Russian Gas Exports to Europe - PDF Free Download

Russian Gas Exports to Europe Russian Gas Exports to Europe A Discussion on Commercial and Geopolitical Drivers A Discussion of Commercial and Geopolitical Drivers Luca Franza Koninklijk Instituut van Ingenierus, Den Haag 1 March 2016 1

PART ONE: THE RUSSIAN STREAMS

01.12.2014: Putin announces South Stream s cancellation

From South Stream to Turk Stream: why? Main triggers: Regulatory issues (compliance with Third Energy Package provisions) Geopolitical issues (stagnating EU-Russia dialogue due to Ukraine crisis) Additional reasons: Financing increasingly difficult Changed outlook for European gas demand Russia s willingness to safeguard position in Turkish market

What is the current status of Turk Stream? Frozen, not cancelled, since jet downing incident IGA repeatedly delayed Only a non-binding MoU 100% Gazprom ownership of offshore section Route is agreed see map Source: Gazprom $9 billion in sunk costs from SS Pipes purchased for two lines, maritime survey only needed on final leg Saipem contract (offshore work) cancelled causing delays Original plan: 15 Bcm to be delivered to buyers in Turkey, 47 Bcm at a new hub located on the Turkish-Greek border. Summer 2015: decision to build only 2 lines (31 Bcm).

What countries still depend on Ukraine transit? SEE: small volumes but no alternatives ITA: biggest offtaker at Baumgarten Source: IEA. Note: Slight recovery in UKR transit in 2015

In 2019, at least 118 Bcm of Russian gas will be sold to Europe under LTCs, which state specific points of delivery (Russian LTCs) 2019: Expiry of Naftogaz-Gazprom transport contract

Cross-border capacity of gas pipelines as of Oct.2015 Clingendael International Energy Programme Unit: Bcm/y. Data: IEA GTF database (except figures in yellow from ENTSOG or company websites) 7 N/A 54.6 N/A N/A N/A 3.2 2.5 2.6 6.9 6.9 19.6 40.1 58.5 2.4 2.3 24 3.9 11.4 C A P A C I T Y 10.9 0.3 2.9 26.9 20.2 19.5 4.8 N/A 37.4 13.4 21.2 2.2 8.3 7.8 5.5 2.4 76.4 19.2 14.8 14 1.7 1.8 3.1 19.6 0.4 21 66.7 92.1 14.1 10.7 3.2 3.3 43.7 1.6 1.8 32.5 4.3 4.4 2.5 1.8 5.9 1 57 25.4 55 N/A 4.2 2.6 4.8 0.8 41.6 4.6 1.5 79 9.7 20.6 6.1 1.8 1.8 38.4 28.6 16 0.9 16.2 2.9 5.3 3.7 38.6 12.8 1.7 13.8 8.2 LIBYA CIEP

Cross-border physical flows of pipeline gas (2015 est.) Clingendael International Energy Programme Unit: Bcm/y. Data: IEA GTF database 2.8 0 28.2 4.1 23.2 0.6 0.8 0.4 0.1 2 0.5 17.1 30.3 38.3 0.1 0.0 13.9 2 4.1 F L O W S 4.3 0 2.5 0.2 6.6 3.6 1.7 0 18 4.7 20.0 0.6 0.5 2.5 0.4 14.2 29.4 1.5 3.6 5.9 0.4 10 0 1 0.1 9.3 16.8 37.5 1.4 6.2 0.1 0.1 30.3 0 0 28.7 0.8 0 1.8 0.9 0.2 0 0 13.6 35.4 0 2.7 0 1.8 N/A 36.7 3.8 0.1 36.6 9.7 5.6 0.5 0 0 15.5 15.4 15.7 0.1 10.6 0 3.2 1.7 7.4 7.5 0.6 8.8 6.7 LIBYA CIEP

C A P A C I T Y Limited cross-border capacity in Southeastern Europe make it difficult to eliminate Ukraine transit risk

(Assuming Russia-Turkey talks resume) 2017+ Option A Construction of one line of Turk Stream 12

Mostly a rerouting of volumes from Western Line (12-13 Bcm) Takes into account small incremental demand around Istanbul (2-3 Bcm) Together with higher Blue Stream offtake, averts gas shortage in Turkey in 2016 Price discounts to Turkey Target date of December 2016 will be missed (Saipem contract cancelled) No big financing headaches (sunk costs), no regulatory complications No impact on other flows Option A impact on rerouting options Map: CIEP Data: GTF (IEA)

