energy Outlook up to ERI RAS-AC

44 1 CHANGING GLOBAL ENVIRONMENT 2 CHANGING DOMESTIC SITUATION 3 IMPLICATIONS: RUSSIAN OIL INDUSTRY 4 IMPLICATIONS: RUSSIAN GAS INDUSTRY 43

45 The crises was accompanied with dramatic changes on all Russian export markets Russian gas exports in , bcm Sources: Rosstat, ERI RAS 44

46 Russian domestic gas consumption stagnates on the back of weak economic growth: economic slowdown and higher gas prices limit gas demand growth in all sectors bcm Russian domestic gas consumption structure Residential Industry and feedstock Centralized heating Power Gas pipelines own needs Sources: Rosstat, ERI RAS 45

47 Major post-crises transformational changes in the Russian gas balance Start of Bovanenkovo by Gazprom and fast growth of IGPs production resulted in gas oversupply Main transportation bottlenecks were expanded (SRTO-Torjok, Urengoi hub, Bovanenkovo-Ukhta) Slower economic performance resulted in domestic gas demand stagnation in all sectors, with the main consumers being strongly affected by the crises and higher prices There is very limited gas export alternative for the Russian gas now: Gas demand in Europe was strongly affected by the crises and it is unlikely to return to pre-crisis levels prior to 2020, there us nearly no room for exports growth Russian gas exports to CIS were gradually falling due to falling gas consumption and inability of the consumers to pay Start of the Sakhalin-2 LNG export could not compensate for the decline of exports to the West, other LNG projects cannot be commissioned before Imports of Central Asian gas fallen dramatically after 2009 explosion on Turkmen pipeline, China emerged as a key gas consumer to replace Russia Export contract with China is signed, but supplies will start only by the end of the decade (the earliest) 46

48 There is significant gas oversupply: Russian gas production potential is huge, significantly exceeding domestic and export demand bcm Russian gas production potential Gazprom Non-Gazprom Domestic demand Sources: ERI RAS 47

49 Russian gas prices were frozen in , then they were growing by 15-25% per annum to reach netback parity, and now they are frozen again... Average weighted wholesale gas prices for industrial consumers in , $/mcm Sources: ERI RAS, Gazprom 48

50 Major shifts: adapting to the new environment Russian gas production tries to adjust to the weak internal and export gas consumption growth rates IGPs production is booming against stagnation at Gazprom, there is increasing output by all producers of more profitable wet gas (instead of traditional dry gas) Gazprom has to sell gas at the regulated FTS price while IGPs have an opportunity to provide price discounts As a result Gazprom has to constrain its own supplies, while independents actively expanded into end users market In order to ease pressure on the domestic market, partial breakup of the gas export monopoly was approved (for LNG). 49

51 Increasing role of the IGPs at the expense of Gazprom Russian gas production structure by company Sources: Rosstat, ERI RAS 50

52 New regional gas monopolies evolve Source: Sberbank Investment Research 51

53 Russia is trying to adjust in Europe (but very cautiously in order not to ruin the prices), its price strategy is in fact more flexible than declared In 2013 Gazprom started to implement a new price discount model with so-called retroactive payments. Despite Gazprom`s strident rhetoric in favor of traditional oil indexation, in fact numerous adjustments and contract reviews have already been made in the course of the last 5 years. Analysis of Gazprom`s official reports demonstrates a much more flexible negotiating position than has commonly been thought to be the case. During the period 2009 mid-2014 as many as 58 gas supply contracts were reviewed with 39 clients (see next slide), providing price discounts, easing of take-or-pay obligations and a certain introduction of a spot component. Calculations using Russian Customs Service statistics, Gazprom reports and the Nexant World Gas Model (which allows the assessment of contractual prices based on the prices of oil products), clearly show the increasing differential between these two prices. In fact, by 2013 Gazprom had already provided nearly on average 16% discount to its European customers compared to its pre-crisis traditional oil-linked price formulas. 52

