Shifting Realities. Russian Gas Sector: New Actors and Rules New Markets

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1 Shifting Realities. Russian Gas Sector: New Actors and Rules New Markets Danila BOCHKAREV Senior Fellow, EastWest Institute Platts 8 th Annual European Gas Summit September 29-30, 2014 Berlin

2 Major Trends Gas glut, shifting production balance (Gazprom vs. independents ) and decrease in gas output.

3 Russia s Natural Gas Output 2013: Russia s natural gas output increased 2 % from 655 bcm (2012) to 668 bcm. Consumption in 2013 declined 1.4% YoY to 419 Bcm. Russia s gas glut persists (20-30 bcm?). Gazprom s spare capacity 130 bcma? Gazprom s output remained flat in bcm in 2013 after falling from bcm in 2011 to 487 bcm in 2012 (- 5 %). 1H 2014: production is down to bcm (-4.3 % YoY). Gazprom increased its exports to Europe/Turkey to bcm (2013), but lost its market share in Russia (- 7 % YoY in 1H 2012, % YoY in 2012). 1Q2014 Gazprom Russia s deliveries also decreased from 90.3 to 84.5 bcm (-6.4 % YoY). The share of independents increased from 9.6 % (55.5 bcm) in 2010 to 27 % (180.6 bcm) in In 1H 2014, independents delivered 48.5 bcm (+ 6.4 %), oil companies 14.8 bcm (+5.7 %) of gas.

4 Major Trends Gas glut, shifting balance between (Gazprom vs. independents ) and decrease in gas output. Domestic Gas Market: Tectonic Shifts?

5 Domestic Gas Market: New Trends Independent gas producers gained premium market share (45 % of sales to industrial consumers and power plants), 75 % of their customers are located close to key production areas of independents. Gazprom has a monopoly on low profitability market segments. Residential sector accounts for 19 % of Russia s gas demand but accounts up to 36 % of Gazprom s sales. Independents has only few residential clients, while Gazprom supplies up to 90 % of socially significant consumers. Gazprom s monopoly on storage and transportation is under threat: attempts to advocates indiscriminate access to Gazprom s pipeline system (GTS) and deregulated access to underground gas storage.

6 Tula Region: Case study (2013) Regulated tariffs for population are low: Gazprom FTS tariffs for population 3058 RUR plus VAT for 1000 cubic meters. Regulated tariffs for industrial consumers are higher: Industry - RUR 4062 plus VAT. Industrial consumers subject to the principles of state regulation (Governmental Decree 333 from ) RUR 4468 plus VAT. For Gazprom it is critical to recuperate premium market segments lost to gas independents.

7 Major Trends Gas glut, shifting balance between (Gazprom vs. independents ) and decrease in gas output. Domestic Gas Market: Tectonic Shifts? Export liberalization.

8 Liberalization of LNG Export Modification of Article 3 of the Law on the Export of Gas and Articles 12 and 24 of the Law on the External Trade (Dec. 1 st, 2013). Export rights are granted to the companies responding to the following conditions: Holders of LNG terminal construction license (issued before Jan. 1 st, 2013) Novatek s Yamal LNG. Commercial entities, controlled by the state (50 % or more), holding exploration licenses Russia s continental shelf (Rosneft or its JVs e.g. Pechora LNG?). Further amendments ahead?

9 Liberalization of LNG Export: Proposed Amendments 2013: A. Vasilenko Amendment (2013) removal of terminal license deadline (recalled). May 2013: V. Yazev proposed to extend the deadline to July 1 st 2014 rule to accommodate Pechora LNG (apparently, negative conclusion from the Government).

10 Pechora LNG: New Opportunity? Private LNG project based on the Barents Sea coast (min. 5 mpta capacity, cost $5.3 $6.6 billion). Planned JV (Rosneft 51 %, Alltech Group 49 %). Resource base: Kumzhinskoe field (119,3 bcm & 4.5 million tons of condensate); Korovinskoe field (41.1 bcm & 1 million tons of condensate). Rosneft will also bid for undistributed Layavozhskoe (137.9 bcm of gas and8.6 millions tonnes of oil) and Vaneivisskoe (85 bcm of gas and 5.7 million tonnes of liquids) gas fields. License issue resolved via legislation change?

11 Liberalization of LNG Export: Proposed Amendments 2013: A. Vasilenko Amendment (2013) removal of terminal license deadline (recalled). May 2014: V. Yazev proposed to extend the deadline to July 1 st 2014 rule to accommodate Pechora LNG (preliminary negative conclusion from the Government). September 2014: LUKOIL proposed to fully liberalize LNG export (source - RBC, 19/09/2014). These developments reflect lobbyists wars between Gazprom and non Gazprom producers.

12 Major Trends Gas glut, shifting balance between (Gazprom vs. independents ) and decrease in gas output. Domestic Gas Market: New Trends. Export liberalization. Lobbyists wars between Gazprom and non Gazprom producers.

13 Lobbyists wars between Gazprom and non Gazprom producers. Non-Gazprom: Liberalization of LNG export (1 st December 2013), right to sell gas (up to 10 %) below FTS price limits and capture premium segments (power generation, etc.). Gazprom: China gas deal. Non-Gazprom: Rosneft hopes to get access to the (enlarged) Power of Siberia (independents supply potential 25 bcma). Attempts to amend LNG liberalization. Open Seasons TPA amendment is drafted by the Federal Antimonopoly Service (FAS). Gazprom: right to sell below FTS limits (-2.5 % in 2015, - 5 % in 2016); - 15 % for the volumes above take-or-pay, and for the clients, signing new original contracts after 01/07/2007.

14 Major Trends Gas glut, shifting balance between (Gazprom vs. independents ) and decrease in gas output. Domestic Gas Market: Tectonic Shifts? Export liberalization. Lobbyists wars between Gazprom and non Gazprom producers. Russia s Draft Energy Strategy to 2035: Russia Must Adapt to New Challenges?

15 Russia s Draft Energy Strategy to 2035: Russia Must Adapt to New Challenges? Production will move offshore: Arctic offshore alone will account for 10 % of Russia s gas output by 2035 (would sanctions bring significant corrections?) Completive global energy environment, stagnation in traditional markets (Europe). Export to the EU/CIS 95 % of 2010 volumes by Focus on Asia Pacific: 32 % of oil/petroleum products (12 % in 2013) and 31 % of gas exports (6 % in 2013) by Focus on LNG exports: 30 million tons in 2020 and 100 million tons in Big reforms ahead: unbundling season ), etc.? (ISO type), TPA ( open

16 Major Trends Gas glut, shifting balance between (Gazprom vs. independents ) and decrease in gas output. Domestic Gas Market: Tectonic Shifts? Export liberalization. Lobbyists wars between Gazprom and non Gazprom producers. Russia s Draft Energy Strategy to 2035: Russia Must Adapt to New Challenges? Who will win? Possibly China and other Asian countries

17 Who Will Win? Pipeline Gas and LNG market will be dominated by large players. Tailor-made legislation will persist but new amendments are inevitable. How gradual liberalization of the Single Export Channel ( 2006 Law ) will be extended to new LNG projects and/or pipeline infrastructure: direct export or via Gazprom s single export channel? More of gas-ongas competition and unbundling ahead? Sanctions will complicate new greenfield developments, but also will lead to geographic diversification and new contracts. Upstream will be open to Asian investors, big reforms ahead for the Russian energy sector?.

18 Gazprom in Siberia (C) Gazprom, 2013