European Gas Market State and Prospects: View from Gazprom Export Sergei Komlev Head of Contract Structuring and Price Formation Gazprom Export Flame Conference Amsterdam, April 15, 2015
Short-Term Trends on the European Far Abroad Gas Market Consumption, Indigenous Production, Imports, and Gas Withdrawals Bcm 2013 2014 Changes, bcm Changes, % Consumption 540.3 485.3-55.1-10.2% Indigenous production* 282.7 265.6-17.1-6.0% Net gas UGS withdrawals/injections** 0.3-9.9-10.1 Imports*** 257.4 229.6-27.8-10.8% Gas consumption in Europe dropped by 10.2% in 2014 compared with 2013. On the supply side this decline was partially offset by a significant reduction in indigenous production. European companies injected 9.9 bcm more than withdraw out UGS in 2014 as response to a decrease in demand. In 2013 withdrawn volume was nearly equal the injected one. According to preliminary data, Far Abroad countries reduced import by 27.8 bcm. * Indigenous production includes Norway ** Plus means that withdrawals exceed injections and vice versa *** Consumption = Domestic Production + Gas withdrawals/injections balance of UGS + Import requirements. Sources: IEA, Eurostat, National Statistical Agencies, Estimates by Gazprom Export LLC as of March 2015 ZMB 2 2
Major Factors Affecting Gas Consumption in Europe 2013 2014 1.Weather conditions (cold and long winter, hot summer) 2. Economic recovery 3. Use of gas in power generation Total consumption y-o-y: -1.6% -10.2% ZMB 3 3
Deliveries by Major Countries 2014 Deliveries from Major Exporters Bcm 2013 2014 Changes, bcm Changes, % Gazprom JSC 161.5 146.6-14.9-9.2% Algeria (incl. LNG) 36.4 32.2-4.2-11.5% Lybia (incl. LNG) 5.7 6.5 0.8 14.2% Qatar 24.0 23.1-0.9-3.6% Nigeria 6.9 5.7-1.2-17.1% Deliveries by Major Indigenous Producers 2013 2014 Changes, bcm Changes, % Norway* 114,7 116,8 2,1 1,8% United Kingdom 41,2 41,2 0,0-0,1% Netherlands 77,7 63,1-14,6-18,8% Bcm * Including pipeline and LNG supply of Norway to the European market, but not supply to Asia and America Sources: Bloomberg, IEA, Eurostat, National Statistical Agencies, Estimates by Gazprom Export LLC as of January 2015 ZMB 4 4
LNG Deliveries to Europe ZMB 5 5 LNG Deliveries to Europe by Country 2013 2014 Changes, bcm Changes, % Qatar 24.0 23.1-0.9-3.6% Algeria 13.6 14.8 1.2 8.7% Nigeria 6.9 5.7-1.2-17.1% Trinidad and Tobago 2.4 3.0 0.6 27.0% Egypt 0.4 0.0-0.4-100.0% Peru 1.5 1.3-0.2-12.8% Yemen 0.2 0.0-0.2-100.0% Oman 0.2 0.0-0.2-100.0% Equatorial Guinea 0.0 0.1 0.1 - Total 49.1 48.0-1.1-2.2% Sources: Bloomberg, Estimates by Gazprom Export LLC
Demand for Gas in Power Generation Demand for Gas in Power Generation for Six EU Countries Bcm 2013 2014 Changes, bcm Changes, % Total gas consumption 372.1 319.4-52.8-14.2% Gas consumption in power generation Share of electricity generation in gas consumption Gas consumption in other sectors 74.0 61.6-12.3-16.7% 19.9% 19.3% -0.6 p.p. - 298.2 257.7-40.4-13.6% *EU Countries: Germany Italy United Kingdom Netherlands France Spain In 2014 demand for gas in power generation in six EU countries dropped by 17% or 3 pc above average. Power generation sector accounted for 20% of the demand in 2014. Sources: PIRA, Estimates by Gazprom Export LLC ZMB 6 6
Renewables are Eroding Share of Gas in Power Generation Other trends are the growth of coal and lignite and decline in nuclear electricity generation Source: IEA ZMB 7
Electricity Prices in Germany are High due to Renewables In Germany electricity prices for households are the highest in Europe. They are twice as high a EU 27 average price and tend to grow Prices for industrial users are higher by 32% compared to EU average *Industrial Consumers prices are given for the band with consumption from 20 000 MWh to 70 000 MWh *Private Households prices are given for the band with consumption from 500 kwh to 5 000 kwh Source: Eurostat ZMB 8
