1

Valery NEMOV

Deputy Head of Contract Structuring and Pricing Directorate

Gazprom for European Market: Reliable Supply

in a Changing Environment

The Hague - 4 September 2014

© ZMB 2

Gazprom Group Natural Gas Supplies are not going to compete with LNG import on Chinese market:

- Supplies of piped gas through the “Eastern” route will compound the consumption base in the North-East of China

- LNG supplies are targeted to coastal regions and playing the balancing role.

- Growing Chinese market is still open for the future increase of supplies.

Gazprom JSC and CNPC signed the sales and purchase contract for gas supplies through the “Eastern” route.

Term of supplies: 30 years Annual supply volume: 38 bcm on plateau Beginning of supplies: 2018 - 2020 (dependent on when the construction period is gone to end)

Пекин

Шанхай

поставки

по «восточному»

маршруту

Гуанчжоу

LNG import terminals

on stream

planned

LNG supplies

Routes of piped gas imports

pipe routes on stream

future supplies routes from Russia

поставки из

Центральной

Азии

поставки из

Мьянмы

Харбин

Шэньян

Чангунь

Gazprom Group Natural Gas Supplies to China

© ZMB

Long-Term Contract Gas Exports in 2013

Total* – 162.7 bcm

*Far abroad Source: Gazprom export

Germany; 40,1

Turkey; 26,7

Italy; 25,3

UK/Belgium; 12,5

Poland; 9,8

France; 8,2

Czech Republic; 7,3

Hungary; 6,0

Slovakia; 5,4

Austria; 5,2

Finland; 3,5

Bulgaria; 2,8 Greece; 2,6

Netherlands; 2,1 Serbia; 1,9

Romania; 1,4 Slovenia; 0,5

Switzerland; 0,4 Denmark; 0,3

Croatia; 0,2 Bosnia; 0,2

3

© ZMB 4

Supplies to Europe by Largest Gas Producers in 2013

2010 2011 2012 2013 Change in 2013

(bcm) Change in 2013

(%)

Russia (Gazprom) 138.6 150.6 139.9 162.7 22.8 16.3%

Algeria (inc. LNG) 57.3 52.4 46.5 37.9 -8.6 -18.5%

Lybia (inc. LNG) 10.3 2.5 6.7 6.2 -0.4 -6.5%

Qatar 32.9 43.9 31.3 24.8 -6.5 -20.7%

Nigeria 13.5 18.1 12.1 7.5 -4.6 -38.0%

Supplies by Largest Gas Exporters

2010 2011 2012 2013 Change in 2013

(bcm) Change in 2013 (%)

Norway* 115.4 109.4 121.4 115.4 -6.0 -4.9%

UK 76.5 72.9 43.8 40.9 -2.9 -6.5%

Netherlands 64.5 51.1 72.6 81.5 8.9 12.2%

(bcm)

(bcm) Supplies by Largest European Producers

Источники: Базы данных Международного энергетического агентства, Евростата, национальных статистических агентств , компаний «ВудМаккензи» и «Ллойдс» по состоянию на январь 2014 г., оценки ООО «Газпром экспорт».

* Для Норвегии показаны объемы газа и СПГ, поставленные на европейский рынок. Объемы СПГ, поставленные в Азию и Америку, не учитываются.

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Key International Markets for Gazprom – Europe and CIS

Gazprom Gas Deliveries to Europe* Gazprom Gas Deliveries to CIS and Baltics

The Gap is Widening Between European Indigenous Production and Consumption

5

2010 2011 2012 2013

138.6 150.0

139.9

162.7

bcm

$/mcm $302

$383

$402

* European countries including Turkey except for CIS and Baltics

$387

2010 2011 2012 2013

68.0 71.1

64.4

56.1

$308 $298

$235 $274

Mid-Term Forecasts of Gas Consumption in Europe

100%

90,4% 90,3 90,2

90,6

88,3 88,5

86,0 86,2

90,8% 91,6%

84

86

88

90

92

94

96

98

100

102

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

% Actual 2006-12

CERA (2013-01) CERA (2013-07) CERA (2013-11) PIRA (2012-3) PIRA (2013-7) PIRA (2013-10) CEDIGAZ - pessimistic (2013-6) CEDIGAZ - base (2013-6)

