NexantThinking TM. Russia as a Global Natural Gas Producer: Dormant Bear or Ready to Roar? Special Reports. Brochure April 2015

Transcription

1 NexantThinking TM Special Reports Russia as a Global Natural Gas Producer: Dormant Bear or Ready to Roar? Brochure April 2015

2 Special Reports NexantThinking TM Special Reports Russia as a Global Natural Gas Producer: Dormant Bear or Ready to Roar? Brochure April 2015 This Report was prepared by Nexant, Inc. ( Nexant ) and is part of the NexantThinking suite. Except where specifically stated otherwise in this Report, the information contained herein is prepared on the basis of information that is publicly available, and contains no confidential third party technical information to the best knowledge of Nexant. Aforesaid information has not been independently verified or otherwise examined to determine its accuracy, completeness or financial feasibility. Neither Nexant, Subscriber nor any person acting on behalf of either assumes any liabilities with respect to the use of or for damages resulting from the use of any information contained in this Report. Nexant does not represent or warrant that any assumed conditions will come to pass. The Report is submitted on the understanding that the Subscriber will maintain the contents confidential except for the Subscriber s internal use. The Report should not be reproduced, distributed or used without first obtaining prior written consent by Nexant. Each Subscriber agrees to use reasonable effort to protect the confidential nature of the Report. Copyright by Nexant Inc All rights reserved.

3 Contents Section Page 1 Introduction and Report Objectives OVERVIEW BACKGROUND Study Scope OBJECTIVE REPORT STRUCTURE SENSITIVITY ANALYSIS DELIVERABLES Proposed Table of Contents Methodology GENERAL APPROACH SCENARIOS AND SENSITIVITIES WORLD GAS MODEL Nexant s Experience GENERAL GLOBAL GAS EXPERTISE SPECIFIC EXPERIENCE RELEVANT TO RUSSIAN/EUROPEAN NATURAL GAS OTHER SELECTED FSU EXPERIENCE Contact Details CONTACT INFORMATION i

4 Section 1 Introduction and Report Objectives 1.1 OVERVIEW Russia is the biggest gas exporting country in the world, exporting large quantities of natural gas via pipeline to Europe and Commonwealth of Independent States (CIS) countries (Figure 1.1) and small amounts of liquefied natural gas (LNG) to buyers located in Asia and the Asia Pacific. Given the well documented problems - political, economic and regulatory surrounding its supply to Europe, Russia needs to diversify its access to global gas markets via new pipeline and LNG export ventures. Figure 1.1 Major Gas Pipelines of the Former Soviet Union (Source: East European Gas Analysis) Russia s quest for new outlets coincides with the entry of new players into the global gas export market. Australia s importance as a global LNG exporter is growing significantly, and the rise of gas export schemes in Africa, Former Soviet Union countries, the Mediterranean, the Middle East, and North America significantly expands the pool of gas supply options available to customers. The growing importance of market economies like Australia and potentially the United States as world gas exporters illustrates the shift in market dynamics since 2001, when the Gas Exporting Countries Forum (GECF) was created as a vehicle to exercise producer power. 1

5 Section 1 Introduction and Report Objectives To address these issues, Nexant plans to undertake a new multi-client study with the objective to assess future Russian natural gas production, exports and prices under a range of scenarios and sensitivities. The report will be essentially analytical and quantitative with Nexant s proprietary World Gas Model (WGM) used to provide the analysis. Details of WGM can be found in Section 4.3 of this prospectus. The report will consider a number of scenarios and sensitivities for global gas markets with the focus on future Russian gas trade flows taking into account the competitiveness of Russian natural gas relative to other global supply sources. This multi-client report will build on Nexant s extensive array of intellectual capital in the areas of global gas production, trade, and commodity pricing. Whilst being essentially quantitative in nature, the report will also cover some of the softer, more qualitative issues, including the geopolitical aspects of international gas trade, including the following: How will the current Russian economic crisis and falling oil price environment affect Russia s gas production and export plans? How will Europe s weak gas demand prospects affect Russia s gas export plans? To what extent will Asia and China in particular, represent an opportunity to diversify pipeline supply? How much competition will Russia face from other suppliers in those markets? Is there scope for reducing Europe s reliance on Russian natural gas via the development of competing pipeline gas and LNG export projects in Africa, Former Soviet Union countries, the Mediterranean, the Middle East, and North America? To what extent can Europe s Transportation System Operators build reverse flow capacity in the network, thereby boosting West-to-East gas flows to Eastern European countries currently dependent on Russian gas? What is the extent of Russia s impact on European natural gas pricing? Conversely what is the impact of Europe s weak demand and market liberalization on prices Russia can achieve in European markets? How will different unconventional gas production scenarios in North America and perhaps in Europe and Asia displace demand for Russian natural gas imports? This prospectus describes the proposed study, and presents the scope of the proposed report, the methodology employed, and Nexant s qualifications to perform such a study. The study has a target completion date of end of the fourth quarter of

