European Gas Market in 2017: State and Perspectives Sergei Komlev Head of Contract Structuring and Price Formation Directorate Gazprom Export Oil & Gas Forum, Thompson Reuters Moscow, December 14, 2017
Mid-Term Recovery of Gas Demand in Europe Continued in 2017 Extensive growth of demand for natural gas in the EU28 from 430 bcm in 2014 to about 500 bcm in 2017, or by estimated 70 bcm. That growth occurred on a back of a declining indigenous EU production, which was down by 18 bcm over the last three years. Strong demand and declining production has led to an increased supply and demand gap widening to 88bcm. Pipeline gas was the main source to meet the growing demand requirements. Sources: Eurostat, International energy agency (IEA), ENTSOG, IHS, PIRA, National Statistical Agencies as of July 2017. 2
Short-Term Gas Supply and Demand Trends in Europe Gas Consumption, Indigenous Production, Imports, Exports and Storages in European Countries In bcm Q1-3 2016 Q1-3 2017, bcm, % Demand 370.1 397.1 27.0 7.3% Total Supply, Including 364.1 383.1 19.1 5.2% Indigenous production* 189.2 190.0 0.8 0.4% Imports 207.5 226.9 19.4 9.3% Net UGS withdrawals / injections** -23.9-22.3 1.6-6.6% Reverse to Ukraine -6.5-11.0-4.5 68.6% LNG Re-exports -2.3-0.5 1.8-79.3% Net Imports*** 198.7 215.4 16.7 8.4% Statistical Difference, %**** 1.7% 3.6% 2.0 pp Demand for natural gas in Europe in Q1-3 2017 preliminary increased by 27.0 bcm or 7.3% compared with Q1-3 2016. Meanwhile the total supply increased by 19.1 bcm or 5.2%, mainly as a result of imports increase by 19.4 bcm or 9.3%. Indigenous production remains at the same level, having increased by 0.4%. The net UGS injections in Europe by the end of Q3 2017 amounted to 22.3 bcm (i.e. by 1.6 bcm less compared with the results of 2016). Reverse flows to Ukraine in Q1-3 2017 increased up to 11.0 bcm compared with 6.5 bcm in Q1-3 2016. LNG re-export volumes declined significantly from 2.3 bcm in Q1-3 2016 to 0.5 bcm in Q1-3 2017. Combination of the above mentioned factors led to an increase in net imports in Q1-3 2017 by 16.7 bcm or 8.4% compared with Q1-3 2016. *Indigenous production includes Norway. ** Positive value means that withdrawals exceed injections for the period and vice versa. *** Net Imports = Imports + Reverse + Re-exports. Given values may differ from the calculated ones as they are rounded. **** Statistical difference=(demand Total Supply)/Total Supply, %. Sources: Eurostat, IEA, ENTSOG, IHS, National Statistical Agencies as of October 2017. 2
Major Factors of Gas Consumption in Europe in Q1-3 2016 and Q1-3 2017* 1.Favorable weather conditions (cold and long winter, hot summer) Q1-2 Q1-3 2016 Q1-2 Q1-3 2017 2. Economic recovery 3. Useof gas in power generation 4. Base period effect Total consumption dynamics, YoY: +2,7% +2.7% +2,2% +7.3% * Factors are defined in comparison with long-term averages. Factors could affect consumption in a bidirectional way. Changes in volumes made on Factors are defined in comparison with long-term averages. Factors could affect consumption in bidirectional way. Changes in volumes made on year-on-year a year-on-year and quarter-on-quarter basis. and quarter-on-quarter basis. 3
Weather Index in Europe for Q1-3 2017 in Relation to Historic Average Value Index is calculated as a sum of degree days for respective month aggregated for European countries HDD heating degree days CDD cooling degree days. The calculation is made by Gazprom Export LLC on the basis of weather conditions data of more than 130 areas of various European countries. In Jan.-Sept. 2017 European weather index was slightly below historical average (98% of the average value), but higher than in Jan.-Sept. 2016. That is why its overall impact was positive. Weather index exceeded the historical average levels in several countries of Europe: in Italy, Turkey, Romania, Hungary, Austria, the Czech Republic. Significant negative deviations from average level was observed in the UK. 3