~155-160

bcma

Under current market conditions the mid-term (2014-2017) estimate of gas deliveries to Europe is 155-160 bcma, depending on weather

© ZMB

Weak Demand for Gas in Europe

European Gas Consumption and Imports in 2013

2010 2011 2012 2013

2012/11,

%

Consumption (bcm) 602.0 557.3 546.8 538.2 -1.6 %

Indigenous production (bcm)

311.6 290.0 292.3 282.7 -3.3 %

Imports* (bcm)

290.3 266.8 254.4 255.5 +0.4 %

Source: International Energy Agency, Eurostat, Gazprom Export. Gas calorific value: 1cm = 37 MJ * Including balance of gas storage

Net Heating & Cooling Degree Days*

Source: Gazprom Export (based upon annualized HDD/CDD for Europe)

Gas burned for electricity

~ -14%

Industrial production

-0.5%

Weather index +0.5%

Industrial Production Index on Key Markets

Source: National Statistics Authorities

* Relation to 14-year average

6

-10%

-5%

0%

5%

10%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

-15

-10

-5

0

5

10

15

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

Dec

-12

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

Jun

-13

Jul-

13

Au

g-1

3

Sep

-13

Oct

-13

No

v-1

3

Dec

-13

Jan

-14

Feb

-14

Mar

-14

Ap

r-1

4

May

-14

Jun

-14

%

Germany UK Italy France Turkey

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1H 2013 1H 2014 ∆

(bcm) ∆ (%)

Consumption (bcm) 301.8 245.9 -55.9 -18.5%

Indigenous production (bcm) 150.0 138.1 -11.8 -7.9%

Gas storage withdrawal/injection balance**

20.1 -3.4 -23.5 -116.7%

Import needs* (bcm)*** 131.8 111.2 -20.6 -15.6%

Источники: Базы данных Международного энергетического агентства, Евростата и национальных статистических

агентств по состоянию на апрель 2014 г., оценки ООО «Газпром экспорт».

* Поставки газа из Норвегии учтены в графе «Собственная добыча».

** Отбор в случае положительного знака, закачка - отрицательного

*** Предварительная оценка объема импорта, рассчитанная по трем верхним значениям.

Gas consumption in Europe has dramatically dropped in 1H2014 by 18.5% in comparison with 1H2013. In gas supply, this volumes have been partially compensated by significant decrease of indigenous production.

3.4 bcm of gas less were withdrawn from storages in European countries, than injected in them in 1H 2014. On the contrary, in the same period 2013 – more by 20.1 bcm. It means that 23.5 bcm of gas from storages less were used, and that made the most considerable in gas supply cut.

Decrease in import needs made up, по предварительным данным, according to calculations and estimates, 20.6 bcm.

Gas consumption in Europe has dramatically dropped in 1H2014 by 18.5% in comparison with 1H2013. In gas supply, this volumes have been partially compensated by significant decrease of indigenous production.

3.4 bcm of gas less were withdrawn from storages in European countries, than injected in them in 1H 2014. On the contrary, in the same period 2013 – more by 20.1 bcm. It means that 23.5 bcm of gas from storages less were used, and that made the most considerable in gas supply cut.

Decrease in import needs made up, по предварительным данным, according to calculations and estimates, 20.6 bcm.

European Gas Consumption, storage balance and Imports in 1H2014

Even Weaker Demand for Gas in Europe in 2014

© ZMB 8

Calculated by Gazprom export на основе данных о погодных условиях более чем в 130 областях различных европейских стран.

Значения индекса выше 100 % отражают благоприятные погодные условия (холодные зимы, жаркие лета) для роста потребления газа.

Низкие значения отражают неблагоприятную погоду для потребления газа.

Weather index for 1H2014 in relation to average

Weather Impact

Milder than average weather conditions were responsible for the significant drop in gas consumption during 1H 2014 in all major

countries

Milder than average weather conditions were responsible for the significant drop in gas consumption during 1H 2014 in all major

countries

© ZMB 9

Sources: PIRA, “Gazprom export” estimates

1H 2013 1H 2014 г ∆ (bcm) ∆ (%)

Total gas consumption 220.4 172.4 -47.9 -21.8%

Gas consumption in power

generation 28.3 21.6 -6.7 -23.6%

Power generation share in gas

consumption structure 12.8% 12.5% -0.3 p.p

Gas consumption in other sectors 192.0 150.8 -41.2 -21.5%

* the following countries are included in this group:

- Germany, - Italy, - UK, - Netherlands, - France, - Spain, - Poland.

