7m THE OXFORD INSTITUTE FOR ENERGY STUDIES a ftECOGmiEt) mattmtint ntnrm ot int jui/essirv of osfoso UNIVERSITY OF Russia Gas Sector James Henderson APRIL 2015 w Russia is the world's second! largest Krolder of gas reserves 40.0 35.0 30.0 Russia ranks only behind Iran in gas reserves, although the country's own estimate is that it has 44tcm of ABC1 reserves 33tcm is equivalent to almost 200 billion barrels of oil reserves, double Russia's provide oil reserves Russia is also the second largest producer 900.0 800.0 700.0 600.0 E 500.0 u -° 400.0 300.0 200.0 100.0 0.0 OHfNoo^-iritDtNOOCTiOHrsirn'^Ln^orsoocriOHrsifYi^Ln cr>cr>cr>cr>cr>cr>cr>cr>cr>oooooooooo^H^H^H^H^H^H a^a^a^cncntTicncncncnoooooooooooooooo HHHHHHHHHHfNfN(NrMrNrMfNfN(NfNlfNI(NrM(NfNfN Russia USA Norway 'Canada China Qatar Historically Russia (Soviet Union) has been the world's largest gas producer However, following the shale gas boom, it has now been overtaken by the USA Russia's problem is not a lack of resources, but a lack of markets Russia is also tfie second biggest gas consumer 900.0 800.0 700.0 600.0 500.0 u The Russian economy depends on gas - it accounts for 50% of energy demand Two thirds of power generation is gas-fired, and subsidised prices support industry The Russian population is very dependent on gas for warmth in winter However, it is by far the largest exporter 250.0 ■ Pipe ■ LNG Russia is a "gas superpower" in terms of its impact on the global market It exports by pipeline to Europe and the FSU and by LNG to Asia, and is expanding its gas network Russian State is the major stakeholder with a wide agenda, seeing gas as an important domestic and international political tool State Gazprom IGPs Consumers □ Security of gas supply □ Company's □ Company's □ Acceptable (low) for the domestic profitability and profitability and gas and electricity consumers including financial financial prices sensitive regions and sustainability sustainability □ Reliable supplies social groups □ Stable □ Access to the new i i (including for the □ Low transportation production markets non-payers) tariffs volumes domestically and □ Gazification □ Low gas prices abroad □ Transparent and affordable for the □ Non-discriminatory easy access to gas supply services industry and for the pipeline and population storage access □ Ensure politically important □ Stable production volumes infrastructure projects and external gas policy □ Ensure tax revenue growth from the gas industry Gas taxation is mot nearly as important as oil! Comparative rates of MET for Gazprom and Independents Comparative contributions of oil and gas taxes to federal budget 1200 1000 y 800 600 400 200 F .■Li I I I I Jan-10 Jan-11 Jan-12 Jan-13 Jul-13 Jul-14 Jul-15 Oct-15 ■ Gazprom ■ Independents 50.0 45.0 40.0 35.0 30.0 c £ 25.0 ZD 20.0 15.0 10.0 5.0 0.0 Oil MET Gas MET Oil Export Tax Gas Export Tax Export tax rate is 30%, and is only paid on pipeline gas exports (i.e. is only relevant to Gazprom) LNG is free of export tax MET is based on a very complex calculation, involving a base tax adjusted for a series of field characteristics and location Gazprom pays a different MET rate to Independent producers, in particular because in Q4 2015 the Russian government sought to extract extra tax revenue to fund the budget deficit — Gazprom paid RR745/mcm versus an average for the Independents of around RR550/mcm — However, Gazprom's rate was increased by 36.7% in order to generate an extra RR100bn+ for the government Gas contributed 7% of budget revenues in 2015 compared to 36% from oil Russia has a strategic geographical advantage Existing Pipeline Planned Pipeline Existing LNG LNG under construction Possible LNG r2i\ Core Supply Capacity Gazprom - 550-600bcm Independents - 200bcm CIS i Gazprom - 40bcm Domestic Demand - 450bcm Gazprom - 260bcm Independents - 190bcm \ \ ® \ \ Central Asia Imports - 25bcm