Demand for Gas Would Return to Germany Due to: Natural Gas in Power Generation Rebound (aging coal plants, necessity to reach environmental goals, and refusal from nuclear energy) Small-scale CHP (low-cost energy and tax benefits) Broader use of LNG in bunkering and road transport (lower prices and environmental restrictions) Source: BCG Target Scenario Source: GPG calculation ZMB 9
Long Term European Natural Gas Consumption According to consensus forecast for 2025 and 2035, demand could be 26.6% and 32.8% higher compared to 2014 Source: Gazprom Export ZMB 10
Natural Gas European Demand and Production Gap Due to falling indigenous production European demand for additional gas imports could be 152 bcm by 2025 and 215 bcm by 2035 Source: Gazprom Export ZMB 11
Gazprom is the Major Supplier of Gas to Europe European Far Abroad 2013 2014 Changes, bcm Changes, % Gas deliveries by Gazprom, bcm 161.5 146.6-14.9-9.2% Share in consumption, % 30,0% 30,2% 0.2 p.p. Share in imports, % 62,7% 64,0% 1.3 p.p. European Union 2013 2014 Changes, bcm Changes, % Gas deliveries by Gazprom, bcm 133.1 121.0-12.1-9.1% Share in consumption, % 27.3% 28.7% 1.4 p.p. Share in imports, % 41.5% 42.4% 0.9 p.p. Share in Gazprom s exports 82.4% 82.5% 0.1 p.p. Sources: IEA, Eurostat, Gazprom JSC, Gazprom Export LLC ZMB 1 12
Full Costs of North American LNG are Higher than European Forward Hub Prices Source: Bloomberg, Wood Mackenzie, Gazprom Export estimates ZMB 13
Full Costs of USA LNG are Higher than European Hub Prices (2) Source: Bloomberg, Wood Mackenzie, Gazprom Export estimates ZMB 14
$/Mbtu. US LNG Off-Taker Bears All Price Risks 17 LNG Price in North-East Asia Henry Hub, $/Mbtu 2 3 4 5 6 7 8 9 10 16 15 14 13 12 11 10 9 8 Oil-linked prices for LNG, supply in North-East Asia (bottom axis) Spot gas contract linked to Henry Hub (upper axis) 7 50 55 60 65 70 75 80 85 90 95 100 105 110 Brent, $/bbl Source : E&Y ZMB 15
140 120 Hubs Liquidity in Europe Originates from LTCs and not from Spot & Short-Term LNG Deliveries bcm Asia Europe Middle East 100 53,9 Americas 80 60 71,6 46,3 40,6 50,5 56,3 65,8 70,0 40 20 0 26,9 6,4 16,7 2,1 4,1 9,5 2,9 3,1 13,0 2,2 23,0 4,1 2,4 12,9 17,4 17,2 11,7 12,1 6,7 2008 2009 2010 2011 2012 2013 2014 Sources: GIIGNL, Gazprom Export calculations ZMB 16
Oil-Indexed and Quasi Oil-Indexed Prices Still Dominant in European Gas Imports from Third Countries* 28.9 % 2,8% 1,9% 4,1% 2013 2,7% 2,4% 3,5% 2014 30.1 % 16,1% 42,7% 21,5% 42,1% 1,2% 2,7% 1,7% 10,6% 2,4% 16,1% 71.1 % 3,5% 1,8% 9,3% 10,8% 69.9 % Gazprom oil-indexed Norway 1/2 oil indexed Algeria oil-indexed Libya oil-indexed Qatar oil-indexed other LNG oil-indexed Norway 1/2 hub-indexed Qatar hub-indexed Gazprom hub-indexed other LNG hub-indexed *Norway supply is not considered as import source Gazprom oil- and quasi-oil-indexed Norway 1/3 oil-indexed Algeria oil-indexed Libya oil-indexed Qatar oil-indexed other LNG oil-indexed Norway 2/3 hub-indexed Qatar hub-indexed Gazprom hub-indexed other LNG hub-indexed ZMB 17
Overblown Gas Demand Expectations in Europe in the Past Resulted in Market Overcontraction Source: Purvin and Gerts 1998 Forecast for 2015, Gazprom Export calculations ZMB 18
There is Need to Rebalance Market by Eliminating Paper and Physical Gas Disconnect LTC Contracts Midstreamers End-users Sell Q 1 volume on hubs under a forward contract that equals to MAQ+ Portfolio optimization Buy back Q 2 volume of paper gas that equals to physical demand by the end-users Hub Year-ahead contract Under current market conditions: Q 1 > Q 2 Source: Gazprom Export ZMB 19
Paradox of European Balances: Both Hub Prices and Storage Volumes are the Bottom 90 80 Bcm 600 550 $/Mcm 500 70 450 60 400 50 350 300 40 250 30 200 20 150 100 10 2012 2013 2014 2015 50 2012 2013 2014 2015 0 J F M A M J J A S O N D 0 J F M A M J J A S O N D Source: Gazprom Export Estimates, Argus, Gas Infrastructure Europe ZMB 20
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