the political and commercial dynamics of · 2016-03-10 · the political and commercial dynamics of...
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The Political and Commercial Dynamics of
Russia’s Gas Export Strategy
The Political and Commercial Dynamics of
Russia’s Gas Export Strategy
James Henderson
SWEDEN, MARCH 2016
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• 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
• Demand from CIS countries is declining as they look to diversify away
from Russia (especially Ukraine)
• 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;
future growth relies on pipelines to China
The Russian Gas Matrix – Gazprom decline reflects
commercial reality
The Russian Gas Matrix – Gazprom decline reflects
commercial reality SUPPLY SOURCES: 2002 2008 2012 2013 2014
Gazprom production 522 550 488 487 444
Non-Gazprom production 73 114 169 181 196
Central Asian imports 34 61 29 33 26
TOTAL 629 725 686 701 666
MARKETS:
Russian gas demand (UGSS) 412 462 465 461 453
Exports to CIS countries 89 89 63 57 36
Exports to Europe (physical Russian gas) 129 159 139 163 147
LNG Exports to Asia 0 0 14 14 14
Change in Storage -1 15 5 6 17
TOTAL 629 725 686 701 666
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bcm
Gazprom’s production decline reached a post-
Soviet low in 2015
Gazprom’s production decline reached a post-
Soviet low in 2015
Gazprom production peaked at just over 600bcm in 1992, 2015
production fell to 418.5
Russian production fell to 633.5 Bcm; non-Gazprom production
rises to 215 Bcm
Yamal output is increasing to compensate for decline in core fields
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e Gazprom paying the price for investment in
relatively high cost reserves in Yamal region
Gazprom paying the price for investment in
relatively high cost reserves in Yamal region
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, ultimately low-cost resource with
capex now largely sunk 4
Delays in Yamal production
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2012 2013 2014 2015E 2016E 2017E
bcm
Production Capacity Initial Estimate
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e Russia has a gas bubble searching for markets Russia has a gas bubble searching for markets
Russia’s total supply capacity to western markets is c.750-800bcm
Demand for Russian gas currently stands at 670bcm (2014)
Supply capacity is set to rise by 2020 as Gazprom and Independents
develop new fields
Demand in core markets is at risk – Russia needs to protect existing
sales and find new customers rapidly
S-K
-V
5
Core Supply Capacity
Gazprom – 550-600bcm
Independents – 200bcm
East Siberia Capacity
Gazprom – 60bcm
Independents – 30bcm? Sakhalin Capacity
Gazprom – 15-22bcm
Independents – 15bcm?
Europe Demand
Gazprom –
165bcm
CIS
Gazprom – 45bcm
Domestic Demand - 460bcm
Gazprom – 270bcm
Independents – 190bcm
Chinese Demand
Gazprom – 0-100bcm?
Independents – 0-???
Asian Demand
Gazprom – 15-???bcm
Independents – 0-???
Existing Pipeline
Planned Pipeline
Existing LNG
LNG under construction
Possible LNG
Central Asia
Imports – 25bcm
250
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600
650
Production 2008 Production 2014 GZP capacity 2013 GZP capacity 2014
bcm
Gazprom – 100bcm+ of extra capacity
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Total Demand Transport Own Use Gazprom Group Prod'n 3rd Party Prod'n
The changing Russian domestic gas market The changing Russian domestic gas market
Rising prices have incentivised alternative supply in the Russian
gas market
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
Independent production now accounts to more than 30% of the
Russian total, but questions now emerging about ability to supply
customers
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To
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Ind
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Gazp
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Gazprom’s market share down to 55% in 2014 Independents produce more than 30% of Russia’s gas
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
No
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Sh
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of
Ou
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E
US$
/mcm
RU
R/m
cm
RUR/mcm US$/mcm
The Russian domestic gas price
The Russian domestic gas price
Rising trend in regulated price halted mid-2014. June 2015: tariffs
up by 7.5%, transportation tariffs for independents by 2%.