East Siberia Capacity Gazprom - 60bcm Independents - 30bcm? Chinese Demand Gazprom - 0-100bcm? Independents - 0-??? Sakhalin Capacity Gazprom - 15-22bcm Independents - 15bcm? id Asian Demand Gazprom - 15-???bcm Independents - 0-??? Russia is strategically placed between the world's largest gas importing regions Gazprom's surplus capacity gives it a strong bargaining position, especially in Europe With Europe being the sink for surplus LNG, Russia's gas marketing strategy is of vital importance to global gas players Russian gas can also compete in Asia, although one window of opportunity has arguably been missed The Russian Gas Matrix SUPPLY SOURCES: 2002 2008 2012 2013 2014 2015 2016 Gazprom production 522 550 488 487 444 419 419 Non-Gazprom production 73 114 169 181 196 216 221 Central Asian imports 34 61 31 33 29 26 19 TOTAL r 629 F 725 r 688 r 701 r 669 661 659 MARKETS: Russian gas demand (UGSS) 412 462 465 461 458 444 436 Exports to CIS countries 89 89 63 57 42 38 26 Exports to Europe (physical Russian gas) 129 159 139 163 152 163 179 LNG Exports to Asia 0 0 14 14 14 15 16 Change in Storage -1 15 7 6 3 2 2 TOTAL 629 725 688 701 669 661 659 Supply and demand for Russian gas is only balanced because of decline in Gazprom production Domestic demand is stagnant and independents are gaining market share CIS countries are looking to diversify away from Russia European demand has been in decline and EU now wants to reduce reliance on Russia Emergence of Asia is currently based on one LNG plant on Sakhalin Russia's gas resources - Gazprom still dominates Gazprom's share in global gas Gazprom's share in Russian gas reserves reserves 17% 72% Gazprom's A+B+C1 reserves amount to 36.15 trln m3 of gas Russia has just over 50tcm of gas reserves (Russian classification) Gazprom continues to dominate, but the issue of available resources is becoming less relevant The real challenge in 2016 is monetisation, as demand has come under pressure Comparison) of proved gias reserves 20000 18000 16000 14000 12000 u 10000 8000 6000 4000 2000 0 Gazprom Rosneft Novatek Gazprom Neft Lukoil Although Gazprom is by far the largest company, Rosneft and Novatek also have global scale gas reserves By comparison ExxonMobil has 1.75tcm of reserves and BP has 1.35tcm Gazprom's production Bras been in decline throughout the post-Soviet Gazprom production profile u 650 600 550 500 450 400 350 300 oocrio^HrMm^LniDi^oocrio 00 00O rsi m o o o o o o o o LD ID O O o o o o 00 CTi o o o o o h n m ^ in T—I T—I T—I T—I T—I T—I o o o o o o Gazprom production peaked at just over 600bcm in 1992 It declined relatively consistently to 2000, before recovering for a period as Zapolyarnoye was developed to meet domestic demand Since 2008, however, production has fallen by more than 100bcm, to reach a post-Soviet low of 420 bcm in 2015 Imports from Central Asia are also down sharply 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ■ Turkmenistan ■ Uzbekistan ■ Kazakstan (net) ■ Azerbaijan Russia used to transit Central Asian gas to Europe Turkmenistan has almost ceased all sales through Russia, turning to China instead Kazakhstan is the only Central Asian country with any significant gas ties to Russia The "Independent" Sector Unas emerged Share of Non-Gazprom Production 40.0% Non-Gazprom Gas Production 5.0% j 0.0% u 2000 2002 2004 2006 2008 2010 2012 2014 2016 250 200 150 100 50 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 Novatek BRosneft Lukoil ■ GazpromNeft ■ Other ROCs ■ PSAs ■ Other Historically non-Gazprom producers only produced "associated" gas, which was essentially a waste product Now they have a market for this gas other than Gazprom and also produce natural "dry" gas Novatek and Rosneft have led the way in production growth and NGP output now accounts for over one third of the Russian total Tfiie chang»ngi Russian) domestic gas market Russian