Gas consumption decrease rate in power generation sector in 1H 2014 is larger than in other sectors and

makes up 23.6%.

Nevertheless, as the share of power generation in gas consumption structure so significantly declined under negative trends in the past , it is currently not a factor

that determines the total level of consumption.

Gas consumption decrease rate in power generation sector in 1H 2014 is larger than in other sectors and

makes up 23.6%.

Nevertheless, as the share of power generation in gas consumption structure so significantly declined under negative trends in the past , it is currently not a factor

that determines the total level of consumption.

Gas consumption in power generation sector and other sectors in the largest European countries* (estimate) (bcm)

Negative Trends in Gas Consumption for Power Generation

© ZMB

Long-Term Prospects of Gas Consumption

Source: Projections derived from consultants, companies and governmental bodies, Gazprom export calculations

10

550

602

556 547 538

645

551

517

581 594 606 607 611

634 650 645 650

512

699

731 725

669

560

477

611 626

642 655

664

702

726

772 742

640

680 690

828

712 700

740

782

400

500

600

700

800

900 2009

2010

2011

2012

2013

Avera

ge

EC

IEA

IHS

CE

RA

PIR

A

Exxon M

obil

Oxfo

rd IE

S

BG

BP

Wood M

ackenzie

Cedig

az

EIA

EG

F

Sta

toil

Tota

l

Enerd

ata

Avera

ge

EC

IEA

Exxon M

obil

Oxfo

rd IE

S

BP

IHS

CE

RA

Cedig

az

Enerd

ata

EIA

Sta

toil

bcm

Updated: July 2014 Updated: July 2014

2009-2013 2025 2035

© ZMB

Long-Term Prospects of Gas Production

Source: Projections derived from consultants, companies and governmental bodies, Gazprom export calculations

11

293

312

290

292

283

250 236

219

197

238

277

214 217

183

161

270

215

236 237

100

200

300

400

2009

2010

2011

2012

2013

Avera

ge

IEA

IHS

CE

RA

EIA

Ce

dig

az

PIR

A

EC

Avera

ge

EIA

IEA

IHS

CE

RA

Ce

dig

az

PIR

A

EC

bcm

Обновление: июль 2012 Обновление: июль Обновление: июль Обновление: июль Updated: July 2014

2009-2013 2020 2030

© ZMB

Source: Consensus projections derived from consultants, companies and governmental bodies

The Gap is Widening Between European Consumption and Indigenous Production

12

0

100

200

300

400

500

600

700

800

900 2

00

9

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

20

26

20

27

20

28

20

29

20

30

20

31

20

32

20

33

20

34

20

35

bc

m

Production forecast spread Consumption forecast spread

Production consensus forecast Consumption consensus forecast

Updated: July 2014 Updated: July 2014

According to forecast, European demand for additional gas imports will amount to:

164 bcm by 2025 211 bcm by 2035

According to forecast, European demand for additional gas imports will amount to:

164 bcm by 2025 211 bcm by 2035

Wide spread of consumption forecasts by 2025 is due to the «anti-gas» scenario by the European

Commission and the «super-gas» scenario of the European Gas Forum

Wide spread of consumption forecasts by 2025 is due to the «anti-gas» scenario by the European

Commission and the «super-gas» scenario of the European Gas Forum

Moscow, 04 April 2010 13 из 21

22%

5%

13%

17%

14%

4%

25% 26%

5%

15% 20%

12%

3%

19%

3.6 4.6

tcm:

2030 forecast

North America

Central and South America

OECD Europe

Other Europe and Eurasia

Middle East

Africa

Asia Oceania

2013

Dynamics and Geographical Structure of Gas Demand – Gazprom’s Forecast

© ZMB

Source: “Gazprom in Figures”, Gazprom export corporate brochure

Mutually Beneficial Europe – Russia Dependency

Gazprom has been a reliable supplier for more than 40 years

Gazprom has already supplied more than 3 trillion cm of gas to European customers

Minimum Annual Quantities of gas in Gazprom’s LT contracts portfolio ensure deliveries around 4 trillion cm of gas to Far Abroad during all the period of validity (including new volumes related to the projects of North Stream and South Stream)