6 Section 1 Introduction and Report Objectives 1.1 BACKGROUND Russia s Position in the Global Gas Market Russia has an impressive position in the global gas business. The country hosts roughly a quarter of the world s proven natural gas reserves, much of which are controlled by Gazprom. Together with a vast gas pipeline network, and gas supply contracts with European and CIS buyers, Russia is the world s secondlargest gas producing country, as shown in Figure 1.2, and the leader in global gas exports. It also consumes large quantities of gas in its own right, with domestic consumption approaching 467 bcm in Figure 1.2 Top Global Gas Producing Countries (2013; BSCM) (Source: BP/Nexant) Trinidad Australia Uzbekistan UAE Egypt Mexico Turkmenistan Malaysia Netherlands Indonesia Algeria Saudi Arabia Norway China Canada Iran Qatar Russia USA The Soviet Union, and subsequently the Russian Federation, has been supplying Europe with gas since the 1960s. The development of Russia s upstream production capacity and its transportation network were underpinned by long-term contracts with buyers in the West, whereas sales to Warsaw Pact countries were shorter-term arrangements. Since the fall of Communism, Russia s importance as an exporter to Europe has continued to grow. Russia also exports gas to other Former Soviet Republics in Eastern Europe and Central Asia, as shown in Figure

7 BSCM Section 1 Introduction and Report Objectives 250 Figure 1.3 Russian Natural Gas Exports to Main Markets (Source: International Energy Agency/Nexant) W Europe E Europe FSU XLS: C:\Users\blittle\Documents\Temp\Russian exports.xlsx\sheet1 State-owned Gazprom retains the monopoly over Russian pipeline gas exports and is the premier gas export company in the world. Russia s exports are not confined to pipeline sales: in 2013, the Gazpromcontrolled Sakhalin II LNG export project sold 15.2 bscm of LNG to customers located primarily in Asia. Over the past decade or two, Russia has pursued aggressive natural gas production projects and diverse export schemes. Not all these plans have been successful, but this serves to increase the pressure on initiatives that remain extant. A Gazprom led consortium completed the 55 bscm/y Nordstream pipeline in 2011 linking Russia directly to Germany and other European markets and by-passing both Ukraine and Belarus. The project was a joint venture with several leading European gas companies taking equity positions and contracting for offtake. Transit of gas via Ukraine has dwindled recently with flows now focused on the new route. Gazprom was the chief sponsor of the recently-shelved 63 bscm/y South Stream pipeline connecting Russia to markets in southern and central Europe via Bulgaria. South Stream was put forward as a rival to the Nabucco project, which despite having the political backing of the EU, has also been cancelled. The latest incarnation of this project is Turkey Stream with capacity of 63 bscm via Turkey and Greece rather than Bulgaria. Moscow has assiduously cultivated its relationship with Beijing over the past decade or so in the hopes of penetrating the potentially vast Chinese gas market. These efforts bore fruit in 2014, when Russia closed a deal to sell 38 bscm/y of gas to PetroChina via a new 4,000 kilometer pipeline To maximize its global gas market reach, Russia hosts no less than six greenfield LNG export projects in various stages of maturity. 4

8 Section 1 Introduction and Report Objectives Geopolitical Issues The international community has long been concerned about Russia s global importance as a gas exporter and its potential to leverage its position for political purposes. These concerns are nothing new and extend back to the 1960s when the United States imposed sanctions on the supply of American equipment for the construction of the first generation of Soviet pipelines to Europe. Those pipelines were constructed despite U.S. opposition. The Soviet Union/Russia has generally proved to be a reliable supplier both during and after the Cold War, notwithstanding occasional short term interruptions caused by disputes with Ukraine and Belarus on transit issues. The current situation arising from the crisis in Ukraine has been discussed widely in the media and other reports. Nexant will not attempt a detailed political analysis in this proposed study. Rather, Nexant will provide a quantitative view of the supply implications stemming from the current situation. This view will incorporate sensitivities concerning possible, partial, or a total interruption of supplies from Russia to Europe. To complete the picture, Nexant will deploy its proprietary global gas model to consider the issue of diversification of supply by various means, such as increased LNG imports or via domestic unconventional gas production Gazprom s Hold over Russian Exports Various oil companies and independent gas companies have made increasing contributions to Russian gas production in recent years. However, Gazprom has long been synonymous with Russian gas exports. The company maintains a monopoly over Russian pipeline gas exports, and until very recently, over LNG exports. In the past, Gazprom was also able to exert a powerful influence over gas exports from other Former Soviet Republics in Central Asia. Geographical realities dictate that gas from most of these Republics can reach European markets only via Russian territory. Instead of allowing countries like Turkmenistan transit rights, Russia s policy was to purchase exports and then re-sell to European buyers. This dominance has started to erode for two reasons. First, Azerbaijan has opened up a new transit route to Europe via Georgia and Turkey, thereby avoiding Russian territory altogether. Second, Turkmenistan is pursuing sales opportunities in the east and sending increasing volumes to China via new pipelines which are already flowing gas, stealing a march on Gazprom s own plans to pipe gas to China Gas Exporting Countries Forum Russia is a leading member of the GECF. When GECF was established in the early years of this century, the Forum members accounted for close to 100 per cent of world gas exports. There were serious concerns that GECF would develop into a gas OPEC with power to influence gas pricing mechanisms. Since then the landscape has changed considerably, with non-gecf countries acquiring a more prominent role as global gas suppliers: total LNG exports from Australia and the United States are expected to exceed 150 bcm by On pricing mechanisms, the Forum s stated preference for oil indexation has been under pressure in recent years with even Russia re-negotiating contracts with increasing indexation to gas hub prices Competitors for Russian Gas Market Share Major pipeline gas and LNG export projects are in various stages of development in Australia, North America, East Africa, and the Middle East, which all represent alternative sources of gas supply for customers in Asia, the Asia Pacific, CIS countries, and Europe. Many of these competing gas export projects are subject to similar cost pressures as Russia. Furthermore, none of these potential supply sources is immune from the effects of low crude oil prices, especially given the need to develop costly delivery infrastructure. 5

