7m THE OXFORD INSTITUTE FOR ENERGY STUDIES a fieeoGNiiED in«pt»ttni ttmm or mi jmvEftsirv of oifofie Russia Gas Sector James Henderson NOVEMBER 2018 Russia is the world's second largest holder 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 -° 400.0 300.0 200.0 100.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 '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 the 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 Hie largest exporter 250.0 200.0 1 - 150.C 100.C 50.0 n n m(203 ■ ■ u _Q III 1 1 1 1 1 1 1 ■ U.U / * / / / ✓ / ■ Pipeline ■ 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 not nearly as important as oil Comparative contributions of oil and gas taxes to federal budget 50.0 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 Gas contributed 6% of budget revenues in 2017 compared to 40% from oil Russia has a strategic geographical advantage Existing Pipeline Planned Pipeline Existing LNG LNG under construction Possible LNG 1^ Core Supply Capacity Gazprom - 550-600bcm Independents - 200bcm Domestic Demand - 450bcm Gazprom - 260bcm Independents - 190bcm CIS I Gazprom - 40bcm | \ East Siberia Capacity Gazprom - 60bcm Independents - 30bcm? Sakhalin Capacity Gazprom - 15-22bcm Independents - 15bcm? Central Asia Imports - 25bcm Chinese Demand Gazprom - 0-100bcm? Independents - 0-??? 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, both via pipeline and LNG The Russian Gas Matrix SUPPLY SOURCES: 2002 2008 2012 2013 2014 2015 2016 2017 Gazprom production 522 550 488 487 444 419 420 470 Non-Gazprom production 73 114 169 181 196 216 220 221 Central Asian imports 34 61 31 33 29 26 23 25 TOTAL r 629 r 725 r 688 r 701 r 669 661 663 r 716 MARKETS: Russian gas demand (UGSS) 361 413 424 421 425 411 424 430 Consumed in Transport system 51 49 41 41 33 32 32 38 Exports to CIS countries 89 89 63 57 42 38 32 33 Exports to Non-CIS (physical Russian gas) 129 159 139 163 152 163 179 197 LNG Exports to Asia 0 0 14 14 14 15 16 16 Change in Storage -1 15 7 6 3 2 -21 2 TOTAL 629 725 688 701 669 661 663 716 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 reserves 17% Gazprom's share in Russian gas reserves 72% rTJH Independent kXLfll^U producers 72 %x^T^X 23 % / \ Vndismbuted / \ subsoil reserves T v_y* « Gazprom's A+B+C^ reserves amountto36.1 5 trill m\fgas 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 gas reserves 20000 18000 — 16000 — 14000 — 12000 — u 10000 _Q 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 has been in decline throughout the post-Soviet era Gazprom production profile 400 350 300 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 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 Finally recovered in 2017, thanks to rebound in European demand Imports from Central Asia are also down sharply 70 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 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 changing Russian domestic gas market Gazprom's market share has fallen Gazprom's market share down to 50% in 2016/17 450 ■ 400 ■ 350 300 - a— >— *— u 250 ■ 200 ■ 150 ■ 100 50 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ■ Total Demand ■ Gazprom Sales • Rising prices and economic stagnation have dampened demand in the domestic market, although 2016-17 showed a slight recovery • 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 ■ Total Demand ■ Transport Own Use ■ Gazprom Group Prod'n ■ 3rd Party Prod'n Russian gas market breakdown Russian gas consumption 2013-2015, bcm 500 400 300 200 DO 460 454 441 27 41 31 30 32 33 Oil companies awn consumption I Gazprom technical reeds Gas pipline system (GTS) own consumption i Supplies in eastern Russia i Supplies in the UGS zone Share in the domestic gas market (2015), % ■ Gazprom (own production) ■ Gazprom (buying from independent gas producers) Gazpromneft Novatek Rosneft ethers 20 "3 20 ■ 4 2015 A significant amount of gas is used for technical purposes Losses are also very large A triopoly of major gas companies has emerged - Gazprom is the largest, and controls the pipeline system, but it is no longer a monopoly The "Independent" Sector has emerged Share of Non-Gazprom Production 2000 2002 2004 2006 2008 2010 2012 2014 2016 Non-Gazprom Gas Production 250 200 E u -Q 150 100 50 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ■ Novatek ■ Rosneft ■ Lukoil ■ 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 Exports to FSU countries have collapsed 11111...... 