54 # Country Company review application 1 Austria Centrex Austria EconGas OMV Austria Erdgas Import Salzburg 1 4 Austria Gazprom Austria (GWH Gashandel) Bulgaria Bulgargaz Czech Republic RWE Transgas (RWE Supply & Trading) Czech Republic Vemex s.r.o. 1 8 Denmark DONG 1 9 Estonia Eesti Gaas AS 1 10 France GDF SUEZ Germany E.ON Germany Verbundnetz Gas AG 1 14 Germany WIEH Germany Wingas Greece DEPA Hungary Centrex Hungary Zrt Hungary Panrusgas Gas Trading Plc Italy Axpo Trading (EGL) Italy Edison (Promgas) 1 21 Italy ENI Italy ERG Italy PremiumGas Italy Sinergie Italiane Latvia Latvijas Gaze 1 26 Lithuania Lietuvos Dujos 1 27 Netherlands GasTerra Poland PGNiG 1 29 Slovakia SPP Serbia Srbijagas Turkey Botas Turkey Akfel Gaz, Avrasya Gaz, Bosphorus Gas, Bati Hatti, Kibar Enerji, Enerco Enerji, Shell Enerji A.S Shell Energy Europe (SEEL) 1 Renegotiated contracts (by years) Contract renegotiated according to Gazprom's data 1 - Discount made (inc. discount that is made without amendment to contract) according to Gazprom officials statements or media Source: ERI RAS using Gazprom Annual Reports , Quarterly report: 1 Quarter

55 As a result of all these price discounts, by the end of 2013 Russian contract price at the German border equalled NBP and Gazprom managed to restore its 30% market share Regional spot and oil-linked gas price dynamics Source: EEGAS 54

56 Starting from 2013 over-take-or-pay volumes became necessary in Europe bcm 800 Buyers market Sellers market European gas balance Buyers market? Indigenous production Import LNG contracts TOP Import LNG contracts ACQ-TOP Import pipeline contracts TOP* Import pipeline contracts ACQ-TOP** Demand (IEA-2013 New Policies Scenario) Sources: IEA; Cedigaz; ERI RAS. 55

57 Existing long-term contracts guarantee stable sales volumes for Russia until at least 2022 bcm 200 Contract volumes and supply volumes of Russian gas to Europe ACQ Fact MCQ Sources: Cedigaz, Gazprom, ERI RAS. 56

58 There are 7 Russian LNG projects under consideration currently, but all of them face commercial, technical and regulatory challenges Shtokman Gazprom 7,5-15 mln t Baltic LNG Gazprom 15 mln t Pechora LNG ALLTECH Group 2,6 mln t Yamal LNG NOVATEK 15 mln t Sakhalin-1 LNG ROSNEFT 5+ mln t Vladivostok LNG Gazprom mln t Sakhalin-2 LNG Gazprom 10 mln t + 5 mln t potential expansion 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 bcma. 57

59 LNG export liberalization just a part of a power game Igor Sechin Gennady Timchenko Alexey Miller 58

60 Under the "shale pressure" Russia started its historical shift Eastwards Now there is clear urgent need for Russia to diversify its energy export markets: There is no room for increase of Russian exports to Europe Increasing competition (North American shale gas and oil, potential Iran, Iraq, Australia, Brazil entrance to the global markets) For geopolitical reasons Europe is targeting to decrease dependence on Russian energy supplies The sanctions target the finance and energy sectors, restricting some state firms' and banks' ability to raise financing North-East Asia seems to be the most attractive new energy market Asian markets are demonstrating the highest growth rates even during the crises, and according to all projections, they will drive future global hydrocarbon demand growth Lack of own energy resources (and problems with nuclear in Japan) make North-East Asian countries ideal, complimentary partners for Russia in the energy trade. Asian partners are regarded by Russia not only as a market, but also as a source of financing, technologies, equipment and even labor force. Russia is now promoting switching to roubles and RMB payments, which could mark a new stage in the whole Asian energy trade development. Creation of the new energy infrastructure in the Russian Eastern Siberia and the Far East is regarded as a tool to accelerate country`s economic growth, helping to form new industrial clusters based on the development of energy resource production and processing. 59

61 Negotiations with China, which have been going on for more than a decade, finally resulted in the mega-deal MoU on gas exports via two potential routes (Altai and East Siberia) signed in 2004 Gazprom purchase of Kovykta in 2011 allowed negotiations to focus on eastern route Major parameters agreed by 2013, apart from the vital element of price In 2013 CNPC-Novatek deal was structured on 20% of Yamal LNG and 2,2 mln tonnes of Yamal LNG supples. May 21, 2014 Putin`s to visit Beijing new geopolitical environment catalysed final decision - Gazprom and CNPC signed the 30-year contract for 38 bcma of Russian pipeline gas supply to China. On August 2014 Gazprom started negotiations with CNPC on the Western route (6700 km long Altai pipeline with 30 bcma capacity from the Western Siberia, diverting supplies targeted to the European market). Gazprom says that the pipeline could be built very fast and its capacity might be expanded up to 100 bcma. Russian energy ministry expects the contract to be signed before the end of In October 2014 Gazprom for the first time announced that it is ready to refuse from Vladivostok LNG and to send all the feed-gas to China via pipelines. On October 13, 2014 Russia finally signed 40 year long intergovernmental agreement for the Eastern gas supplies. The Western route was not agreed. Rosneft started negotiations with Chinese on Skhalin-1 LNG sales. 5