9 Section 1 Introduction and Report Objectives If all these projects were to be built to the timescales proposed by their sponsors the world would be awash with gas. However, Nexant s base case scenario takes a realistic view of which projects are likely to go ahead and which may be deferred or cancelled. This report will examine the sensitivity to higher or lower levels of investment and the impact this may have on producer behavior and pricing consequences. Further uncertainty surrounds the levels of domestic production that could displace Russian gas imports, particularly in China. China presents the biggest opportunity for Russia to diversify its exports and reduce its dependence on Europe for gas export revenues. In the global context, China is a major wild card regarding gas import/export levels, and will continue to be so over the coming decades. The role of gas in China s primary energy mix, the success of its nascent unconventional gas production plans, and the extent of its dependence on pipeline gas and LNG imports will have a great bearing on Russia s fortunes as a natural gas exporter Russia s Intentions for the Chinese Gas Market In September 2007, the Russian Industry and Energy Ministry appointed Gazprom to pursue gas production, infrastructure development, and sales opportunities in Eastern Siberia and the Far East, as shown in Figure 1.4. However, profitability is certainly a concern and progress in the years following 2007 has been slow. However, Moscow is keen to push through prestige projects, such as the 61 bscm/y Power of Siberia pipeline carrying gas from the Irkutsk and Yakutia gas production centers to Vladivostok and to China. Russia s motivation to make the Power of Siberia project a reality is especially great considering Europe s declining gas demand and the worsening political relationship with Europe. Figure 1.4 Resource Development Plan For Eastern Siberia and Russia s Far East (Source: Gazprom) 6

10 Section 1 Introduction and Report Objectives Challenges Facing Russia as a Gas Supplier Looking out to 2040, Russia faces numerous challenges as a gas supplier. In the short term, its unfolding economic crisis is a major obstacle, the effects of which will be compounded by falling oil prices. The effect of current economic sanctions on Russian gas project development is another major consideration. Project sponsors may lack the access to finance and technology originally envisaged. For costly Arctic and Siberian projects, these separate but interdependent challenges could affect the competitiveness and timing of new sources of Russian gas supply and improve the outlook for competing gas supply projects abroad. Weak gas demand in Europe has been compounded by the impact of EU-led market reform, which has effectively removed the monopolies once enjoyed by Gazprom s customers. Owing to competition from other suppliers, traditional gas importers with long-term purchase contracts no longer have a captive customer base, thereby exposing them to take-or-pay problems. Moreover, the emergence of gas hubs and exchanges has improved price transparency. The disconnect between spot gas prices and oilindexed contractual prices that has prevailed for some years has encouraged buyers to reduce their longterm offtake commitments and press for prices that are at least partially indexed to the new gas hubs. Gazprom has already agreed to revisions in many of its contracts. Overall, the volume of gas sold in Europe with a linkage to oil has fallen below 50 percent, according to a survey by the International Gas Union which is authored by Nexant experts. Ultimately, European gas imports are expected to rise even as demand falters owing to expectations for an even more rapid decline in indigenous European gas production. However, the days of giant gas utilities in Europe with the confidence to enter into long term contracts may be over, especially for rigid deals with pricing linked to oil. Gazprom s future gas pricing strategies must consider the changing market realities in its traditional markets and the effects of new sources of competing gas supplies, especially volumes that are indexed to spot prices. To that end, this study will incorporate sensitivity analysis taking into account different gas production scenarios in Asia, Europe, and North America using Nexant s World Gas Model. By so doing, Nexant will identify the extent of demand displacement for Russian natural gas imports and the effect of variable Russian flows on global natural gas prices New Russian Energy Strategy Russia is preparing a new Energy Strategy to As of April 2015, a final version of this document had yet to be released, but publication is expected during the course of the calendar year. This document will offer a timely look at the challenges and opportunities to be discussed in this report. Among other things, Nexant expects the updated Energy Strategy document to outline the country s energy sector objectives and priorities, and the mechanisms by which Moscow will realize these goals. Nexant s analysis will focus on Russia s official objectives for the gas sector, especially regarding forecast natural gas production, exports, and infrastructural development. This will serve as a basis of comparison for Nexant s own views on the evolution of Russia s natural gas policy and its position as a global gas player. 7