(Assuming Russia-Turkey talks resume) 2017+ Option B Construction of two lines of Turk Stream Direction of Western Line reversed 14

Option B impact on rerouting options Romania, Bulgaria, FYROM and Greece freed form Ukraine transit Turk Stream 2nd Line underutilized in our static scenario Map: CIEP Data: GTF (IEA)

(Assuming Russia-Turkey talks resume) 2018-2019+ Option C Construction of two lines of Turk Stream Direction of Western Line reversed Construction of minor infrastructure in SEE: Interconnector Bulgaria-Serbia (Kalotina-Dimitrovgrad) Reverse flow Romania-Hungary (Csanadpalota) Connection of hub on Turkish/Greek border with Greek network

Option C impact on rerouting options This scenarios includes small interventions, all included in list of PCIs Romania, Bulgaria, FYROM, Greece, Serbia and Bosnia H. freed form Ukraine transit Hungary can reduce exposure to Ukraine transit by 30% 50% utlization of Turk Stream 2nd Line in our static scenario Map: CIEP Data: GTF (IEA)

(Assuming Russia-Turkey talks resume) 2020+ Option D Construction of two lines of Turk Stream Expansion of TAP to 20 Bcm And construction of ancillary infrastructure IGB (Interconnector Greece-Bulgaria) to allow contracted Azeri deliveries to Bulgaria 18

Option D impact on rerouting options Russia could use TAP+ to supply Greece and reroute 8 Bcm of shipments to Italy, reducing Italy s exposure to Ukraine by 40% Alternative rerouting: 3 Bcm to Bulgaria and FYROM through IGB and 5 Bcm to Italy 2/3 of Turk Stream 2nd Line utilized in our static scenario Numbers in yellow: capacity reserved to Azerbaijan on the basis of the TPA rule exemption Map: CIEP Data: GTF (IEA)

(Assuming Russia-Turkey talks resume) Option E Full-fledged Turk Stream Construction of new pipelines inside the EU Source: OSW

Even if talks between Russia and Turkey resume, there are regulatory and financial obstacles Regulatory issues include: 1) Can Russia unilaterally change delivery points stated in LTCs? 2) Is the Western Line s reversal compatible with the Third Energy Package? 3) Can Russian gas be transported through TAP? 4) Will the EC grant TPA to the proposed long-haul pipelines that will carry RU gas? 5) Can the current antitrust probe have an impact on Russian plans? Financing issues include: 1) Can Gazprom afford to build all the lines of Turk Stream? 2) Who can fund all the proposed pipelines within EU? TSOs invest using public money exempted from TPA, but can they afford? Private investment (merchant model) not automatically exempted from TPA 3) Would cooperation among regional TSOs help? 4) EC unlikely to grant funding, given political support to Ukraine transit upgrade

Recent evolutions to take into account Nord Stream expansion (Nord Stream-2) Softening of Russia s stance on Ukraine transit post 2019 22

PART TWO: THE BIGGER PICTURE Three decisive trends affect Russia s commercial position in Europe: Recent decline in EU gas demand and uncertainty on future demand Profound changes to EU gas market and way in which gas is traded Renewed geopolitical tensions

Clear downward trend in Russian gas exports to the EU Compensated (and often hidden) by higher exports to Turkey Russian gas to EU 180 160 140 120 134 131,9 134,2 142 145,3 161,7 161,8 154,4 158,4 120,5 107,4 117,2 112,7 138 124 135,8 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: CIEP Graph on Russian Central Bank and Gazprom data

Bcm/a Domestic Pipeline imports LNG but, overall, Russia maintained its market share Stable around 30% of EU gas consumption and 40% of imports 600 500 400 300 R U S S I A 200 100 0 2009 2010 2011 2012 2013 2014 Other Nigeria Algeria Qatar Libya Algeria Russia Norway Other Italy Germany Romania UK Netherlands Source: CIEP Graph on BP data

as European 1 gas demand also fell -120 Bcm since economic and financial crisis 1 = here including Turkey and EFTA

2009-2012: Russian gas under LTCs not competitive Midstreamers launching renegotiations and arbitrations Reconvergence