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 ■ Ukraine ■ Belarus ■ Other FSU Ukraine has managed to reduce Russian imports to zero since 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 120.0 100.0 80.0 I 60.0 n 40.0 20.0 Russia's western gas pipeline network ©East European GasAnalysis, 2014 18 Gas demand is declining in Europe and growth has slowed in Asia European gas demand rebounding from major post 2008 decline Asian gas demand- a varied picture 600 550 500 450 400 350 300 2010 2011 2012 2013 2014 2015 2016 2017 ■Japan » S Korea ■Taiwan -China -India -Indonesia -Malaysia -Thailand -Singapore ■Pakistan -Bangladesh -Vietnam ■Philippines Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-lS Growth of renewables and cheap coal undermined demand in Europe, combined with an economic downturn However, environmental pressure and improving price scenario has helped to boost demand Demand growth in Asia is being driven by air quality issues in China Gas is the cleanest fossil fuel, but the economics of coal are still challenging the environmental case 19 Focus on European market will remain core Gazprom strategy for many years Gazprom sales to Europe Gazprom market share in Europe • Gazprom deliveries to Europe have surged in 2016and 2017, to reach 194bcm, 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 long) term take or pay contracts with European customers to 2030 250 200 150 Bern 2CC 50 Source: ERI RAS in Henderson and Pirani (OIES 2014) 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 I ACQ #REF! Take or Pay 85% Take or Pay 70% Even at 70% ToP, Gazprom's average annual sales exceed 100 Bcm/year until the mid-2020s Gazprom's huge volumes need to cross multiple borders/jurisdictions before they reach delivery points - not comparable to any other supplier! 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 Russian-European Relations in 2016-18 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, Nord Stream 2, general regulatory issues Hard to see relations "getting back to normal" even if Ukraine political situation settles down Russia unclear as to whether it wishes to continue using Ukraine transport system to transit gas to Europe 2019 a critical year as negotiations for a 2020 deal continue • Pressure on because of Ukrainian and EU elections The Nord Stream Pipelines Copenhagen0 oMalm0 $ oKi|lX LubeckQ Rostock Grelfsw GERMANY -9., * — ^ ~ 1 Kaunas w?ld oNiechorze r. . . .. . *. .J Gdansko Kaliningrad i I oSczecin Restrictions on onshore pipeline now removed Gazprom using all available capacity to supply the key market in NW Europe Black Sea Pipelines - 1, 2 or more? 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 have been volatile, but 2 pipelines are now progressing Key question is how will any new pipe interact with European market and EU politics oh Russian export pipeline capacity is almost full, ^rc Ukraine provides flexibility_ Russian gas exports to Europe by major route Capacity utilisation of major gas export routes 20.00 18.00 16.00 14.00 12.00 I 10.00 8.00 6.00 4.00 2.00 0.00 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17May 17 Jul 17 Sep 17 Nov 17 Jan 18 Mar 18May 18 Jul 18 ■ Ukraine ■ Nord Stream I Belarus-Poland c o 140% 120% 100% 80% 60% 40% 20% 0% Jul 16Sep 16Mov 16Jan 17Mar lTvlay lTJul 17Sep 17Nov 17Jan 18Mar la/lay 18Jul 18 ^—Ukraine Utilisation NS Utilisation Bel-Pol Utilisation • Nord Stream 1 and Yamal Europe pipelines are almost full, especially during winter demand peaks • Jump in Nord Stream utilization after OPAL ruling in September 2017 • Capacity utilization for Nord Stream and Yamal over 100% since October 2017 (NS maintenance in July 2018) • Ukraine provides increasing amounts of flexibility during cold weather • Utilisation reached 77% in November 2017 and March 2018, and 83% in July 2018 during NS maintenance • Monthly flows have varied between 6.4bcm and 8.8bcm in the past 12 months NATURAL GAS PROGRAMME w 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 29 Russia's potential supply by 2020 - Gazprom has an 80bcm surplus fbK available in the short-term and others have growth plans Russia historic and potential gas production 900.0 2008 2010 2012 2014 2016 2017 2020 Gazprom HNovatek ■ Rosneft ■Lukoil ■ Other ROCs ■ PSAs ■ Other Growth potential at Sakhalin Novatek targeting 10Obcm by 2020 Rosneft targeting 10Obcm by 2020 and has fields available Gazprom can get back to 550bcm (+80bcm) at very low cost