11 Section 2 Study Scope 2.1 OBJECTIVE The objective of this multi-client study is to provide quantitative analysis of current and future world gas market scenarios and their future impact on Russian gas production levels and exports. Recognizing the large uncertainties present in the gas market, Nexant will generate a number of scenarios and sensitivities for global natural gas production with an emphasis on Russia, and present its outlook for Russia s gas exports using our powerful World Gas Model (WGM). The report will be strongly quantitative although more qualitative aspects will also be discussed. 2.2 REPORT STRUCTURE The report will comprise two parts (see Section 3). The first part will provide an introduction and background to Russia s past and present role in the international gas market. The second part will provide detailed projections under the scenarios, and will be based on outputs from WGM Part I: Introduction and Background The introduction and background section will cover the topics detailed below Status of Russia as a Natural Gas Producer/Exporter This section will outline the various geopolitical and economic challenges faced by Russian producers and exporters. The discussion will extend to Russia s strategic response to the challenges both in the past and expected changes in the future. Nexant will discuss Russia s current attitude towards long-term contractual gas pricing. The report will also review the outcome of Russia s new Energy Strategy. The quantitative part of this section will outline Russia s gas reserves position and analyze Russian natural gas production and exports from 2005 through Nexant will also summarize Russia s longterm contractual gas/lng sales with existing customers in CIS countries, Europe and Asia and identify the countries with the greatest dependence on Russian gas supplies Status of Russia s Domestic Gas Market As well as being a major exporter of natural gas, Russia has a large domestic gas market. At times in the recent past, Russia has experienced difficulties in meeting its obligations to the export and domestic markets, especially during periods of cold weather in Russia. In addition, Russia has occasionally sold gas to domestic users at a considerable discount to export sales, thereby creating an incentive for Gazprom in particular to favor exports over domestic sales. This section will compare the prices for Russian gas in the domestic and export sectors. Nexant will also discuss Moscow s attempts to address the issue of multi-tier pricing via gas price reform in Russia. Finally, Nexant will review the role of non-gazprom companies in Russian gas production and domestic gas sales Background to Gas Markets Supplied by Russia This section will focus in particular on the historical development of the gas markets in Europe and China. Europe has long been Russia s key export market whereas China represents the market with the strongest growth potential. Since Europe is Russia s key outlet for gas exports, this section will emphasize recent trends in European gas demand, production and imports by pipeline and LNG. Nexant will analyze European demand across all major end-use sectors, including residential, commercial, industrial, power generation, and other sectors. Production will be reviewed across the continent 8

12 Section 2 Study Scope including Norway. Imports will be reviewed including both pipeline and LNG routes and by origin. Infrastructure developments and projects will be discussed in the context of attempts to diversify supply options and improve cross-border capacity within Europe to improve resilience. The future of Chinese demand is one of the key uncertainties in world markets. China s booming economy and very low level of penetration of gas in the overall energy mix places huge uncertainty over the future level of gas demand with huge ramifications for world gas markets. The supply side is equally uncertain with potential for more domestic production and imports by both LNG and pipeline. The relevance to Russia is twofold. First, China represents a major alternative destination for Russia s exports by pipeline. Second, LNG supplied to China may be diverted from other markets, including Europe, easing competitive pressures on Russia. Finally this section will review the potential markets for Russian LNG Part II: Projections to Scenario Description Three main scenarios will be studied, as discussed further in Section 4.2. The result of each scenario will be presented in graphical and tabular form covering future trends in global gas supply and demand, trade and prices. A brief description of each scenario will be given, including a discussion in terms of differences related to strategy and pricing policies adopted by Russia and its competitors. Quantification of the key assumptions used to characterize each scenario will be provided in terms of: Energy prices (oil, coal, and carbon prices) Trends in gas consumption and production capacity Infrastructure development and costs For each scenario, Nexant will identify the various sources of new gas supply, together with pipeline and LNG projects, competing for Russian market share between 2015 and Nexant will consider the scope of available volumes and the likely timing of these projects including any delay compared to the sponsors planned start-up dates. Nexant will take into account infrastructure development issues; political angles, and the attendant strengths and weaknesses of these various sources of supply, including the anticipated breakeven costs for production and exports from these sources. These considerations are entered into WGM as part of the set-up for each scenario Projections of World Natural Gas Supply, Demand, Inter-Regional Trade, and Prices Nexant s analysis will focus on Russia and its traditional gas export market of Europe and new markets in Asia. However, summary balances will be provided for all regions with projections of supply and demand balances, inter-regional trade and key gas prices including both contract and spot prices. This will provide global context under each scenario, for the detailed results provided for Russia, Europe and China Gas Market Outlook in Europe and China The market outlook for Europe and China will each be reviewed in detail based on WGM outputs for the three scenarios. As with the global overview the presentation will be in graphical and tabular form and will cover projections to 2040 of the following aspects for each scenario: Gas consumption by country (Europe) and region (China) and by market sector Gas production including conventional and unconventional production Gas imports by LNG and pipeline Key gas prices including contracted and hub prices 9