Long-term gas contract renegotiations (since 2010) Facing the threat of arbitration, European gas suppliers: 1. Fiddled with traditional formulae without changing them structurally P t = P o + x a 1 x b 1 (Go t Go o ) + (1- ) x a 2 x b 2 (HFO t HFO o ) One-off price discounts Frequent adjustments to P 0, α, b 1, b 2 2. Accepted lower off-take from customers One-off derogations to meeting ToP requirements Structural reduction of MCQ (lower ToP requirements) Structural reduction of ACQ (rare) +15% -15% Cmax ACQ (100%) MCQ (take-or-pay) 3. Offered more opportunities for renegotiations ( joker clauses) 4. Shortened the backward indexation time lapse ( 12.0.6 3.0.3 ) 5. Introduction of hub indexation J F M A M J AVERAGE APPLICATION

$/MMBtu Recent evolution in European gas prices (notably Russian contract prices vs spot) Source: EEGAS (graphically adapted)

2015 was a relatively good year for Gazprom in the EU Record sales to Germany, Italy. Increased activity on NBP in the UK. Germany Italy United Kingdom France Poland Hungary Austria Czech Republic Lithuania Slovakia Bulgaria Finland Netherlands Latvia Greece Denmark Estonia Slovenia Romania 0,7 0,5 0,5 0,2 2,8 2,4 2,0 2,0 4,0 3,8 3,1 4,4 4,2 5,9 9,7 8,9 11,1 24,4 45,3 Total: 135,8 Bcm Source: CIEP Graph on Gazprom data (2016) 0,0 10,0 20,0 30,0 40,0 50,0 Bcm

LNG vs Russian gas competition dynamics at play in 2015 Deliberate Russian gas purchase minimization in Q1

Bcm/y Global market balance hinging on Russia-LNG dynamics 600 Europe as market of last resort. Its capacity to absorb LNG (determined also by Russia flex) provides support to world gas prices 500 Russia Flex LNG to be absorbed by EU LNG Surplus Flexible LNG 400 300 EU Demand Russia T-o-P Non-RUS Here balanced market: there is margin. But what if Russia flex is exhausted? China Japan Korea Taiwan India Inflexible LNG 200 Domestic Niche markets 100 Production 0 EU demand Pipeline supplies Non-EU LNG demand Global LNG supplies Source: Timera Energy (graphically adapted)

Bcm/y Global market balance hinging on Russia-LNG dynamics 600 Europe as market of last resort. Its capacity to absorb LNG (determined also by Russia flex) provides support to world gas prices 500 400 300 200 EU Demand Russia Flex Russia T-o-P Non-RUS LNG to be absorbed by EU LNG Surplus T-o-P volumes must be taken This bit cannot be absorbed by Europe! Possible downward price spiral China Japan Korea Taiwan India Flexible LNG Inflexible LNG Increase in flex LNG 100 Domestic Production Niche markets 0 EU demand Pipeline supplies Non-EU LNG demand Global LNG supplies Clearly, an increase in European, Chinese or Indian demand would push away the tipping point Source: Timera Energy (graphically adapted)

Russia s positioning in European and global gas markets Russian contracts support EU hub prices (see CIEP December 2014 study) EU hub prices support Asian prices So Russian contracts provide support to global gas prices Russia is thought to have >100 Bcm of spare capacity ready to land in Europe for ~3$/Mmbtu, LNG can also come in cheaply (~4$/Mmbtu) Unable to protect value in last years, Russia may go for volume to deter further FIDs particularly on LNG projects Europe trying to complete internal market, diversify away from Russia and maintain Ukraine route Russia considering new ways of doing business (e.g. hub deliveries), trying to diversify away from Europe and get rid of Ukraine route

Russian gas appears competitive with US LNG (delivery to Europe) Source: Howard Rogers (Oxford Institute for Energy Studies)

Even in low gas demand growth scenarios, Europe s gas import needs are expected to increase 700 600 500 Demand (NPS) EU + Norway production 400 300 Import 2015: 236 Bcm Import 2030 (e): ~260-390 Bcm Demand (CPS) Demand (450) Demand (Statoil) Demand (Exxon) 200 Demand (Cedigaz) 100 0 2015 2020 2025 2030 Graph by CIEP. Sources: WEO 2015 (IEA), Statoil, ExxonMobil, Cedigaz

So who could fill the gap? Not EU producers, Norway and Algeria because declining or flat. Azerbaijan, but limited volumes Turkmenistan, but obstacles to TCP and commercial misalignments East Mediterranean, but high local demand and geopolitical risk Iraqi Kurdistan, but high perceived regulatory and geopolitical risk Iran, but very high local demand and LNG more likely Flexible LNG, notably from US and Qatar, but not a guaranteed flow Russia, but against goal of diversification

Thank you for your attention! Visit us at www.clingendaelenergy.com