Gazprom is the world’s largest source of gas (31.12.2013 proven reserves are 35.7 trillion cm)

EU – one of the consuming markets for Gazprom

Supplies to EU ensured steady revenues for Gazprom for 40 years

Relations with the major gas business counterparts in the EU

Contribution of Gazprom to EU

Contribution of EU to Gazprom

Key information

≥ 4 tcm ≥ 4 tcm

Obligations before the International Group of Companies for years

2014-2042

≥ 35.7 tcm proven resources

≥ 35.7 tcm proven resources

600 bcm

Gas consumption forecast for European

Far Abroad up to year

2030

600 bcm

Gas consumption forecast for European

Far Abroad up to year

2030

This makes possible long-term supplies to Europe for more than 50 years

1|4 1|4

14

© ZMB

The existing structure of Gazprom long-term contracts fully guarantees the reliability of gas supply to Europe

Balanced bilateral long-term commitments

The Buyer and the Seller share price and volume risks

International arbitrage

Flexibility

Supported in many cases by intergovernmental agreements

Major suppliers to Europe have similar contracts

15

Reliability of Gas Supply to Europe

© ZMB

Gazprom’s EU market share is 27,6 % (30,2% - in European Far Abroad) in 2013

The prices of Russian gas are fully competitive and are subject renegotiate

European customers are perfectly protected by long-term oil-indexed contracts against any form on monopoly abuse of power

Long-term contracts in place, the European customer – not the supplier – is who defines daily gas volumes within the contractual flexibility (DCQ nominations)

Gazprom is not a Threat to Competition in the EU

16

© ZMB

Trading Point (Hubs) as Price Reference Indicators

Turnover Coefficient of European Gas Trading Points («churn ratio») in 1H 1 2014 in comparison with 1H 2013

The new organizing model of gas market in the EU gives preference to trading in hubs

deals are usually registered on small hubs, but not exchange transaction, which are lacking for a lot

The new organizing model of gas market in the EU gives preference to trading in hubs

Regulatory displacements of LT-contracts delivery points from national borders to hubs under 3rd Package requirements did not result to effect that was previously expected – any significant increase of liquidity did not happen

Only OTC-deals are usually registered on small hubs, but not exchange transaction, which are lacking for a lot of weeks or even months. Buying volumes of gas in an impersonal and standardized way is impossible. That means, there is no any exchange gas trading on the most of EU territory

The potential of directive liquidity increase leverage is at the end of its resource

17

* Source: LEBA, International Energy Agency

0

5

10

15

20

25

30

0

100

200

300

400

500

600

UK NBP Nethelands TTF Germany total France PEG Austria Baumgarten/VTP

Italy PSV Belgium Zeebrugge

bcm

Volume of trading 1H 2013 Volume of trading 1H2014 Churn ratio (right axis) 1H 2013 Churn ratio (right axis) 1H2014

© ZMB

0

100

200

300

400

500

600 MCM/d

Gazprom is the major provider of supply flexibility to Europe as seasonal swing in Russian gas daily deliveries doubled

Source: International Energy Agency database

1998-2005 80-100MCM/d seasonal swing

2005-2013 150-220MCM/d seasonal swing

Removal of Midstream Flexibility Threatens Energy Security

© ZMB

Cost of Seasonal

Midstream Flexibility

Average cost of full-cycle gas

storage

(assumes that over the year the

volume of gas pumped into

underground storage equals to the

volume of withdrawals)

US$21.45/mcm

Cost of Short-term

Midstream Flexibility (1)

Additional transportation capacity

payments for flexible capacity

(7,000 hours of flexibility)

US$13.7/mcm

Cost of Short-term

Upstream Flexibility (2)

Average price for a 10% daily

production swing in UK (Deloitte)

USD$ 4.0/mcm

Explanation of the Contract-Hub Price Gap: Contracted Gas Offers Enhanced Delivery Flexibility

© ZMB 20

Gone out from electricity generation, gas consumption is now a function of unpredictable weather

Wide renewable penetration into the energy consumption structure makes gas demand twice dependent on weather

After midstream business is dead, nobody is taking responsibility for supplies structuring

Higher risks of gas undersupply during cold snaps

Flexibility cost is underestimated, and the mechanism for that should be developed

Threats are on the Market, but not on the Supply Side

© ZMB

Thank you for your attention