Russian gas export policy: reacting to the EU policy

BRUSSELSOctober 10, 2012

Russian gas production restored to pre-crises levelwith growing input of independents

The share of non-Gazprom producers in gas output

Sources: Rosstat, MED

Russian gas production

bcm %

2

Russian production will increase,but this is going to be more expensive gas

Cost of gas supplyto central Russia in 2020

$/mcm

Production volumes, bcm3

Long-term Russian gas production forecast

0

100

200

300

400

500

600

700

800

900

1000

2005 2010 2015 2020 2025 2030 2035

Far Eastern F.D.

Siberian F.D.

Northwestern F.D.,

inc. Shtokman

Volga F.D.

Southern F.D., inc.

Caspian offshore

Urals F.D.

Main directions of the European gas market transformation do not favor Russian export

4

• Unbundling• Gas Target Model

requires all gas to be supplied at the virtual hubs

• Spot volumes are increasing very fast(30-40% p.a.)

• Majority of the European stakeholders support transition to the spot pricing

• Lower than contracted volumes

• Recovers very slowly• In the power sector gas is

strongly competing with coal

• Growing supplies of LNG

• Diversification of pipeline supply sources

Supply Demand

RegulationPricing

4

European gas demand is stagnatingduring the last decade

Source: Gas Medium-Term Market Report 2012. IEA. 5

High price of gas doesn`t support gas use in power sector

6Source: Bloomberg.

Third Energy Package creates high risks for Russia

Region CompanyGazprom`s

share

Bulgaria Topenergy 100%

Southern

Europe

South Stream Hungary

Zrt50%

Poland EuRoPol Gaz. 48%

Lithuania Lietuvos Dujos 37,06%

Lithuania STELLA VITAE 30%

Latvia Latvijas Gaze 34%

» Third party access:

� Potential limitation of the pipeline owner`s gas transmission volumes

� Contract mismatch

» Unbundling:

� Ownership unbundling

� Independent System Operator

� Independent Transmission Operator

� The necessity for the certification of operating companies with foreign participation creates additional barriers for Gazprom`s business in each member-state and makes it more dependent on current political relationship with the national governments

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Gas Target Model demands all gas to be soldat virtual hubs – what will happen with the LTCs?

Источник: 17th Madrid Forum

Currently Gas Target Model

Country A

Country B

Country C

8

Hub A

Hub B

Hub C

Physical and traded spot volumes in Europeare increasing very fast

Source: IEA, Medium Term Oil and Gas Markets 2011.

9

bcm

Strong pressure to reviewRussian export contracts

10

Company and CountryContracted Volumes

(bcm)Contract Status

Italy

Edison 2,0The Parties agreed on a discount (70 $/mcm acc. to Morgan Stanley). Total compensation of €200 mln. for FY2011.

Eni 3,0 15% spot pricing

ERG N/A 15% spot pricingSinergieItaliane N/A 15% spot pricing in 2009. Price discount (lower P0) in 2012.

Germany

E.ON 20,0 15% spot pricing. Lawsuit in arbitration.

RWE 8,0 Lawsuit in arbitration.

Verbundnetz Gas 6,4 Discount negotiated

BASF N/A In negotiations with Gazprom

Wingas Price discount (lower P0) in 2012Baltics

Estonia 0,4 15% discount granted

Latvia 0,7 15% discount grantedLithuania 2,7 Demands a 15% discount

Others

PGNiG(Poland) 9,0 Demands a 10% discount, lawsuit filed to Stockholm arbitration Court

Botas(Turkey) 6,06,5% discount granted in 2009. 10% discount granted in 2011. Turkey declined to extend the expiring contract.

GDF Suez (France) 8,0 15% spot pricing in 2009, price discount (lower P0) in 2012

Econgas (Austria) 5,6 15% spot pricing in 2009. In 2012 price discount (lower P0)

SPP (Slovakia) N/A Price discount (lower P0) in 2012

Sources: MorganStanley. press

Global LNG supply: next wave starting 2015

11Source: Enerdata.