NATURAL GAS PROGRAMME Meanwhile growth in LNG supply is about to explode 500 150 100 50 I USA - Corpus Christi T1& 2 I USA - Cameron LNG I USA - Dominion Cove Point I USA - Freeport USA-Sabine Pass T1-T5 I Russia-Yamal 1 I Australia-CSG Curtis (Shell/Petrochina) Australia - Prelude I Australia-lcthys Australia-Gorgon T2 I Australia-Wheatstone I Australia-Gorgon Tl I Australia-Asia Pacific LNG (CP) Malaysi a-Sarawak I Australia-Gladstone Santos I Australia-Queensland Curtis I Papua New Guinea-Hides Existing 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 31 Gas prices are converging due to global oversupply and increased! LUG trading Global gas prices 20.00 Gazprom has adjusted its pricing strategy Russian gas price in Europe vs Spot Price 14 0 i Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Jul 17 Jan 18 Jul 18 TTF Ave from Russia 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 foe LNG Russian pipeline gas versus US LNG at SRMC «^ <^ A1^ 0^ ^ t?> n^ k.^ -° >fr tCW s'r' t?>" t>" £ ^ # ^ ^ ■ US$/mmbtu K US$/mmbtu competitive with US Europe Full comparison of Russian and US gas to Europe 12 10 X2 -I 6 3 4 Logical price range for Russia III l hi J* ^ ^° ^ *!>' <$~ V ^ ^ /° On a short-run marginal cost basis (SRMC) the key variables are the US$/Rouble exchange rate and the price of Henry Hub gas At current levels Russian gas can compete with, and slightly undercut US LNG in Europe In the longer term, Russia would logically adopt a strategy to keep the European gas price between the short and long-run cost of US LNG - $4-8/mmbtu - Allow some US LNG to enter Europe but prevent new FIDs based on European economics Mew field developments focused in East Russian federation Nizhnevartovsk Tyumen^ O Chelyabinsk i '■•) Omsk O ,' O Qostanay Gas Fields (~\ Gas Producing ~ ... .. Region Gas Pipelines Existing Proposed Oil Pipelines Existing Under Construction tm m a • • LNG Liquefaction Plant Existing fl*™^ Planned /Iww^ Tomsko Novosibirsk O Novokuznetsk Seme Altai Pipeline v \ KRASNOYARSK Qi Q Sobinskoye Yurubcheno ■Tokhomskoye UlaanbaatarO MONGOLIA 0Harbin\0upNakhodka "^Vladivostok fv/jlllAiVWy H I N A ('-'Sea 0 f Shenyang O 7*0 Koi Korea Japan • Gazprom plans to develop the Chayanda and Kovykta fields in East Siberia, with a combined capacity of 50bcma • Both fields are targeting the export market, now via pipeline to China rather than the previous pipe and LNG plan • LNG now focussed on Sakhalin Island, although growth in doubt Gazprom's Goal of a Balanced Export Portfolio 250 E U _Q 200 150 100 50 0 O ^ O & & *fr rfr fft & & ffr ^ o£ # # # # # # # # # # ^ ■ Europe ACQ ■ Power of Siberia ■ Altai SKV Exports 36 Can Gazprom afford all its new pipeline plans? Gazprom has reduced spending on transport... 60.0 2010 2011 2012 2013 2014 2015 2016 ■ Transport ■Gasprod ■ Refining Liquids prod ■ Electricty ■ Distribution ■ Storage ■ Other .. .but needs to increase it at a time of low gas prices 12.00 2015 2016 2017 2018 2019 2020 2021 ■ TurkStream (1st 2 pipes) ■TurkStream (2nd 2 pipes) Power of Siberia ■ Altai *Assumes 90% of capex will be Russian materials and labour and an exchange rate of RR60/$ • Gazprom has been forced to reduce its overall spending due to low gas prices • However, peak capex for its three major new pipelines is likely to be c.$1 Obn p.a. • How will it afford this given the impact of US sanctions? Gazprom capex turns cashflow negative in new price environment Gazprom historic cashflow 2500 700 c .Q CC CC X 11 Q. ni U U T3 c ni U 2000 1500 1000 500 Free cashflow turns negative thanks to pipeline investments $80,000 $60,000 $40,000 I $20,000 s- ZD I Net Cash from Operating Activities I Cash Capex •Free Cashflow $(20,000) $(40,000) $(60,000) OOWO^NOIUJLULULULULIIU rNrNfMrMfNCNjOOOOOOO (N (N N IN rN (N (N Operating cash flow Investing cash flow, net ■ Free cash flow From 2017 transport will again make up a large share as Turk Stream and Power of Siberia are built The impact of rouble devaluation should reduce costs in US$ terms, meaning total capex will average $30-35bn per annum Falling cashflow from lower prices and lower domestic revenues will mean that free cashflow could turn negative $20bn of capex for a second eastern pipeline would clearly worsen the situation 3 Novatek is a local gas company that now has global ambition based on significant growth Novatek has benefitted from a focus on core NPT asset base Production has risen dramatically, mainly through