Dollar price has collapsed as a result of devaluation – netback
parity achieved by default
Regulated price continues to be used as a benchmark, although
actual prices are increasingly set around it
October 2015, the antimonopoly service said: expect tariff increase
of less than 5% in 2016, and 35 bcm of gas traded on exchange 7
The Impact of Devaluation
Assumes 5.5% increase in ruble gas price in 2016, and exch rate of RR76=US$1
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2010 2011 2012 2013 2014 2015 2016
US$
/mm
btu
Industrial Price Russia Net Forward to Europe Europe Spot Price
Netback parity has almost been achieved
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e Europe sales rebounded in 2016, but FSU
exports continued to decline
Europe sales rebounded in 2016, but FSU
exports continued to decline
European sales have rebounded in 2015, to reach 158.5bcm
January and February data in 2016 is also up year-on-year
FSU sales fell again as Ukraine continues its strategy of
diversifying away from Russia
Gazprom has stated its intention to maintain at least a 30% market
share in Europe, and has talked of expanding this figure over time
The company continues to be sceptical about the threat from US
LNG, but will clearly face an increasing challenge
8
0.0
50.0
100.0
150.0
200.0
250.0
300.0
2007 2008 2009 2010 2011 2012 2013 2014 2015
bcm
Europe (LTC supply) FSU (sales)
Gazprom sales to Europe and FSU Gazprom market share in Europe
0%
5%
10%
15%
20%
25%
30%
35%
0
100
200
300
400
500
600
700
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991
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921
993
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941
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961
997
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981
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082
009
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102
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E
% R
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imp
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bcm
Europe Demand Russian Imports % Russian imports
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• Stagnant gas demand and continuing rise of renewables in European
power sector – Cheap coal price displacing gas as back fuel for renewables
• Climate change talks and future of carbon pricing
• Global oversupply of LNG and consequent price competition – Imminent start of US LNG exports
• Impact of EU legislation and regulation, including DG COMP investigation
• Hostile attitude towards Russian gas within EU
• Ukraine transit and impact of Russia’s by-pass strategies
• Possibility of increase in oil price
• Changing governance structure of European utility sector
Issues for Russian gas exports to Europe Issues for Russian gas exports to Europe
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e Challenges in the West have prompted a “Pivot to Asia” Challenges in the West have prompted a “Pivot to Asia”
Gazprom and the Kremlin understand that Europe is looking for a
way to reduce its dependence on Russian gas
Politically and commercially Russia can benefit from diversifying
its export markets
The “pivot to Asia” is the obvious choice given China’s increasing
demand and NE Asia’s use of LNG
Pipeline exports to China can offset the worst case scenario in
Europe, and provide a potential bargaining chip
10
The new geography of Gazprom’s export strategy
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bcm
Europe 70% ToP Power of Siberia Altai Far East Pipeline
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e Eastern Gas Programme had multiple objectives Eastern Gas Programme had multiple objectives
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Gas exports to China via two, or perhaps three, pipelines
LNG exports from Sakhalin and Vladivostok
Development of domestic economy to encourage industrial
growth and re-population
Gazprom given the lead role, but now being challenged
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Price at entry
to China
Transport
to
Shanghai
Price in
Shanghai at
City Gate
Transport
back to
Xinjiang
Net back
price at Altai
pipeline
entry point
US$/mmbtu US$/mmbtu US$/mmbtu US$/mmbtu US$/mmbtu
Turkmen price in West China 4.00 4.48 8.49 4.48 4.00
Russia East Siberia Gas 4.13 2.50 6.63 4.48 2.15
Asia Spot LNG (Jan 2016) 6.45 0.00 6.45 4.48 1.97
Average LNG imports (Dec 2015) 7.64 0.00 7.64 4.48 3.16
Qatar LNG (Dec 2015) 8.83 0.00 8.83 4.48 4.35
US LNG (HH $2/mmbtu) 9.30 0.00 9.30 4.48 4.82
Myanmar imports 4.68 1.85 6.53 4.48 2.04
Benchmark Import Price 3.21
China domestic price (Shanghai) (Nov 2015) 10.72 0.00 10.72 4.48 6.24
Average Overall Benchmark Price 3.59
• Low gas prices are raising questions about economics of exports
• Uncertainty about future of Chinese gas demand also undermining Russian