Market niche in Europe: strong competition in the future

12Source: WEO2011, IEA; Cedigaz; SKOLKOVO Business school Energy Centre.

Arguments for protecting oil indexation vs. gas indexation

� Strong pressure from the customer side

� 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 dictating prices at the spot market by changing its supply volumes

� Disappearing gas glut on the European gas market in the medium term – gap between oil-indexed and spot prices will narrow

� Arbitration lasts for several years

� Gazprom will face price reopening and contract expiration only after 2015

� With high oil prices even lower sales volumes are providing high revenue

� New projects need high prices

� Oil indexation is needed for the project financing

Oil indexation Gas indexation

13

There are strong commercial reasons for Gazprom to protect the oil indexation at least during the next 3 years

Gazprom’s strategic choice

Alexander Medvedev,

Gazprom Export

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.

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«»

Do you have plan B? What if…

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» Economic recovery will be faster than expected?

» Energy efficiency targets are not achieved?

» Indigenous production will decline faster than expected (like in the UK)?

» Offshore wind and nuclear plans will fail?

» Under-investment in gas production during the crisis increases?

» There will be rapid demand growth in Asia and Europe will not be able to propose prices competitive with the Asian market in order to attract LNG volumes?

» Domestic demand will be expanding even faster in MENA?

» CCS is not commercial by 2020?

» Alternatives (Southern Corridor, LNG including US, domestic shale gas) will not come in time and at lower price than Russian imports?

There are potentially numerous gas supply sources to Europe, but by the end of the day only few of them will work. Russian long-term contracts are insurance in case “if something goes wrong” – it will be called upon after some other options have not materialized. It`s better to have your options open, just in case…

?

«

President of the Russian Federation

Vladimir Putin

We should do everything to avoid difficulties with the EU, and we will …Russia will at the same time look for the other sales opportunities on the other markets. Asia is waiting for Russia »

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By 2020 there is no market niche in China,by 2030 the niche might reach 66 bcm

bcmChinese gas balance

Source: Cedigaz, SKOLKOVO Energy Centre

26 66

0

50

100

150

200

250

300

350

400

450

500

2010 2015 2020 2025 2030

Uncontracted market niche

Central Asia

Other LNG supplies

Australia

Qatar

Indigenous production

Chinese demand

By 2020 market niche in OECD Asia might reach 50 bcm, by 2030 - 116 bcm

18

Japan and South Korea gas balance

Source: Cedigaz, SKOLKOVO Energy Centre

34 50

79

116

0

20

40

60

80

100

120

140

160

180

200

2010 2015 2020 2025 2030

Uncontracted market niche

Others

USA and Canada

Russia

Qatar

Other Middle East

Papua New Guenia

Malasia

Indoneisa

Brunei

Australia

Indigenous production

OECD Asia demand

bcm

Domestic demand recovered after the crises and is projected to increase considerably

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353 354366 368

385394 400 406

422

458

396

458

496

200

250

300

350

400

450

500

550

Russian domestic gas consumption

Sources: Rosstat, MED

Long-term forecast of the Russian domestic gas demand

New deal: growing prices, Tariffs and taxes

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Russian domestic gas prices

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300

350

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05

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Gas prices (Moscow) Netback ($60 Brent)

Netback ($90 Brent) Netback ($120 Brent)

$/mcm

MET on gas for Gazprom and for independents

Conclusions: transition to the new strategy

» European policy and market situation create no incentives to invest in additional gas supplies to Europe

» There are strong commercial reasons for Gazprom to protect the oil indexation at least during the next 3 years

» Asian and domestic markets are becoming more attractive than European market with weak demand and stronger competition

» Russia will have to market more expensive gas from the new projects, revenue maximization seems to be more attractive

» Domestic production and supplies are increasingly dependent on independents

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Contacts

100 Novaya ul., Skolkovo village

Odintsovsky District, Moscow Region, Russia

phone: +7 495 580 30 03

fax: +7 495 994 46 68

web: http://energy.skolkovo.ru/

e-mail: Tatiana_Mitrova@skolkovo.ru

12.10.2012