gas demand has fallen by 6% since 2011 Gazprom's market share down to 50% in 2015 ■ Total Demand ■ Transport Own Use ■ Gazprom Group Prod'n ■ 3rd Party Prod'n • Rising prices and economic stagnation have dampened demand in the domestic market • Alternative sources of supply have also been encouraged • Gazprom has been limited in its ability to compete due to regulated prices, despite requests to allow discounts • Independents have offered discounts and more flexible contract terms to win significant market share • Gazprom's market share has fallen to only 50%, a landmark event Russian gas market breakdown 500 400 300 200 100 Russian gas consumption 2013-2015, bcm 460 20 "3 454 441 31 30 32 33 362 352 i 20 ■ 4 2015 Oil companies own consumption I Gazprom technical needs Gas pipline system (GTS) own consumption i Supplies in eastern Russia i Supplies in the LJGS zone Share in the domestic gas market (2015), % ■ Gazprom (own production) ■ Gazprom (buying from independent gas producers) Gazpromneft Movatek Rcsneft others A significant amount of gas is used for technical purposes Losses are also very large Atriopoly of major gas companies has emerged - Gazprom is the largest, and controls the pipeline system, but it is no longer a monopoly Exports to FSÖ countries Riave collapsed 90.0 2010 2011 2012 2013 2014 2015 2016E ■ Ukraine »Belarus ■ Other FSU Ukraine has managed to reduce Russian imports to zero in 2016 Russia has lost one of its largest export markets, and is now exposed because it still transits gas to Europe through Ukraine The Soviet energy system is gradually unwinding, but the transition process has been long and painful Russia's western gas pipeline network Shtokman Russia OtherCIS Baltic States Europe Yamal (Bovanenkovo, Kharasavey and other) Nakhodkinskoe ©East European GasAnalysis, 2014 18 Gas demand is declining in Europe and girowth has slowed in Asia Bern 600 500 400 300 200 100 European gas demand in decline Asian LNG Demand 12 Month Rolling Average 400 ■ Germany ■ United Kingdom o Italy Turkoy Netherlands ■ Franco ■ Spain (Others ■ Total Jan-09 Jan-10 China Jan-11 ■India Jan-12 ■Japan Jan-13 Jan-14 Jan-15 Jan-16 ■South Korea ■Taiwan Growth of renewables and cheap coal have undermined demand in Europe, combined with the economic downturn Slowing economic growth in Asia, especially in China, has tempered demand growth Gas is the cleanest fossil fuel, but the economics of coal are currently winning 19 Focus on European market will remain Gazprom strategy for many years Gazprom sales to Europe Gazprom market share in Europe 195 175 155 135 115 95 75 lllllllll 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ■ Gazprom LTCs to Europe ■ 35% 30% 25% 20% 15% 10% 5% 0% 2010 2011 ^■Russia I 2012 2013 I Europe Demand « 2014 2015 •Russia share Gazprom deliveries to Europe have surged in 2016, to reach 179bcm, a post-Soviet record Much of this growth was driven by cold weather and by a lack of alternative supply to Europe Not surprising that Gazprom is focused on maintaining European market share at 30%+; it remains key revenue generator Uncertainty over political dimension is main doubt Gazprom's floncj term take or pay contracts wftfr European customers to 20)30 Source: ERI RAS in Henderson and Pirani (OIES2014) 50 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 Even at 70% ToP, Gazprom's average annual sales exceed 100 Bcm/year until the mid-2020s Russian-European Relations in 2016/17 Crisis in Russian relations with Europe Sanctions and counter-sanctions resemble a trade war' Very difficult to conduct "normal commercial" gas relations in this environment or even to arrange meetings to discuss: DG COMP inquiry, OPAL, South Stream, general regulatory issues Hard to see relations "getting back to normal" even if Ukraine political situation settles down Winter Deals have been put together to avoid a