Year-over-year Dynamics of Economic Activity in 2012 2017 Industrial Production Index in 2017 was higher than in 2016, 2.4% compared to 1.2%. Industrial Confidence Index, which reflects expectations over the growth prospects, follows an upward trend since August 2016, increased to a record high of 6.7% in September 2017. In Jan.-July 2017 power generation in Europe showed a modest growth by 1.3% compared to the same period last year. Sources: Bloomberg, IEA * For OECD Europe. ** Calculated on the basis of survey of industrial sector representatives conducted by European Commission. Shown as the difference between the amount of respondents with positive and negative expectations on the industrial sector development, in percentage terms with seasonal adjustment. *** EU15 countries, adjusted for the amount of working days, without building sector. 6
Demand for Natural Gas in Power Generation Demand for Natural Gas in Power Generation in European Far Abroad 3Q 2016 3Q 2017, bcm, % Total gas consumption 370.1 397.1 27.0 7.3% Gas consumption in power generation 113.0 134.6 21.5 19.0% Share of power generation in gas consumption 30.5% 33.9% 3.3 p.p. Gas consumption in other sectors 257.1 262.6 5.5 2.1% The major contributor to consumption growth was a boost in natural gas demand in power generation in the European Far Abroad In Q1-3 2017 demand for gas in power generation was up by 19%, outrunning the growth of demand in the other sectors, which was up by 7.3% compared to Q1-3 2016. The share of power generation in total demand for natural gas grew up to 33.9% in Q1-3 2017 (Q1-3 2016 30.5%). Sources: Eurostat, International energy agency (IEA), ENTSOG, IHS, PIRA, National Statistical Agencies as of July 2017 Given values may differ from the calculated ones as they are rounded. 5
Gas vs. Coal in Power Generation of Germany and the United Kingdom Gas-Coal Switching Price in Power Generation in Germany and the UK* *Gas-coal switching prices differ to diversity of efficiencies of power plants on German and British markets and due to UK Carbon Price Support as addition to EU ETS. ** Gas price - TTF Day-ahead. *** Coal price - CIF ARA Carbon floor in the UK significantly boosted a competitiveness of gas-fired power plants over coal generators in 2016 2017. In German only the most effective gas-fired power plants are competitive. Forward prices with deliveries in 2018 point to a decline in coal prices. That may reduce economical attractiveness of gas in the power sector. Source: based on Bloomberg, Department of Energy and Climate Change of the UK s Government (DECC) 6
Deliveries by Major Suppliers in Q1-3 2017 Deliveries by Major Exporters Q1-3 2016 Q1-3 2017, bcm, % (bcm) Gazprom PJSC* 126.8 141.3 14.5 11.4% Algeria (incl. LNG) 37.3 35.4-1.9-5.0% Qatar 19.8 18.4-1.4-7.1% Nigeria 6.7 9.5 2.9 42.7% Iran 5.7 7.1 1.3 23.0% Deliveries by Major Indigenous Producers Q1-3 2016 Q1-3 2017, bcm, % (bcm) Norway** 89.5 95.5 6.0 6.7% United Kingdom 33.1 32.8-0.2-0.7% Netherlands 32.7 28.2-4.5-13.7% * Including the contracts of Gazprom export LLC, direct contracts of Gazprom Schweiz AG and volumes marketed via gas auctions of Gazprom Export LLC. ** Including pipeline and LNG deliveries from Norway to the European market and excluding LNG to Asia and America. Sources: Bloomberg, Eurostat, ENTSOG, IEA, IHS, National Statistical Agencies as of October 2017. Given values may differ from the calculated ones as they are rounded. 7
Supply Dynamics to Europe by Major Exporters in Q1-3 2017 Comparison of supply dynamics in Q1-3 2017 with the range of deliveries in 2010 2016 demonstrates the record level of supplies of PJSC Gazprom and low level of Qatar LNG deliveries. Algerian deliveries, being close to the upper boundary of the 2010-2016 range, significantly decreased in Q1-3 2017 compared with Q1-3 2016. Sources: Bloomberg, IEA, IHS as of October 2017. 8
Supply Dynamics to Europe by Major Internal Suppliers in Q1-3 2017 Comparison of supply dynamics in Q1-3 2017 with range of deliveries in 2010 2016 demonstrates high level of supplies from Norway, which in January, April, June and July surpassed the level of previous years, as well as low level of supplies from the UK and especially from the Netherlands, not reaching the range of deliveries in 2010-2016. Sources: Bloomberg, IEA, IHS as of October 2017. 9
European Gas Storages Gas Storage Level of European countries, % of Capacity By the end of Q3 2017 the UGSs of European countries were filled by 78.4%, what is below the average level for the last five years (81.0%). Source: on the basis of IHS and IEA data. 10
