Global and Russian Energy Sector at the Crossroad: New Challenges Dr. Tatiana Mitrova Head of Oil and Gas Department Energy Research Institute of the Russian Academy of Sciences Washington 6 December, 2013
1 GLOBAL SHIFTS 2 CHANGING GLOBAL OIL MARKETS AND IMPLICATIONS FOR THE RUSSIAN OIL EXPORTS AND ECONOMIC GROWTH 3 CHANGING GLOBAL GAS MARKETS AND IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS AND DOMESTIC GAS MARKET 2
Global markets transformations Slowing demand in the OECD (crises, structural changes, energy efficiency) and shrinking import market niches for the traditional suppliers (shale revolution). Demand shifts to non-oecd Asia, which will become more and more important player Growing supply and potentially increasing competition with Australia, Brazil, Iraq, Iran, East Africa and North America. Stagnant prices: shale revolution has already decreased prices in North America and Europe, additional shale oil will limit oil prices growth. In all scenarios oil prices do not exceed 100-130 $/bbl, gas prices stay at the current levels. Changing contractual structures (more spot indexation in Europe, long-term bilateral contracts in Asia) 3
Growth will be mainly provided by the developing countries Population growth, GDP, and energy consumption by region Source: ERI RAS POPULATION GROWTH IN DEVELOPING COUNTRIES IS FOLLOWED BY AN INCREASING SHIFT IN THE CENTRE OF ECONOMIC AND ENERGY CONSUMPTION TOWARDS THESE COUNTRIES 4
Directions of the international energy trade are changing considerably International energy trade, mtoe Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 5
The role of oil and gas for the Russian Federal budget is huge Oil and gas taxes and duties in the 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 20% 2000 15% Oil MET 1000 0 2005 2006 2007 2008 2009 2010 2011 2012 10% 5% 0% Share of oil&gas MET and export duties in the Federal budget incomes Source: http://www.roskazna.ru/reports/fb.html 6
Decreasing competitiveness of the Russian energy resources due to depletion of the old fields and tax system makes Russia most sensitive to the market changes among all the suppliers Russian energy export by fuel in the official MED scenario and in the Outlook-2013 scenario MED scenario Outlook-2013 scenario Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 7
1 GLOBAL SHIFTS 2 CHANGING GLOBAL OIL MARKETS AND IMPLICATIONS FOR THE RUSSIAN OIL EXPORTS AND ECONOMIC GROWTH 3 CHANGING GLOBAL GAS MARKETS AND IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS AND DOMESTIC GAS MARKET 8
There are tremendous shifts expected on the liquid fuels market, with declining demand in OECD and booming unconventional liquids production Liquid fuel supply and demand balance by 2040, Baseline Scenario Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 9
Unconventional oil potential, especially for low-permeability of US shale formations, has been evidently underestimated Evaluated and actual oil production from shale formations in the USA in 2012 mtoe 120 100 80 60 40 20 Source: ERI RAS 0 DOE 2011 IEA WEO 2011 ERI RAS 2011 Actual production OIL PRODUCTION FROM SHALE PLAYS HAS INCREASED FROM 8M TONS IN 2007 TO 100M TONS PRODUCED IN 2012. SUCH A PACE IN THE DEVELOPMENT OF UNCONVENTIONAL OIL TURNS THE YESTERDAY'S SHALE SCENARIOS IN THE TODAY S BASELINE ONES. IN OUR BASELINE SCENARIO, THE GLOBAL OIL PRODUCTION FROM THE SHALE PLAYS IS ESTIMATED TO REACH 420M TONS BY THE END OF THE FORECAST PERIOD AND IT WILL BE MOSTLY PROVIDED BY THE NORTH AMERICAN PLAYS. 10
Unconventional oil will reach 16% of total liquids production by 2040 Dynamics of liquid fuels supply structure, Baseline Scenario Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 11
By 2040, the supply of oil will increase by 1 bn tons There are no fundamental reasons for significant growth of oil prices at the forecasted levels of demand Oil supply curve (cost of production) Demand Growth Source: ERI RAS 12
Equilibrium oil prices decrease up to 2020 and afterwards do not exceed 130 $/bbl Equilibrium oil prices in the three scenarios Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 13
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 Heavy oil and bitumen Oil from gas deposits 30% 4% 3% 4% 2%3% 12% 8% 2012 2030 59% 34% Other Shale and tight oil 41% * According to the Energy Strategy-2030 and Social-Economical Development Forecast Up To 2030 Source: ERI RAS. 14
In order to sustain production, Russia needs to develop new fields, which, however, are not competitive under the current tax regime Mln t Forecast for the liquid hydrocarbon production in Russia Sources: CDU TEK, LUKOIL. 15
The Mineral Extraction Tax and export tax require much lower breakeven costs $/bbl 250 Tax exemption 200 150 Tax exemption 100 50 0 Affordable breakeven under the current taxation EOR Bazhenov rock Arctic Source: ERI RAS. 16
Russia still has a huge potential for Enhanced Oil Recovery, but adjustments of the tax regime are necessary Potential for increasing ORF in Russia Sources: Energy Ministry, LUKOIL. 17
1 GLOBAL SHIFTS 2 CHANGING GLOBAL OIL MARKETS AND IMPLICATIONS FOR THE RUSSIAN OIL EXPORTS AND ECONOMIC GROWTH 3 CHANGING GLOBAL GAS MARKETS AND IMPLICATIONS FOR THE RUSSIAN GAS EXPORTS AND DOMESTIC GAS MARKET 18
Global gas market development: incremental demand will be concentrated in the non-oecd countries The balance of gas supply and demand in 2040 Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 19
In the long-term average weighted regional gas prices are not expected to increase significantly Equilibrium gas prices in the three scenarios Source: Global and Russian Energy Outlook up to 2040. ERI RAS-AC. 2013. 20
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 21
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 22 22
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-take-or-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. 23
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. 24
There is still market niche for Russian gas in in China post 2020 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. 25
and OECD Asia is looking for Russian gas (though quickly contracting the North American LNG as well) 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. 26
Law in LNG export liberalization opens new opportunities for monetization of the Russian gas reserves Shtokman Gazprom 7,5-15 mln t Yamal LNG NOVATEK 15 mln t Baltic LNG Gazprom 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 27
Despite challenging conditions, Russian LNG projects are competitive, though they require strict cost management $/MBtu 15,0 Europe LNG projects delivered costs and margins Asia 13,0 1,9 2,2 11,0 5,0 4,4 4,8 9,0 5,1 2,1 Margin Regasification 7,0 LNG transportation Liquefaction 5,0 Pipeline Production 3,0 1,0-1,0 Yamal Shtokman US LNG Yamal LNG LNG Source: NEXANT, ERI RAS.. Vladivostok LNG US LNG East Africa Australia 28
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 it requires strict costs control, cautious evaluation of the export projects and more flexible pricing system. 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 International consortia could enable the Russian oil and gas industry to: attract foreign investment and apply advanced technology; ensure tight control over costs and other business results; access new markets for product sales; and facilitate access to logistics and adapt to the rules of international markets. Energy saving. Russia has a huge potential (energy consumption could be decreased by 30% based on comparable OECD efficiencies) 29
Contacts Energy Research Institute of the Russian Academy of Sciences "Global and Russian Energy Outlook up to 2040" http://www.eriras.ru/files/global_and_russian_energy_outlook_up_to_2040.pdf 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 30