gas crisis in Ukraine and Europe, but these are by their very nature ad hoc and short term Russia unclear as to whether it wishes to continue using Ukraine transport system to transit gas to Europe DG COMP Proceedings Against Gazprom: the April 2015 Statement of Objections DG COMP's press release covered 3 issues: • Hindering cross border sales (territorial restrictions): Poland, Czech Republic, Slovakia, Bulgaria, Hungary, Latvia, Estonia, Lithuania - destination clauses found in some contracts (and removed) • Alleged unfair pricing policy: "the specific price formulae ..have contributed to the unfairness of Gazprom's prices [and] seem to have largely favoured Gazprom over its customers" - relevant countries: Bulgaria, Estonia, Latvia, Lithuania and Poland • Concerns on transport infrastructure: Bulgaria/South Stream (not going ahead); Poland/Yamal Settlement now reached with Commission, but some member states and Ukraine continue to object 23 The 3rd Package and the GTM: the biggest impact is potentially on Gazprom Number of Volumes, borders crossed to bcm/y reach a delivery point Gazprom's huge volumes need to cross multiple borders/jurisdictions before they reach delivery points - not comparable to any other supplier! The Nord Stream Pipelines St. Petersburg Gazprom cannot use more than 50% of OPAL (but it is assumed that the EC would lift the restrictions in the event of transit crisis) Black Sea Pipelines - 1, 2 or none? South Stream to Bulgaria undermined by EU regulations and cancelled in December 2014 Turkish Stream proposed as a replacement - up to 4 strings providing gas to Turkey and southern Europe Turkey-Russia relations collapsed, leading to postponement, although rapprochement may be on the cards Key question is how will any new pipe interact with European market and EU politics Gazprom export strategy to Europe based on growing import requirement GAZPR0M:S SHARE IN THE EUROPEAN GAS MARKET Forecast — gas production vs. consumption in Europe ■ PJSC Gazprom ■ Other sources of gas Source: Gazprom Investor Day, 2015 Source: Gazprom Investor Day, 2016 • Gazprom believes, not surprisingly, that its place in the European gas market is relatively secure - European import set to rise - Indigenous production in long-term decline - Alternative sources of competitive gas are not abundant • Target is to at least maintain market share, which implies some small growth in volumes • What will be the reaction to increased availability of LNG in short-to-medium term? Gazprom's western production focussed on Yamal, but delays are driven by market forces • Gazprom has seen its production profile shift away from its core West Siberian mega-fields • Gazprom committed to development of Yamal peninsula in 2005/06, just before the economic crisis and impact of shale gas • It is now stuck with this strategy, and is having to rein in production plans due to lack of demand • However, Yamal is a long-term, low-cost resource 28 Gazprom has started Bovanenkovo, Rosneft and Novatek have extremely ambitious plans on gas production expansion, while obligatory utilization of the associated petroleum gas stimulates growth of VIOCs gas output Company Production in 2015, bcm Unutilized potential and capacities additions under development by 2020, bcm Gazprom 406 -155 Novatek 52 -48 Rosneft 42 -48 VIOCs (APG) 46 -15 TOTAL 635,5 266 Meanwhile growth in LNG supply7 is about to explode 500 100 50 ■ USA - Corpus Christi T1& 2 USA - Cameron LNG ■ USA - Dominion Cove Point ■ USA - Freeport USA-Sabine Pass T1-T5 ■ Russia-Yamal 1 ■ Australia-CSG Curtis (Shell/Petrochina) Australia - Prelude ■ Australia-lcthys Australia-Gorgon T2 ■ Australia-Wheatstone ■ Australia-Gorgon Tl ■ Australia-Asia Pacific LNG (CP) Malaysi a-Sarawak ■ Australia-Gladstone Santos Australia-Queensland Curtis ■ Papua New Guinea-Hides Existing 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 