62 Secret mega-deal The contract is linked to oil prices and has 'take-or-pay' clause. Contract price is not officially disclosed (Russian trade representative in China announced, that it it slightly higher than Central Asian gas price for China). With total amount of the 30 year long deal of $400 bln., average price is estimated at $/mcm (average Gazprom`s export price to Europe in 2013 was 380 $/mcm). It seems that there is strong price review clause in the contract. $25 bln. were expected as a down payment from the Chinese side, but the deal failed. Now Gazprom plans to attract loans from the Chinese banks by the end of 2014-early 2015 (most likely at Libor + 3-5%). New LNG projects coming on stream in the next years in Australia and the US will not only have to compete between each other for demand, but also against the price set by pipeline imports deals such as the one between Russia and China, which has an estimated price of around $11-12/MMBtu. 61

63 Pipeline and LNG export options in the Russian East Siberia and Far East 62

64 The Empire Strikes Back : Altai, Korean and Japanese pipeline negotiations The whole Russia s Eastern strategy is closely related to Chinese deal and Power of Siberia pipeline construction The 61 bcm Yakutia Khabarovsk Vladivostok (some 3,200 km) gas pipeline will be constructed at the first stage by This will make it possible to initiate direct gas supplies to China 2019 (though there were some statements, which Gazprom later refused, that the first Russian gas will reach China in 2020 and that by 2024 there would be only 25 bcma supplies). Pipeline infrastructure is the key to opening up Russia s vast Eastern resource base; Additional leg to South Korea through Bohai Bay is possible. Sakhalin has the option of increased LNG exports or the S-K-V pipeline to Vladivostok and possibly into NE China. On August 2014 Gazprom started negotiations with CNPC on the Western route (6700 km long Altai pipeline with 30 bcma capacity from the Western Siberia, diverting supplies targeted to the European market). Gazprom says that the pipeline could be built very fast and its capacity might be expanded up to 100 bcma. Russian energy ministry expects the contract to be signed before the end of In October 2014 Gazprom started negotiations with CNOOC on LNG supplies. In October 2014 Gazprom for the first time announced that it is ready to refuse from Vladivostok LNG and to send all the feed-gas to China via pipelines. 63

65 Global competition is increasing, but Russian Eastern gas export options are looking competitive Eastern gas export options costs and margins comparison, $/MBtu Source: ERI RAS 64

66 Gas production potential in the Russian Eastern Siberia and Far East is considerable Eastern Siberian gas production potential, bcm Yurubcheno- Tokhomskoye Красноярский and центр Kuyumbinskoye Fields 50 Якутский центр Chayandinskoye Kovyktinskoye Иркутский центр Yurubcheno-Tokhomskoye and other Rosneft Small gas field (IOC) Kovystinskoe Chayandinskoe Russian Far East gas production potential, bcm Sakhalin - 3 Sakhalin - 2 Marketable gas Sakhalin-1 Sakhalin - 1 Marketable gas Sakhalin-2 Marketable gas Sakhalin-3 Source: ERI RAS 65

67 The main increase in Russian gas exports will be to Asia bcm 350 Russian natural gas exports CIS West pipeline West LNG East pipeline East LNG Source: ERI RAS. 66

68 bcma but even in the long-term Russian energy exports to Asia do not even come close to the levels that have already been reached on the European markets Total Russian pipeline and LNG export potential from East Siberia and Far East 120 mtoe 700 Russian energy export forecast by markets East Siberia Pipe Sakhalin 1 Yamal LNG Vladivostok LNG Sakhalin Expansion Sakhalin Current Sources: ERI RAS, Russian Gas Matrix, OIES CIS Europe Asia 67

69 Conclusions More competitive external environment and domestic challenges are creating less favorable conditions for the Russian energy sector. It will hardly be ably to provide the same high share of the budget incomes in the future. International isolation might further undermine Russian energy sector development, moreover it is now asking for subsidies and state support. Oil production in Russia can be maintained for a period of time, but it demands radical reform of taxation and industrial structure, which does not seem to be probable. Russian gas industry still has a huge potential for production and export growth, but without strict costs control, cautious evaluation of the export projects and more flexible pricing system these opportunities could be lost. China is obviously becoming the main Russia`s trade partner. 68

70 Contacts Energy Research Institute of the Russian Academy of Sciences "Global and Russian Energy Outlook up to 2040" Vavilova str., 44/2, office , Moscow, Russian Federation phone: fax: web: