Russian Oil and Gas: At a Crossroad Dr. Tatiana Mitrova Head of Oil and Gas Department Energy Research Institute of the Russian Academy of Sciences London September 6, 2013
The role of oil and gas for the Russian Federal budget is huge and it is growing: 40% in 2012 compared to 9% in 2000 Oil and gas taxes and duties in the Russian Federal budget 6000 50% 5000 43% 42% 41% 41% 45% 40% Gas export duty 4000 38% 33% 35% 39% 35% 30% Gas MET 3000 25% Oil export duty 2000 20% 15% Oil MET 1000 10% 5% Share of oil&gas MET and export duties in the Federal budget incomes 0 2005 2006 2007 2008 2009 2010 2011 2012 0% Source: http://www.roskazna.ru/reports/fb.html 1
1 CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS TO EUROPE 2 GAS EXPORT DIVERSIFICATION AND DOMESTIC MARKET DEVELOPMENT 3 RUSSIAN OIL PRODUCTION: HOW TO SUSTAIN VOLUMES? 2
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Global LNG supply is expected to boom by the end of this decade with Australia, USA and Canada becoming the largest market players Mln. tonnes 600 Global liquefaction capacities (existing and planed) 500 400 Other East Africa 300 US 200 100 0 Canada Australia Existing Source: ERI RAS 3
Situation on the European gas market during the last years did not favor Russian exports Growing supplies of LNG Diversification of pipeline supply sources Supply Demand Lower than contracted volumes Recovers very slowly In the power sector gas is strongly competing with coal Spot volumes are increasing very fast (30-40% p.a.) Majority of the European stakeholders support transition to the spot pricing Pricing Regulation Unbundling Gas Target Model requires all gas to be supplied at the virtual hubs 4 4
but European gas market is going to be tight until 2015-2016 as LNG is diverted to Asia; post 2016 very limited new supplies will become available and there will be an additional call on the over-takeor-pay volumes: good opportunity for Russia to enhance its position bcm 700 European gas balance 600 500 400 300 200 100 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Indigenous production (IEA 2013) Pipeline contracts MCQ Russia Pipeline contracts MCQ North Africa LNG contracts MCQ delivered LNG contracts MCQ diverted New LNG supplies Available ACQ-TOP volumes Demand (IEA 2013) Source: WEO2011, IEA; Cedigaz; ERI RAS. 5
Russian position in Europe will largely depend on gas pricing: traditional Groningen model is questioned now, as even renegotiated oil-linked contract prices are higher than spot-based $/1000 m3 500 European spot and oil-linked gas prices 400 300 200 Delta NBP Russian gas on the German border 100 0-100 Source: Bloomberg; ERI RAS. 6
Evolution of the Russian gas export strategy: what will be the Russian response? Traditional strategy 1990-2002 Miller`s team strategy 2002-2008 Anti-crises strategy 2009-2013??? 2013-2020 Volume maximization, Price damping Price maximization and volume growth Minimal price adjustments acceptable for the consumers (price maximization in the new conditions), stagnating volumes Most probably price maximization One target market Europe Only pipeline gas One target market Europe Only pipeline gas Attempts to diversify markets (Asia) Strong desire to develop LNG Russian role dominant regional supplier Russian role dominant regional supplier Russian role regional swing producer Russian role global swing producer? 7 7
Gazprom could give further price discounts and increase its market share, but Russia s strategic choice is in favor of the short-term profit maximization «We were faced with the choice of whatever was to maintain the supply volumes and the market share, or make the profit our high priority. As a public and commercially oriented company, Gazprom is interested in increasing profits to provide income to shareholders. Therefore, the choice was made, the correct one, in favor of the revenues, and the year results confirmed that. Alexander Medvedev, Gazprom Export» 8
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 ensured by the existing portfolio of the long-term contracts, which guarantees stable sales volumes for Russia until at least 2022 bcm Contractual quantities and real supply volumes of Russian gas to Europe 200 180 160 140 120 100 80 ACQ Fact MCQ 60 40 20 0 Sources: Cedigaz, Gazprom, ERI RAS. 9
Oil indexation vs. gas indexation: "a bird in hand is worth two in the bush approach Oil indexation Disappearing gas glut on the European gas market in the medium term gap between oilindexed and spot prices already started to narrow Gazprom will face next price reopening only after 2015, and contract expiration only by 2022 With high oil prices even lower volumes are providing high revenue New projects demand high prices (they have negative margins under spot prices, given that they have to pay export duties) and oil indexation is more convenient for the project financing Russian Government needs the money right now Spot indexation Strong pressure from the customers side Investigation of the European Commission against Gazprom`s pricing Gazprom could demand financial compensation for contract review + 3rd Package exemption for the South Stream and NEL + transitional period for price adjustments + European-level financial support for its mega-projects (like EBRD and other European financial institutions) Gazprom could become a dominant player manipulating the spot market by adjusting its supply volumes There are strong commercial reasons for Gazprom to protect the oil indexation at least during the next 3-5 years 10
1 CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS TO EUROPE 2 GAS EXPORT DIVERSIFICATION AND DOMESTIC MARKET DEVELOPMENT 3 RUSSIAN OIL PRODUCTION: HOW TO SUSTAIN VOLUMES? 11
Everybody is expecting new opportunities on the booming Asian gas markets, but by 2020 there is already no market niche in China... bcm 450 Chinese gas contracts and gas balance 400 26 350 Uncontracted market niche 300 Central Asia 250 Other LNG supplies 200 Australia 150 100 50 Qatar Indigenous production Chinese demand 0 2010 2015 2020 2025 Sources: IEA, Cedigaz, Enerdata, ERI RAS. 12
and OECD Asia is quickly contracting the North American LNG bcm 200 Japan and South Korea contracts and gas balance 180 160 140 34 32 65 Uncontracted market niche USA and Canada Others 120 Russia Qatar 100 Other Middle East 80 Papua New Guenia Malasia 60 Indoneisa 40 Brunei Australia 20 0 2010 2015 2020 2025 Indigenous production OECD Asia demand Sources: IEA, Cedigaz, Enerdata, ERI RAS. 13
Eastern Gas Program is developing, but as there are still no SPAs, the window of opportunities is becoming smaller and price negotiations have now to take into account Henry Hub pricing of the US LNG Sources: Gazprom 14
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 10-15 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 50-70 bcma. 15
Independents are improving their positions on the domestic market, though complete market liberalization and Gazprom`s ownership unbundling are not currently under discussion bcm 700 Russian gas production structure 30% 600 500 400 300 200 100 25% 20% 15% 10% 5% 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Gazprom Other producers* Share of non-gazprom producers 0% * Other producers include PSA and APG Sources: CDU TEK, ERI RAS 16
But at the same time the industry is consolidating, now there are only three major non-gazprom players left on the market: NOVATEK, Rosneft and LUKOIL bcm 100 Natural gas production by the companies with access to the UGSS 90 80 70 60 50 40 30 20 ITERA TNK-BP Rosneft LUKOIL NOVATEK Other 10 0 2006 2012 Sources: CDU TEK, ERI RAS 17
Limited demand growth on the domestic market enforces competition between major players for the most attractive market segments Russian gas demand by sector until 2020 (optimistic scenario) 600 500 400 GAGR 2,3% GAGR 0,3% GAGR 1,1% Residential 2012 2020 AGR 2012-2020 300 Industry and feedstock Total consumption 428 468 40 1,12% Power generation 188 201 14 0,88% 200 100 Centralized heating Centralized heating 72 64-7 -1,36% Industry and feedstock 79 94 15 2,17% 0 2000 2005 2010 2015 2020 Power generation Residential 75 86 11 1,78% Sources: Rosstat, ERI RAS. 18
At the same time the Government frightened by the industrial output decline is ready to slow gas prices growth down to the rate of inflation, which is justified by lower European prices and weak domestic demand 3,00 Different proposed dynamics of the domestic gas price increase (compared to 2010 = 1) 2,50 2,00 1,50 1,00 Netback price (forecast 2011) Netback price (forecast 2013) MED forecast up to 2030 0,50 Gas price growth in line with inflation 0,00 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Sources: MED, ERI RAS. 19
1 CHANGING GLOBAL GAS MARKETS: IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS TO EUROPE 2 GAS EXPORT DIVERSIFICATION AND DOMESTIC MARKET DEVELOPMENT 3 RUSSIAN OIL PRODUCTION: HOW TO SUSTAIN VOLUMES? 20
Main part of the Russian conventional oil is concentrated in the declining Soviet-time fields Structure of the Russian oil production 518 mln.t 512-535 mln.t* Conventional oil Oil deposits with low recovery factor 3% 4% 4% 12% 2%3% 34% Heavy oil and bitumen Oil from gas deposits Other 30% 2012 2030 59% 8% Shale and tight oil 41% * According to the Energy Strategy-2030 and Social-Economical Development Forecast Up To 2030 Source: ERI RAS. 21
In order to sustain production, Russia needs to develop new fields, which, however, are not competitive under the current tax regime. Higher production estimates are justified by the vast resource base, but require completely different taxation system Mln t Forecast for the liquid hydrocarbon production in Russia Sources: CDU TEK, LUKOIL. 22
Russia has a huge potential for Enhanced Oil Recovery: best practices would provide additional 4 bln t without the need to build new infrastructure, but adjustments of the tax regime are the must Potential for increasing ORF in Russia Sources: Energy Ministry, LUKOIL. 23
Unconventional oil and Artic: huge potential, but high costs and lack of technologies make these projects marginal under the current taxation Unconventional oil reserves Mln. t Arctic production volume forecast Sources: Energy Ministry, LUKOIL. 24
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 profit-based taxation, therefore all the exemptions are currently adjusted in the manual regime $/bbl 250 200 150 100 50 0 Affordable breakeven under the current taxation EOR Bazhenov rock Arctic Source: ERI RAS. 25
Conclusions More competitive external environment and domestic challenges are creating less favorable conditions for the Russian oil and gas industry. It will hardly be ably to provide the same high share of the budget incomes in the future. ERI RAS estimates show, that unfavorable situation on the export markets could lead to lower export volumes and slow down Russian GDP growth by 1% p.a. Russian gas industry still has a huge potential for export growth, but without strict costs control, cautious evaluation of the export projects and more flexible pricing system these opportunities could be lost. Under current conditions, oil production in Russia can be maintained through development of the following areas: enhanced oil recovery at existing fields development of unconventional reserves development of the new frontiers: new provinces in the Eastern Siberia and Arctic offshore But to develop these areas, the Government has to change the whole taxation system, not just to give few exemptions. 26
Contacts Energy Research Institute of the Russian Academy of Sciences Nagornaya st., 31, k.2, 117186, Moscow, Russian Federation phone: +7 985 368 39 75 fax: +7 499 135 88 70 web: www.eriras.ru e-mail: mitrovat@rambler.ru 27