LNG Deliveries to Europe in Q1-3 2017 LNG Deliveries to Europe by Exporting Country, bcm Source: IHS. Given values may differ from the calculated ones as they are rounded. Q1-3 2016 Q1-3 2017, bcm, % Qatar 19.8 18.4-1.4-7.1% Algeria 11.3 10.4-1.0-8.4% Nigeria 6.7 9.5 2.9 42.7% Norway 2.0 2.9 0.9 44.9% Peru 1.0 2.9 1.9 197.2% USA 0.3 1.9 1.6 467.0% Trinidad and Tobago 1.1 0.6-0.5-44.0% Angola 0.0 0.5 0.5 - Egypt 0.0 0.3 0.3 - Equatorial Guinea 0.0 0.2 0.2 - Brazil 0.0 0.1 0.1 - Dominican Republic 0.0 0.1 0.1 - Total 42.3 47.8 5.4 12.8% 11
Economics of LNG Supplies from USA to Europe Natural Gas Price Trend in Europe and Full Cost* of US LNG Supplies to Europe Full-cycle costs of US LNG significantly exceed forward prices on the European gas hubs. For the off-takers of American gas with deliveries to Europe it is a loss making exercise. However such off-takers are incentivized by tolling agreements to deliver LNG from the US to Europe even at a depressed prices in order to minimize losses. *Calculated on the basis of Henry Hub Futures prices, P = HH * 115% + X, where X costs of liquefaction (might differ for different projects from $2,37 to $3,00), shipping to Europe, regasification. Sources: Bloomberg, Cedigaz, Cheniere Energy, Wood Mackenzie 14
Asian Price Premium Asian Price Premium, TTF Prices and Asian LNG Prices In Q3 2017 the average LNG import prices in Japan and South Korea were respectively $8.4/MBTU and $8.1/MBTU, that was higher by 24% and 27% compared with Q3 2016 level. This growth reflected an increase in contract prices with oil-indexation due to recovery of oil prices from the beginning of 2016. Asian spot prices in Q3 2017 were at seasonaly low levels about $6.0/MBTU, reflecting weak demand for spot volumes as long-term contracts fully covering demand. As a result, in Q3 2017 the "Asian" premium (difference between Asian and European spot prices) dropped to around $0.4/MBTU. Growth of Asian spot prices which began at the end of the quarter and forecasted prices for 2017/2018 winter show significant increase of Asian premium. Such market conditions will support higher attractiveness of Asian market for flexible LNG deliveries versus European market. Increased seasonal volatility is, among other things, influence of growing Chinese market, which use spot LNG to cover peak demand in heating sector because of shortage of UGS capacity. Sources: Bloomberg, Interfax-GGA, Platts, Ministry of Economy, Trade and Industry of Japan, Customs Statistics of S. Korea and Japan 15
Higher Day-Ahead Prices Compared to Month-Ahead Prices is Clear Indication of Gas Deficit Source: Bloomberg 14
54% 51% From Algeria** From Libya** 35% 34% 75% 97% 24% 25% 44% 55% 74% 81% 85% 70% 91% 79% 28% 27% Capacity Utilization of Main Routes for Gas Supplies to Far Abroad Countries, Q1-3 2017 As of Q1-3 2017 the main gas transportation routes to Europe showed higher capacity utilization. Exceptions were pipelines from Algeria and Libya 9M'16 9M'16 9M'16 9M'16 9M'16 9M'16 9M'16 9M'16 9M'16 9M'17 LNG* 9M'16 9M'16 * incl. LNG trading between European countries and capacity of FSRUs, excl. small-scale LNG supplies ** pipeline gas *** on the basis of technical capacity as of 16 bcma (according to Gazprom PJSC) Source: Bloomberg, ENTSOG, Gassco, GIE, IHS, Snam Rete Gas, Ukrtransgaz, Gazprom PJSC 9M'16 9M'16 9M'16 9M'16 9M'16 9M'16 17
Long-Term European Natural Gas Consumption: Scenarios and Forecasts Updated: October 2017 Definition of European countries slightly differs from one forecast to another. For better comparability all figures are calculated on the basis of compound annual growth rates (CAGR). Forecasts surveyed for the consensus analysis are updated on a regular basis. 18
Natural Gas Demand and Production Gap in Europe in 2010-2035 Updated: October 2017 According to the consensus forecast, additional demand (base year 2016) for import of gas in Europe will amount to approximately: 47 bcm by 2025 74 bcm by 2035 Natural gas European demand and production gap is calculated as the difference between the demand consensus forecast and the production consensus forecast. Definition of European countries slightly differs from one forecast to another. For better comparability all figures are calculated on the basis of compound annual growth rates (CAGR). 19
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