13 Section 2 Study Scope Russian Gas Production, Exports and Price Projections Drilling down from the regional overview, the report will also present results specific to Russia focusing on domestic consumption, production and exports as well as prices achieved in the main export markets and the extent of competition from other supply sources. This study will cover developments relating to: Historic and present Russian natural gas consumption, production and exports Alternative sources of gas supply and Russia s share in key markets Russia s response: diversification of markets, projected Russian gas production and exports This section will identify the various sources of new gas supply competing for Russian market share between 2015 and In the case of Europe, these sources will include European indigenous gas supply (conventional and unconventional), and pipeline gas/lng export projects located in North Africa, the Mediterranean, the Middle East, and elsewhere within the Former Soviet Union (i.e., Caspian/Central Asian countries). Nexant will consider the scope of available volumes and the likely timing of these projects; infrastructure development issues; political considerations; and the attendant strengths and weaknesses of these various sources of supply, including the anticipated breakeven costs for production and exports from these sources. WGM will be run for each scenario using the assumptions set out in the Scenario discussion. Model outputs will include production levels from the competing sources of supply identified by Nexant, and hence Russia s share of the global gas market. 2.3 SENSITIVITY ANALYSIS In addition to the main scenarios, Nexant will generate a number of sensitivity cases. These analyses will be performed simply by changing to one (or a group) of assumptions and comparing the results in terms of Russian export volumes and prices compared with the base case. 2.4 DELIVERABLES In addition to the report itself, subscribers may choose to receive a set of Excel files containing the data behind the main results charts for the three main scenarios 10

14 Section 3 Proposed Table of Contents 1. Executive Summary PART 1: INTRODUCTION AND BACKGROUND 2. Introduction 3. Background to Russia as a Natural Gas Producer and Exporter 3.1 NATURAL GAS RESERVES 3.2 HISTORIC NATURAL GAS PRODUCTION ( ) 3.3 HISTORIC NATURAL GAS TRADE Pipelines Overview Of Long-Term Gas Supply Contracts Overview Of Russian Gas Export Pricing LNG Countries With Significant Russian Supply Dependence 3.4 RUSSIAN ENERGY STRATEGY With Emphasis on Gas Exports Impact of Low Oil Prices and Changes in European Markets Diversification New Energy Strategy to 2035 to be Published Background to Gas Markets in Europe 4.1 HISTORIC TRENDS IN GAS PRODUCTION, CONSUMPTION, AND IMPORTS 4.2 EU REGULATION AND MARKET REFORM 4.3 DEVELOPMENT OF HUBS AND EXCHANGES 4.4 CONTRACTUAL LONG-TERM AND SPOT GAS PRICING TRENDS 4.5 CONTRACT RENEGOTIATIONS 5. Background to Gas Markets in China 5.1 HISTORIC TRENDS IN GAS PRODUCTION, CONSUMPTION, AND IMPORTS 5.2 REGULATION AND MARKET REFORM 5.3 DEVELOPMENT OF HUBS AND EXCHANGES 5.4 CONTRACTUAL LONG-TERM AND SPOT GAS PRICING TRENDS 5.5 CONTRACT RENEGOTIATIONS 11

15 Section 3 Proposed Table of Contents Part 2: PROJECTIONS TO 2040 UNDER THREE SCENARIOS 6. Scenario Description 6.1 DISCUSSION OF SCENARIO DRIVERS 6.2 PRICING BEHAVIOR OF RUSSIA AND ITS COMPETITORS 6.3 ENERGY PRICE ASSUMPTIONS 6.4 CONSUMPTION AND PRODUCTION CAPACITY 6.5 TIMING OF NEW INFRASTRUCTURE PROJECT DEVELOPMENTS 7. World Gas Projections to PRODUCTION AND CONSUMPTION BY MAJOR REGIONS 7.2 INTER-REGIONAL GAS TRADE BY PIPELINE AND LNG 7.3 KEY WORLD GAS PRICES LONG-TERM AND SPOT 8. European Natural Gas Market - Outlook to INDIGENOUS PRODUCTION BY COUNTRY 8.2 CONSUMPTION BY COUNTRY AND MARKET SECTORS 8.3 GAS IMPORTS BY ORIGIN (PIPELINE AND LNG) 8.4 KEY GAS PRICES CONTRACTED AND SPOT 9. Chinese Natural Gas Market to INDIGENOUS PRODUCTION 9.2 CONSUMPTION BY MARKET SECTORS 93 GAS IMPORTS BY ORIGIN (PIPELINE AND LNG) 9.4 KEY GAS PRICES CONTRACTED AND SPOT 10. Projected Russian Gas Production And Exports to INDIGENOUS PRODUCTION BY REGION (GAZPROM AND NON-GAZPROM PRODUCERS) 10.2 CONSUMPTION BY REGION AND MARKET SECTORS 10.3 EXPORTS BY PIPELINE AND LNG AND BY DESTINATION 10.4 KEY GAS PRICES CONTRACTED AND SPOT 10.5 SENSITIVITY ANALYSIS In addition to the three main scenarios the report will include a number of sensitivities. The results will be presented in terms of the marginal impact on Russian gas production, exports, and price expectations. 11. Conclusion 12