organic growth (but also helped by recent acquisitions) Recent dip about to reverse thanks to development of a major new LNG project (Yamal LNG) Novatek's production continues to grow, but is becoming more liquids and LNG focussed Novatek's gas production to become more export focussed 120.0 100.0 E 80.0 .2 60.0 40.0 20.0 0.0 Export sales Novatek's expanding liquids output Production of liquid hydrocarbons, mmt 2008 2009 2010 2011 2012 2015 2020 2025 I East Tarkosalin ■ Khancheyskoye ■ Yurkharovskoye iTermokarstovoye (51%) ■ South Tambeyskoye (60%) ■ SeverEnergia (59.8%) I North Gas (51%) ■ Gydan Fields ■ Other 2030 4.8 124 11.8 II 2013 2014 2015 2016 2017 ■ Crude oil ■ Gas condensate Novatek's gas output continues to grow rapidly, with a 100bcm target dependent on LNG exports Sales into the domestic market will peak by the end of the decade, with LNG exports becoming a core source of revenue Growing liquids production will also be a vital driver of company profits, especially as Severenergia output rises A key question for Novatek will be whether sanctions continue to undermine its LNG growth plans YamaO LNG came online in 2017 Project for construction of an LNG plant on the Yamal Peninsula: □ 2P PRMS gas reserves of the South-Tombeyskoye onshore conventional field at 31.12.15 - 926 bcm □ Liquefaction capacity - 16.5 mmt of LNG per annum (3 trains) □ FID date - December 2013 □ Capex estimate - USD 27 bin □ First production is scheduled for 2017 Shareholders Project came online on schedule and on budget thanks to Chinese financing and support from French major IOC Arctic LNG-2 appears to be more than a possi Yam si Kenels Autonomous Area YamalLNG Arclic LNG 2 Utrerneye Gas, ban Liquids, mmt PRMS Reserves at 01.11.2017 764 37 Potential PRMS reserves addition by 2030 277 15 Jurassic layers development may increase gas reserves by 40% Concept Advantages Natural gas production at U trenn eye field, bcm U t re nn eye fee der f i e Id for Arctic LN G 2 New concept of LNG trains based on GBS platforms Three LNG trains at 6.1 mtpa each utilizing Llride liquefaction license GBS platforms built at LNG construction center (Murmansk) FEED In progress (expected completion late 2013) Tax concessions approved per RF legislation, the same as for Yamal LNG Optimize and reduce CAPEX per ton of LNG liquefaction Low cost, onshore conventional natural gas Leverage existing infrastructure Minimize environmental impact Gas condensate production at Utrenneye field, mmt LS 2023 2024 2025 202S 2027 202B 2029 2030 2023 2D2J 202i 202* 202J 202B 2023 2030 NATURAL GAS PROGRAMME w 17 Rosneft has challenged Gazprom with a broad-based gas strategy Legend Rosneft Gas Delivery Regions Gas Procestng Plants and Gas Treatment Units Shelf Exploration and Appraisal Works LNG Production Project E&A and Gas Production Assets 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 meet contractual commitments Rosneft is under pressure to increase output in order to meet its contractual obligations In 2017 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 201S 2017 Yuganskneftegaz Rospan I Others I Samotlorneftegaz I Vankorneft Purneftegaz | Sibneftegaz Gas sales in Russia Sales volumes, bcm Revenue, Average sales pice, RUBbn th. RUB/ 1000 m3 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 400 350 ~. 300 E ia. 250 .2 200 ^ ^ ^ ^ ^ J> & # ^ / y s y y y y y y a* 120 100 80 40 20 Outlook for Russian LNG projects :-=Eoss bl€ I I Likely - Onlir e 2015 ■ Sakhalin 2 ■ Arctic LNG-2 Far East LNG 2020 2025 2030 2035 ■ Yamal LNG Baltic LNG * Pechora LNG ■ Sakhalin 2 Expansion Yamal LNG Expansion Vladivostok LNG Recent rise in gas prices supports some Russian LNG projects, but a number remain too expensive to be realistic below $8/mmbtu Expansion of Sakhalin 2 and Novatek's Arctic LNG-2 appear realistic , and Yamal LNG can certainly cover its cash costs Further development of Russia's LNG plans will depend upon cost control and partnership Arctic LNG-2 could be the next project to proceed to FID, although Sakhalin-2 expansion is the most logical next project 49 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 3w project ignificant t support Gazprom seeks higher prices to justify Yamal development Higher domestic gas price allows Independents to compete Novatek and Rosneft win many new contracts with domestic customers 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 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