export plans
• Chinese politics also not helping deals to be concluded, especially impact
of anti-corruption drive
• Questions must surely be asked about viability and timing of Power of
Siberia pipeline
• Altai will struggle to compete at current prices, especially as it presumably
needs to offer a price lower than Power of Siberia
Competitive position of Russian pipeline gas to China Competitive position of Russian pipeline gas to China Economics of Russian pipelines look challenging
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e Russia’s LNG prospects undermined by economic
reality
Russia’s LNG prospects undermined by economic
reality
Breakeven prices for Russian LNG projects suggest they are all
too expensive at current gas price
Assuming a rebound in the oil price before 2020, Yamal LNG can
cover its cash costs and Sakhalin 2 will continue to produce
Expansion of Russia’s LNG plans will depend upon cost control
and partnership
Sakhalin 2 expansion and Baltic LNG the most likely to progress,
but not before 2021 at the earliest
Breakeven economics of Russian LNG
projects compared to gas prices
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0
10
20
30
40
50
60
70
80
90
2015 2020 2025 2030
mtp
a
Sakhalin 2 Yamal LNG Baltic LNG
Sakhalin 2 Expansion Vladivostok LNG Far East LNG
Arctic LNG Pechora LNG Shtokman
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
US$
/mm
btu
US LNG SRMC
Asia price
Europe price
Outlook for Russian LNG projects
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• Energy strategy to 2035 sees rapid growth in hydrocarbon exports to Asia
• Power of Siberia pipeline appears to be firm – construction has started on
both sides of border – Flexibility remains in 2019-2021 start date
– Potential for renegotiation remains
• Russia would prefer Altai pipeline, but discussions appear to have stalled
given Chinese uncertainties
• LNG plans are going backwards – Vladivostok LNG postponed indefinitely,
no Sakhalin 2 expansion before 2021, Far East LNG no longer a priority
• A level of desperation appears to have emerged on the Russian side, with
the proposal of a third pipeline from the Far East a clear example
• Realistically only one Russian pipeline is needed before 2025 unless
Chinese gas demand growth accelerates rapidly
Current status of Russia’s Asian plans Current status of Russia’s Asian plans
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• Russia has adopted a rather opportunistic export pipeline strategy over
the past 12-18 months
• South Stream (63bcm) cancelled– Turkish Stream (63bcm) announced –
Nord Stream expansion (55bcm) as alternative – Turkish Stream (1 line,
15bcm) the current plan – Greek pipeline under discussion – potential
Tesla and Eastring connections to Europe
• Position on Ukraine transit has also changed – now looking to negotiate
for access post 2019, as by-pass strategy will not be available by then
Confused evolution of Gazprom’s export strategy to
Europe exemplified by pipeline uncertainty
Confused evolution of Gazprom’s export strategy to
Europe exemplified by pipeline uncertainty South Stream and Turkish Stream Nord Stream, Lines 1-4
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0
2
4
6
8
10
12
US$
/mm
btu
Gas cost Liquefaction Transport Regasification Price Estimate
• US LNG can offer a proxy for the likely increase in availability of LNG to
Europe over the next five years
• Gazprom has stated that it will be prepared to compete with this new source
of supply, perhaps for political as well as commercial reasons
• A key issue for Gazprom (and any other major suppliers) is how to
disincentivise new projects
• Gazprom has rejected the idea of a price war, but has said that it will
compete for market share, and will match US LNG on cost
Uncertainty exacerbated by imminent challenge
from LNG in Europe
Uncertainty exacerbated by imminent challenge
from LNG in Europe
LRMC
SRMC
The potential impact of US LNG in Europe
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30 35 40 45 50 55 60 65 70 75 80 85 90 95 100
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
Coal Price (US$/tonne)
Ga
s P
rice
(U
S$/m
mb
tu
Equiv Gas Price Current Carbon Equiv Gas Price (Euro 20 Carbon)
Equiv Gas Price (Euro 40 Carbon)
• Currently low oil prices are making Gazprom’s gas more competitive (average
import price in December 2015 was $5.73/mmbtu)
• However, this is not low enough to compete with coal in Europe or with US
LNG at SRMC
• In addition, renewables costs are also coming down fast
• Gazprom can be competitive on cost of supply with all these sources of
energy, but will it choose to do so (especially if oil prices rebound)
• Preference would clearly be NO, but necessity may lead to change in strategy
Gazprom could be motivated to start a price war? Gazprom could be motivated to start a price war?