16 Section 4 Methodology 4.1 GENERAL APPROACH Part 1 of the report will draw on Nexant s experience and knowledge of international gas markets covering the wider value chain including developments in the upstream oil and gas industry and downstream energy markets. Subscribers will be presented with in-depth insights into the world gas market in general and Russia s role global gas trade in particular. This report is produced by a global team of Nexant researchers, analysts and recognized experts in the natural gas industry. All our analysis is underpinned by our World Gas Model (WGM), which is presented in more detail below. 4.2 SCENARIOS AND SENSITIVITIES WGM is designed as a flexible tool to help users answer questions arising from the large extent of uncertainty surrounding future outcomes in the international gas market. It is an ideal tool for constructing and analyzing different scenarios and sensitivities. This report will be based on three main scenarios: Base Case Scenario. This will be Nexant s Base Case which is produced on a regular basis for WGM licensees and subscribers. The demand outlook is a consensus view similar to IEA s World Energy Outlook and a realistic view is taken in regard to the timing of the development of proposed infrastructure projects. Indeed many announced projects are deferred beyond 2040 and do not feature in this scenario. Tight Market Scenario. In this scenario demand growth is significantly stronger than in the base case whilst the timing of infrastructure projects is unchanged from the base case leading to upward pressure on prices. Competitive Market Scenario. In this scenario development of new infrastructure outstrips growth in demand leading to an over-supply. Some producers, particularly those in non-gecf countries seek to maximize throughput of their plant by reducing prices below the Long Run Marginal Cost levels assumed for the base case. Russia and other GECF countries will be faced with the decision whether to hold on to traditional price expectations and risk losing market share or respond by also cutting prices. The results of the above scenarios will be presented in considerable detail in the report. Additional sensitivities will also be run and presented more briefly with the emphasis placed on differences in Russian export volumes and prices compared to the Base Case. 4.3 WORLD GAS MODEL Gas Market Analysis The market analysis for this report will be prepared drawing on Nexant s recent studies, both multi-client and single client, and the World Gas Model and its extensive database. Nexant s World Gas Model is available for clients to use under license on their own systems and is also used by Nexant s Global Gas experts to support our consultancy assignments and multi-client studies and reports. Key elements of the model are shown in Figure 4.1. Nexant has used this modelling system to provide the underlying foundation for the market and pricing assessments presented in this report. 13

17 Section 4 Methodology Figure 4.1 World Gas Model Covers all producing, consuming, and transit countries Production and trade flows to balance consumption Nodal system with pipeline network and LNG routes WGM Demand exogenous with cut off above price thresholds Production capacity, pipeline, storage, and LNG infrastructure Forecasts to 2040 on quarterly basis WGM uses a powerful optimizer program, in conjunction with Microsoft Excel, which allows all inputs and outputs to be analyzed by users and linked to other in-house systems. The model projects global, regional, and national gas supply demand balances, international gas trade by pipeline and LNG and both contracted and spot prices. Spot prices are estimated with reference to the cost of supply, competing prices, and the tightness of the market. The model currently has an outlook period to 2040 and the model is balanced on a quarterly basis Global Coverage The model considers every country in the world which either consumes or produces natural gas. Large countries including the United States, Canada, Russia, China, Australia, Malaysia, and Indonesia are further segmented by regions. The focus is on the growing international trade of natural gas by crossborder pipeline and as LNG. The model currently includes over 130 countries with space to add new countries as needed Gas Demand Gas demand projections are exogenous allowing users to overwrite Nexant assumptions with in-house projections and scenarios. The model itself will adjust demand levels using a Demand Side Response mechanism which simulates switching to alternative fuels arising from high cost of gas supply or infrastructure bottlenecks Infrastructure and Supply The model includes detailed data on the gas infrastructure and supply needed to support international trade, including production fields and basins, pipelines, LNG liquefaction and regasification terminals and storage facilities, together with associated costs. 14

18 Section 4 Methodology Project start and end dates can be varied allowing clients to develop alternative scenarios of specific interest Gas Contracts The model includes information on long-term contracts on gas supply by both cross-border gas pipeline and LNG. Volumes are controlled within the range set by Annual Contract Quantity and take-or-pay volumes. Gas prices are simulated in relation to a basket of up to five escalators including oil prices and gas spot prices Cost Data Cost data is included for all facilities in the model including production, pipelines, liquefaction, and regasification terminals, storage facilities, and LNG shipping. Capital costs for production and infrastructure are represented as unit costs (per MMBtu or per thousand cubic meters - mcm) on a Long Run Marginal Cost (LRMC) basis. Shipping costs are built up from shipping distances and assumed day rates and fuel costs Gas Prices Contract prices are calculated within the model based on assumed oil and oil product prices in Europe and Asia. Spot prices are projected within a range determined by the cost of supply and price of alternative fuels. The position within this range depends on how tight the market is at any time. 15