30 Competitive pressure on Russian) gps Asian gas prices versus US LNG at SRMC and LRMC Gas price versus coal in Europe 25.00 20.00 -Q 15.00 Z3 10.00 t 5.00 0.00 UITTT1 *•____ Jan MarMay Jul Sep Nov Jan MarMay Jul Sep Nov Jan MarMay Jul Sep Nov 14 14 14 14 14 14 15 15 15 15 15 15 16 16 16 16 16 16 Asia Spot > US LNG to Asia (Full Cost) Asia Contract • US LNG to Asia (Cash Cost) Coal Price Price 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 Coal Price (US$/tonne) ■ Equiv Gas Price Current Carbon Equiv Gas Price (Euro 20 Carbon) • Equiv Gas Price (Euro 40 Carbon) Key decisions to be made about the competitive position of Russian gas Resource base not a issue; key question remains commercial How will Gazprom (and other Russian exporters) compete with LNG? How will Russian gas compete with alternative fuels? Can Russian gas find a significant role in the Asian gas market? Will Gazprom be the only exporter of Russian gas via pipeline for much longer? Gazprom Unas adjusted its pricing strategy Russian gas price in Europe vs Spot Price 12.00 2.00 0.00 , Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan Mar May Jul Sep Nov Jan 14 14 14 14 14 14 15 15 15 15 15 15 16 16 16 16 16 16 17 Europe Spot Russia to Germany Gazprom has demonstrated that it is prepared to shift towards market prices Price formation in long-term contracts may still be nominally linked to oil prices, but reality shows that actual prices are close to spot levels Renegotiation of contracts has introduced discounts, rebates and spot-linked pricing, and Gazprom is increasingly trading on European hubs Oil-linked price look set to remain competitive in 2017 despite recovery in oil price, although if LNG wave eventually arrives then a reaction may be required Russian gas can be very competitive wftfr OS LING in Europe Russian pipeline gas versus US LNG at SRMC ty ty ty t,v x$ x$ j$ Jr & J* J? J* J* J* J* v# ^ ^ ^ > .0> .0> .->> .0> ./!> .C-O _vV ^ ^ & & & .c? s-P j& .ci5 .£? •-?> ^ ^ f. & c$ S' c ift tfr ift i& i& i& & iA i& A & & A Comparable gas prices in Shanghai (2016) 12.00 10.00 3 8.00 E £ 6.00 ^ 4.00 2.00 0.00 if It ^ J* Altar pipeline presents a negotiating) cha!flengeT but How upstream cost is am advantage Altai can link West Siberian gas to China, providing a potential for arbitrage with Altai pipeline route from West Siberia exports to Europe China has stated a clear preference for Power of Siberia, and negotiations on a western route have stalled Upstream cost would be very low, which could make gas competitive with China's alternatives in the mid to long-term However, transport distance in China is a major issue, and low current gas prices are making negotiations very difficult Option of third pipeline route could make sense if Sakhalin gas resources confirmed The possibility of a third pipeline route to China was raised during a Putin visit to Beijing in Sept 2015 Appeared to be a desperate attempt to sign an MoLI in absence of Altai agreement However, it could make sense as SKV pipeline already in place • Extra compression would be needed to expand capacity from 6bcm to 30bcm Exxon and Rosneft had a pipeline export plan in 2006 SKV could be an export route for Sakhalin 1 gas or surplus output from Sakhalin 3 licence S-K-Vpipeline route offers 3rd export alternative RUSSIA SF.A Ol OKHOTSK YJZHNO-SAKHALINSK OttMROUSK JAPAN / O VLADIVOSTOK M- $EA OF JAPAN NORTH KOREA Gazprom's Goal of a Balanced Export Portfolio E U _Q 250 200 150 100 50 0