Cost of Russian gas supply versus competition Gas must be priced at $3-4/mmbtu to
compete with coal in Europe
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US$
/mm
btu
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Gazprom can benefit from a Saudi-style price war Gazprom can benefit from a Saudi-style price war
0
2
4
6
8
10
12
Russian gasexportprice at$100+
US LNG(SRMC)
Russian gasexport
price (Jan2016)
US LNG(SRMC)
US LNG(Full Cost)
US$
/mm
btu
20
22
24
26
28
30
32
34
36
38
2016 2017 2018 2019 2020
Gro
ss R
even
ues
(U
S$b
n)
ACQ at US SRMC Current volumes at 2015 price
70% ToP at 2015 price 70% ToP at NBP forward
Current volumes at NBP forward Current volumes at US SRMC
• Gazprom is one of the lowest cost suppliers to Europe
• In the past a price war strategy made no sense in a relatively tight market
• However, prices have now fallen so far that the benefits of a further price
cut could outweigh the risks
• Gazprom may not proactively choose an aggressive price competition, but
it may be forced to fight for market share
Cost comparison of Russian and US gas to Europe A higher volume/lower price strategy can
now work for Gazprom
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e Gazprom already showing signs of competing,
and gas price will inevitably go lower by autumn
Gazprom already showing signs of competing,
and gas price will inevitably go lower by autumn
Gazprom has shown an inclination to make its gas price more
competitive
Inevitably its oil-linked price will go lower, given 6-9 month lag
effect
At least some market observers in Russia are suggesting that
Gazprom is in a position to adopt a Saudi strategy
The key question is what will happen as and when the oil price
recovers
19
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
0
50
100
150
200
250
300
350
400
450
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Q12015
Q22015
Q32015
Gaz
pro
m P
rem
ium
/Dis
cou
nt
US$
/mcm
Gazprom Price to Non-FSU NBP Spot Gazprom Premium/Discount
0
20
40
60
80
100
120
140
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
Jan-
11
Apr
-11
Jul-
11
Oct
-11
Jan-
12
Apr
-12
Jul-
12
Oct
-12
Jan-
13
Apr
-13
Jul-
13
Oct
-13
Jan-
14
Apr
-14
Jul-
14
Oct
-14
Jan-
15
Apr
-15
Jul-
15
Oct
-15
Jan-
16
Apr
-16
Jul-
16
Oct
-16
Oi P
rice
(US$
/bbl
)
Gas
Pri
ce (U
S$/m
mbt
u
Oil Price (RHS) Oil-linked contracts (11% slope with 6-9mth lag)
Russia Gas Price to Europe UK Spot Price
Gazprom price to Europe versus NBP Outlook for oil-linked gas price
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Conclusions Conclusions
Gazprom has a supply bubble of up to 100bcm of gas that can be
sold at SRMC into Europe
This gas can compete with US LNG, depending on the level of
Henry Hub gas price
Gazprom has tried to diversify to Asia, but LNG plans have been
pushed back and pipeline plans are moving slower than hoped
Europe will remain the company’s core market for at least the next
decade, and it may have to fight to retain market share
Gazprom has already shown its readiness to adjust prices to
competitive levels
It is showing signs of actively implementing a volume over price
strategy – its oil-linked price will be going lower in any case
The main question is what happens when oil prices start to rise
again – DG COMP outcome may be key to providing answer
Pipeline strategy reflects export uncertainty
20