19 Section 5 Nexant s Experience 5.1 GENERAL Nexant uses multidisciplinary project teams drawn from the ranks of our international staff of engineers, chemists, economists and financial professionals, and from other Nexant groups to respond to the requirements of each assignment. Most of the consulting staff possesses credentials in both scientific and commercial disciplines plus substantial industrial experience. The collective talents of our staff are strategically located and closely linked throughout the world, resulting in valuable insights gained through a variety of perspectives. Nexant is an international consultancy and is dedicated to assisting businesses within the global energy, chemical, plastics, and process industries by providing incisive, objective, results-oriented management consulting. Over four decades of significant activity translates into an effective base of knowledge and resources for addressing the complex dynamics of specialized marketplaces. By assisting companies in developing and reviewing their business strategies, in planning and implementing new projects and products, diversification and divestiture endeavors and other management initiatives, Nexant helps clients increase the value of their businesses. Additionally, we advise financial firms, vendors, utilities, government agencies and others interested in issues and trends affecting industry segments and individual companies. The Nexant Group was formed as an independent global consulting company in 2000, combining a number of companies that had a long history of providing consultancy services to the chemical and refining-related industries. Nexant s experience covers all aspects of project development relating to major refinery, petrochemical, and polymer investments, ranging from grassroots plants to revamps of existing process units. Nexant s key offices serving the petrochemical and downstream oil sectors are located in New York, Houston, London, Bangkok, and Bahrain and locations for other offices are shown Figure 5.1. Figure 5.1 Nexant Office Locations London Houston White Plains, NY Bangkok Tokyo San Francisco Washington Seoul Beijing Bahrain Shanghai Main Offices Representative Offices Buenos Aires Singapore 16

20 Section 5 Nexant s Experience From major multinationals to locally based firms and governmental entities, our clients look to us for expert judgment in solving compelling business and technical problems and in making critical decisions. Nexant s clients include most of the world s leading oil and chemical companies, financial institutions, and many national and regional governments. Nexant, Inc. is active in most of the industrialized countries of the world, as well as in most of the developing areas including the Middle East, Africa, and East and Southeast Asia. Major annual subscription programs are: Process Evaluation/Research Planning (PERP) Petroleum & Petrochemical Economics (PPE) United States, Western Europe, and Asia Polyolefin Planning Service (POPS) The PERP program covers technology, commercial trends, and economics applicable to the chemical industry. The program has more than 40 subscribers, including most of the major international chemical companies. Many of the processes to be analyzed in this multi-client study have been assessed in the PERP program. The PPE program provides historic and forecast analysis of the profitability, competitive position, and supply/demand trends of the global petroleum and petrochemical industry. The program includes capacity listings and analysis, global supply, demand and trade balances, profitability, competitiveness, and price analysis and projections for all the major petrochemical value chains. The PPE program is supported by an internet-based planning and forecasting tool that provides online access to the database behind the reports of the PPE program. The POPS program provides reports on the global polyethylene and polypropylene industry. It is recognized globally as the benchmark source for detailed information and analysis on current commercial, technical, and economic developments in the polyolefins industry. Coverage includes: capacity listing and analysis, detailed consumption, supply/demand, trade, operating rates, price forecasts, technological developments, new products, inter-material substitution, and regional competitiveness. 5.2 GLOBAL GAS EXPERTISE Nexant's gas specialists have considerable experience and an established track record in every area of the gas business, ranging from the initial investment strategy, and planning stage through to the provision of institution and capacity building services for gas sector development, as well as assessing the impact of natural gas on overall energy sector development. Nexant has provided extensive advisory support for the development of natural gas export/import projects, LNG markets, gas to power projects, and crossborder gas pipeline projects. Nexant assigns expert multi-disciplinary teams who can provide a broad range of services and draw on the resources of Nexant's other sectors of expertise, such as power, petrochemicals, liquid petroleum products, clean energy, and energy technology, to deliver integrated energy solutions. Its consultants offer a wide range of experience acquired through operational and management positions with international and national oil & gas companies; major engineering companies; management consultancies, and international development banks. 17