Tz L $20 billion of financing secured in 2016 from a portfolio of Chinese and Russian banks, plus support from Russian government 44 Rosneft Bias challenged Gazprom with a broad-based gas strategy •Rosneft Gas DeBvery yjyN Shelf Exploration /Tn E&A and Gas Production Regions and Appraisal Works hJ/ Assets ^jg. Gas Proceslng Plants LNG Production and Gas Treatment Units ^Q) Project Following the acquisitions of TNK-BP, Itera and Sibneftegas Rosneft has a broad portfolio of gas assets in Russia Total reserves are now approaching 7 Tern, with West Siberia and Eastern Russia accounting for the majority Rosneft has challenged Gazprom in the western domestic market and also in the area of eastern gas exports Rosneft gas output growing to corn refitments contractual Rosneft is under pressure to increase output in order to meet its contractual obligations In H1 2016 it claimed to have achieved this, and even to have sold some gas on the St Petersburg Exchange Development of the Rospan fields is underway, but will need to accelerate if Rosneft is to meet its output target of 10Obcm for a full year The Kharampur gas field will also need to be prioritised is Rosneft is to avoid a supply crunch LNG plans appear to have gone backwards, with Sakhalin gas now more likely to be sold to Gazprom or via pipe to China Gas production ban 31.09 33.23 42% of the total growth is ensured by Rospan H1 2015 Other Yugansh Rospan Samoflor ■ Pumefiegas ■ Vankor Gas sales in Russia H1 2016 ■ Sibneftegas H1 2D15 H1 2016 104 29 32 3.25 3.09 r Sales volunws. bcm Revenues, Average price, RUB bin tri.RUBrDDO cubic meters Rosneft: aggressive output targets backed! up by contracts Rosneft gas production targets Split of contracts signed with industrial customers 120 n 2013 2016 2018 2020 Rosneft aims to produce 100bcm by 2020 It believes that it can have a domestic market share of 19-22% by that date A number of long-term contracts have already been signed to back up this claim, especially with power generators Questions over whether Rosneft has sufficient gas to meet demand, and also over prioritisation of export plans Conclusions on Independent Gas Supply Potential Independent Gas Production in Russia 400 ■ 2012 2015 2020 2025 ■ Novatek ■ Rosneft HUNK-BP ■ LUKOIL ■ Surgut ■Gazprom Neft ■ Other Oil Cos ■ Other 3rd Parties ■ IOC Equity Independents could theoretically produce over 300bcma by 2020 Their gas is generally lower cost than Gazprom's new developments in Yamal, giving a domestic competitive advantage Independents likely to have as much as 60% of domestic market by 2020 Limited exports of LNG can provide a first entry into global markets which could expand further if political support is maintained Russia's LUG Projects - Slow-burnrrrg progress Eight major LNG projects have been proposed in Russia, with a total potential capacity of over 10Omtpa However, only one is producing (Sakhalin 2) while one is under construction (Yamal LNG) Russia now has the opportunity to exploit the hiatus in global LNG projects to develop new production for the early to mid-2020s, when the market is likely to re-balance Small-scale projects as well as global scale developments can provide increased flexibility Russian LNG - How much growth is possible? Existing, planned and possible Russian LNG projects 140 120 100 rc 80 Q. 2015 I Sakhalin 2 I Baltic LNG Arctic LNG 2020 2025 2030 2035 ■ YamalLNG ■ Sakhalin 2 Expansion ■ Yamal LNG Expansion Far East LNG ■ Pechora LNG Vladivostok LNG Significant plans have been discussed, and it is interesting that the possibility of large brownfield expansion is on the agenda Sakhalin 2 Train 3 has always made economic sense - it is arguably the most commercial new development prospect in the LNG world Expansion of Yamal LNG could build on existing expertise to keep costs down, if adequate gas supply is available Greenfield projects could be challenging unless costs are kept low Russian LIMG irr a Global Context Estimated growth in global LNG supply 2016 2020 2025E ^MAsia ^HMEast Africa ^HLatAm N.America Russia Russia % Russia currently accounts for around 3% of global LNG capacity Gazprom has historically targeted a 14% market share of global LNG market by 2030 Potential for Russia as a whole to reach