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Gazprom markets – future directions

Elizabeth Stonor

Russian market specialist, European Gas

Markets

www.icis.com

• Structure of Russian gas market and increasing

importance of independent producers

• Challenge to Gazprom’s position in Russian domestic

market from political rivals

• Gazprom pricing policy and relations with European

customers

• Gazprom production and impact of recent supply deal with

China

Russian gas – a changing scenario

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Russian gas – key facts

• Russian total gas production 2013 668bcm

of which: Gazprom 487.4bcm

Independents 180.6bcm

• Gazprom share of production 2013 73%

• Gazprom share of production 2006 90%

• Russian gas consumption 2013 456.2bcm

• Gazprom production capacity (end-2013) 570bcm

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Who are Russian independent gas producers?

• Novatek – second largest gas producer in Russia

• Oil companies like Rosneft, Lukoil, Surgutneftegaz

• Independents with Gazprom participation such as Nortgas

(now 50% Gazprom), Severenergia (50/50 Gazprom

Neft/Novatek)

• Producers with foreign participation- Achimgaz (Wintershall),

Sakhalin-1 (ExxonMobil), Sakhalin-2 (Shell, Mitsubishi)

• Around 15 small producers supplying local areas, including

JKX in Southern Russia

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Rise of Russian independents

• Competitive due to lower cost of production than Gazprom

• Independents wish to continue increasing production volumes because

of :

a) better gas price environment within Russia following steady increases

in regulated gas prices from 2000

b) improved access for independents to Gazprom’s pipeline system

• Depleting production in older fields is freeing up transport capacity for

independents in Gazprom transport system

•

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Pipeline access in Russia

Gazprom is pipeline monopolist in Russia

Transport tariffs are regulated by Russian Federal tariff service

Pipeline tariffs are point-to-point comprising usage fee and

capacity charge (Rb/kcm/100km)

Gazprom uses unregulated internal transport tariff within Russia

Hitherto independents sold gas close to their production areas to

avoid expense of long distance transport to areas of high demand.

New methodology will help independents by reducing pipeline

access costs for long distance transport.

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The regulated gas price in Russia

• Insert graph The regulated gas price in Russia (from p 1

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Graph sourced from The Oxford Institute of for Energy Studies

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Comparitive prices for domestic gas in Russia

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Graph sourced from The Oxford Institute of for Energy Studies

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Gazprom’s burden in Russia

• Gazprom is obliged to supply socially sensitive and residential

customers in Russia with gas

• Non-payment for gas is significant – by 1 April 2014 Russian gas

debt to Gazprom marketing affiliate Mezhregiongaz Group reached

Rb141.6bn ($3.4bn/€2.97bn).

• 75% of the overdue debt fell to socially sensitive customers –

residential users, utility companies and companies financed from

the state budget, such as hospitals and the army.

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Gazprom export monopoly under threat

• Until 2014, Gazprom was the monopoly gas exporter from

Russia - independents were not permitted to export

• Changes in legislation at end-2013 lifted Gazprom export

monopoly on Liquefied Natural Gas (LNG) allowing

independents to export LNG

• Gazprom retains export monopoly on piped gas in Russia

but government is considering calls to lift this in Russian

Far East

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Political rivals challenge Gazprom’s position in Russia

• Russian government backing was crucial to progress achieved in

market liberalisation in past two years. Igor Sechin, ceo of

Rosneft, and Gennady Timchenko, member of Novatek council of

directors, are close to president Putin. They backed:

• Significant improvement in pipeline access for independents

• Lifting of Gazprom export monopoly for LNG at end-2013

• Proposals currently under consideration for lifting of monopoly on

piped gas exports from new fields in Eastern Siberia and Russian

Far East

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Russian domestic market represents half of Gazprom Group’s total

gas sales volumes, significantly higher than European export

volumes:

Gazprom group sales volumes 2013 % of total

• Russian domestic market 228.1bcm 50.6

• Europe+Turkey 161.5bcm 35.8

• FSU/Baltics 59.4bcm 13.1

• LNG sales 2.02bcm 0.5

Gazprom sales volumes 2013

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Gazprom Group average sales prices 2013

• Gazprom sells at much higher prices to Europe than to FSU

or Russian domestic market

• Average European price (incl. Turkey) $387/kcm

• Average FSU price $272/kcm

• Average Russian domestic price $106.6/kcm

(Rb3393/kcm*)

(*$1=Rb31.8)

•

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Gazprom’s proceeds from gas sales 2013

• Gazprom’s European and FSU exports covered 77% of gas earnings last year:

• Europe +Turkey $53.0bn (Rb1687.3bn)

• FSU $13.3bn ( Rb423.5bn)

• Russian domestic sales $24.3bn (Rb774.0bn)

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Gazprom relations with European customers

• Gazprom insists on maintaining oil-indexation principle in

long-term contracts preferring to introduce concessions on

case-by-case basis

• Increased year-on-year European sales in 2013 may be

anomalous and due to long cold spring in 2013 and

reduction in alternative supply such as LNG.

• However trend continues in 1H 2014 with Gazprom export

sales at 80.8bcm in 1H 2014, up 2.5% year-on-year – more

flexible pricing may be behind this

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Gazprom and Asia-Pacific markets

• 30-year supply contract signed last May with China for

38bcm/yr gas to be delivered from 2018 through planned

Power of Siberia gasline

• China potentially a big new market for Gazprom - current

Chinese gas demand of 170bcm/yr expected to grow

rapidly. But Chinese project will be expensive - $55bn

estimated cost.

• Gazprom holds majority share in Sakhalin-2 selling LNG

into Japan and Korea and plans other LNG projects

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Separate markets, different gas

• China/Asia-Pacific deals will not affect Russian gas

availability to Europe – they are separate markets

• Europe/CIS/European Russia to be increasingly supplied

from new production in Yamal peninsula connecting into

existing transmission grid

• China/Asia Pacific to be supplied from new production at

Chayanda and Kovykta fields located far from existing

infrastructure. New Power of Siberia line and other

infrastructure being built to transport the gas to China.

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Conclusions

• Gazprom is willing to concede market share in less profitable Russian market to

independents

• Russian independents Novatek and Rosneft are outpacing Gazprom on developing LNG

sales outside Russia

• Development of Gazprom’s gas supply to China will be expensive and only bring earnings in

the longer-term

• Loss of Ukrainian sales has significantly dented Gazprom’s export volumes to former

Soviet Union - future of Ukrainian sales uncertain against political dispute

• Europe will remain best market in medium term but Gazprom will need to be price

competitive

• Political tensions around Ukraine and western sanctions could affect development of

production in Russian Far East both for Gazprom and the independents, especially Novatek-

led Yamal LNG project

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Find the full webinar at:

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