21 Section 5 Nexant s Experience Nexant s range of services includes: Market Analysis Market analysis and forecasts, supported by Nexant s proprietary World Gas Model, including gas supply and demand, LNG, and gas pipeline trade flows, and wholesale gas prices Gas market studies covering the full value chain, for countries and regions, as well as studies focusing on markets for new or incremental LNG and gas pipeline supplies Advisory Services Advisory services on gas business strategies, gas project development, contractual arrangements and mergers and acquisitions Commercial analysis of projects, including due diligence services on new gas investment projects Market Development Studies supporting gas market development in emerging gas markets, including gas monetization studies and gas master plans Development of gas regulatory frameworks, gas pricing mechanisms, and transportation tariff studies Economic and financial evaluations of gas projects for bilateral and multilateral development agencies Pre-feasibility studies to develop LNG and gas pipeline infrastructure projects Nexant s consulting services cover all areas of the natural gas business and its Global Gas team is excellently qualified to assist on assignments throughout the gas chain. 5.3 SPECIFIC EXPERIENCE RELEVANT TO RUSSIAN/EUROPEAN NATURAL GAS Nexant is exceptionally qualified to perform this study s comprehensive analysis based on our multidisciplinary business approach and having carried out studies of this type throughout our more than 45-year history. The knowledge and experience gained from these engagements will provide an invaluable basis for Nexant to successfully address the objectives of the study. A partial list of projects relevant to Russian/European natural gas includes: Gas Demand Assessment for Europe. The study focused on potential demand for gas in Europe for gas delivered via the proposed Nabucco pipeline project and other routes via Turkey. Several scenarios were investigated for future demand growth in all European countries, current gas contract commitments and competition from other potential supplies from Russia, North Africa, Middle East and LNG Analysis of Market Opportunities along Gas Transit Pipeline. This entailed an assessment of the markets along the Brotherhood pipeline gas transit route (from Russia through Ukraine, Slovak and Czech Republic), the economics of supply from Russia to Germany (including transportation and supply costs) and commercial opportunities along the route Gas Market Advisory Services, Europe\Asia\Middle East. Nexant undertook a market advisory role (on behalf of lenders) for potential LNG supply to a number of European and Asian countries in support of the development of a new liquefaction plant in the Middle East region. Gas supply\demand balances and gas price analyses were carried out for all target markets 18

22 Section 5 Nexant s Experience Gas Pipeline Transmission Improvement in the Central Asian Republics. Nexant reviewed the technical, economic, market, institutional and contractual conditions of gas exports and identification of project(s) aimed at developing cross-border gas trade between the Central Asian republics Gas Transmission System Capacity Allocation (Bord Gais Eireann, Ireland). Nexant performed a review of demand forecasts and investment plans in the context of the proposed duplication of the Interconnector gas pipeline with the UK, and provided a risk assessment of the investment in the context of the market changes arising from the implementation of the EU Gas Directive 5.4 OTHER SELECTED FSU EXPERIENCE Russia Turkmenistan Yaisk Refinery Technical and Economic and Environmental Due Diligence Primorsky Refinery in the Far East of Russia - Marketing and Techno-Economic Study Prefeasibility Study for New Far East Refinery Project Prefeasibility Study for New Novyi Urengoi Petrochemical Complex Due diligence of a Refinery/Petrochemical Company in Russia Strategy for Chemical Industry Expansion in Russia and Abroad Independent Market and Economic Study in Support of Petrochemical Strategy Development Development of Strategy for a Major Fertilizer Company in Russia Evaluation of the Russian Methanol Industry for a Foreign Methanol Producer Valuation of the Russian Trading Opportunities and Due Diligence Assessment of a Russian Terminal Company in the Far East of Russia Techno-economic Evaluation of the Russian PET Opportunities for a Foreign Company to Enter the Market Study for the Development of a Gas-Based Petrochemical Complex Fertilizer Complex Study LPG study for Petronas Gas Desulfurization and Sulfuric Acid Plant Feasibility Study 19

23 Section 5 Nexant s Experience Kazakhstan National Petrochemicals Master Plan Feasibility Study on a Downstream Plastics Processing Project Review for Lenders of a Chlor alkali Project Global Refining Strategy for KazMunaiGaz Atyrau Refinery Modernization Technical Due Diligence of a Kazakh Phosphates Company Review of Feedstock-Driven Petrochemical Opportunities in Kazakhstan Azerbaijan Nexant has undertaken a program of linked assignments for the government of Azerbaijan to identify opportunities and projects in the petrochemical industry and the fertilizer sector. This work has extended to direct support in identifying and, with the client, interviewing prospective business partners, technology providers, and contractors 20

24 Section 6 Contact Details 6.1 CONTACT INFORMATION AMERICAS Nexant, Inc. 44 South Broadway, 4th Floor White Plains, NY U.S.A. Attn: Nelly Mikhaiel Senior Consultant Tel: Fax: nmikhaiel@nexant.com Or Attn: Heidi Junker Coleman Global Programs Support Manager Tel: Fax: hcoleman@nexant.com EUROPE Nexant Limited 1 King's Arms Yard, 1st Floor London EC2R 7AF United Kingdom Attn: Anna Ibbotson Principal aibbotson@nexant.com ASIA Nexant (Asia) Ltd 22nd Floor, Rasa Tower Phahonyothin Road Kwaeng Chatuchak, Khet Chatuchak Bangkok Thailand Attn: Tiankanok Sirichayaporn Senior Consultant Tiankanoks@nexant.com Special Reports 21

25 Section 6 Contact Details Nexant, Inc. San Francisco New York Houston Washington London Frankfurt Bahrain Singapore Bangkok Shanghai Kuala Lumpur