a share of over 10% by 2025, although Gazprom may not be the leader by then Longer term future will depend on competition with other forms of fuel in the global energy economy Russian LNG looks very competitive from Yamal and Sakhalin Comparative cost of LNG delivered to Asia 12.0 IL 1 in ■■ 1 Sakhalin Yamal Qatar Australia US Gulf East Canada LNG ■ LRMC ■ SRMC Africa In the short term (to the early 2020s) the key will be the ability to compete in a potentially oversupplied market Costs are sunk for Sakhalin-2 and (almost) for Yamal LNG, and so they can compete down to short-run marginal cost Qatar and Australia look very competitive on this basis, while US LNG competitiveness will largely depend on the level of Henry Hub gas price FID for expensive new projects seems unlikely in the short-term unless lOCs are prepared to take a significant future price risk However, a number of Gazprom projects have delayed a p a n Gazprom attempted to replicate Rosneft's ESPO strategy with Vladivostok LNG However, liquefaction at Vladivostok was always a high cost alternative and has now been postponed Even the expansion of the existing plant at Sakhalin 2 has been pushed back Gazprom has also postponed Baltic LNG in the West, bringing its entire LNG strategy into question Yamall LNG will be the first (only?) new project, with gas going west as well as east Yamal LNG production forecast ■ l l l l___ 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 ■Train 1 ■ Train 2 ■ Train 3 • The Yamal LNG project is estimated ultimately to produce 16.5mmtpa with first gas coming in 2017/18 - construction is well underway • The introduction of CNPC as a 20% partner and LNG purchaser is a significant advance for the project and could be crucial for financing • Technical complexity and the harsh environment could cause some delay, financing of total $27 billion budget remains biggest problem • Gas will be transported west for up to 7 months of the year, creating the potential for competition with Gazprom in Europe Yamal LNG project to access eastern and western markets Year-round to Europe -► Us LNG part of a logical progression in the Russian gas sector? Gazprom dominant, 3rd party gas is all associated from oil cos. Emergence of ITERA as useful 3rd party Novatek "co-operates" with Gazprom to free up gas for export the most jw project ignificant t support Gazprom seeks higher prices to justify Yamal development Higher domestic gas price allows Independents to compete r Novatek and Rosneft win many new contracts with domestic customers r Domestic market saturated - look for new export sales 1 LNG exports liberalised for specific projects - but sales with government oversight State company needs to control exports - but need it be Gazprom? Gazprom remains a favoured state entity, but global market conditions may force radical change involving gradual introduction of new players Conclusions The Russian gas sector is undergoing significant change, and is having to respond to domestic and international pressure In the FSU, political reasons have caused a decline in exports In Europe, political and commercial reasons have put Gazprom under greater pressure, although it has responded Gazprom's overall role in Russia is declining, but it remains the main exporter by pipeline Novatek and Rosneft are increasing their share of the domestic market, and are also challenging Gazprom in the LNG market It may be the case that Gazprom's dominant position as gas exporter to Asia and Europe could also be challenged Russian gas is competitive in both markets, but the Russian government needs to decide if it needs to diversify its exporting options Russian gas will remain a vital part of the global gas system, if it is marketed in a commercial rather than a political fashion Contact Details iames.henderson(Soxfordenerqv.orq +44 (0)1865 311377 +44 (0)7764 951084