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The University for businessand the professions
The University for businessand the professions
The Russian Gas Deficit
Geopolitical Implications for Bulgaria and for Europe
Professor Alan Riley.
Sofia
Friday 16th November
The University for businessand the professions
A Russian Gas Deficit?
• 47 Trillion Cubic Metres
in the ground
• Surely they cannot be
running short of gas?
The University for businessand the professions
Gas Deficit: A Serious Supply Issue
• Declining Production in ‘legacy’ Gas Fields
• Lack of Investment in New Fields
• Low Domestic Prices
• Diverted Investment
• Capital Costs
The University for businessand the professions
Source: Gazprom, Institute of Energy Policy
546523
505477
461442
428
37 6488
100
16 16 20
78
350
400
450
500
550
600
1999 2000 2001 2002 2003 2004 2005
Independent gas producer takeover additions
Zapolyarnoye gas field
Gazprom production net of Zapolyarnoye and Purgaz
Matured fields: over 20% decline in 6 years!
Gas sector: on the forefront of supply crisis
The University for businessand the professions
Gas production on Gazprom’s mature gas fields would continue to rapidly decline
0
100
200
300
400
500
600
2004 2010 2015 2020
bcm
pa
OtherOrenburgAstrakhanUrengoy (achimov)Yeti-PurovskoyeSouth RusskoyeVyngayakhinskoyePestsovoyeYubilyeynoeWest TarkosalinskoyeKomsomolskoyeZapolyarnoyeMedvezheAneryakhinskoyeKharvutinskoyeYamburgYen-YakhinskoyeUrengoy
Source: Jonathan Stern, Oxford Institute for Energy Studies, ‘The future of Russian gas and Gazprom’, 2005
Urengoy and Yamburg will decline by 30% by 2010 as compared to 2004!
The University for businessand the professions
Where Gazprom had been investing in the previous years?
Source: Institute of Energy Policy, Gazprom data. * - Gazprom estimate
Cumulative capital investment by Gazprom in 2000-2006, USD bn (money of the day)
70
30,6
12,5
0 20 40 60 80
Investments required to developgas fields of Yamal Peninsula*
Capital investments in areasother than gas production
Acquisitions outside gas sectorin 2003-2005
Actual investments in upstreamgas production
SibneftSibur (petrochemical company)Pow erOther
17,9
The University for businessand the professions
IEA Concerns I• We are afraid that
Gazprom will not have
enough gas to supply
even their existing
customers and existing
contracts. This is our
data,” Claude Mandil, IEA
executive director.
The University for businessand the professions
IEA Concerns II• Inefficiency & Lack of Competition
• Increasing Gasification
• Ability of Central Asia to Deliver
• Incentives for Gas Independents
The University for businessand the professions
Stern: Future of Russian Gas?
• OUP Book, The Future of
Russian Gas & Gazprom
• Extent of Depletion of NPT
Fields
• Lack of Investment in New
Fields
• Domestic Price Increases Vital
• Raises Issue of Accelerated
Depletion
The University for businessand the professions
Gazprom in Crisis• UK Defence Academy
Paper, Michael Fredholm
• Gas Supply Shortage
investment-depletion
problem
• Details of 05/06 Deficit
• Looks at Potential Deficit
Solutions
The University for businessand the professions
Russia Short of Gas?• Milov former energy
minister www.energypolicy.ru
• Series of Papers and
Speeches on Subject
• Believes Potential
Problem as early as 2010
The University for businessand the professions
President Putin• Chaired a Meeting on the
Deficit in the Kremlin
• Looking for Solutions
• Reportedly Unhappy with
Gazprom
• Influence on Price
Increase Announcement
in November 2006
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How Big and When?• Milov: 126bcm by 2010.
• Central Asia and Domestic Gasification could make it worse
• 155bcm current EU Imports
• Accelerated Depletion…2008?
The University for businessand the professions
Deficit Solutions I• Kremlin Meeting September 2006
• Short Term Supply Problems
Nuclear, Hydro-Timing
• Coal-Near Term Possibilities-But Rail Capacity
• Energy Efficiency-Difficult to Put in Place Incentives
The University for businessand the professions
Deficit Solutions II• Higher Domestic Prices?
-Time Delay
-Political Trouble
-Economic Trouble
• Energy Saving in Industry?
-Kremlin Needs Effective Tax Regime
The University for businessand the professions
Russian Deficit Analysis• Unclear how great
• Significant
• Very Little to be a lot worse-eg accelerated depletion or increase in domestic demand
The University for businessand the professions
Deficit Consequences• Much More Serious than a Cut Off
• Pressure to Switch to Alternatives
• Pipeline Questions
• Impact on Energy Liberalisation
• Bulgarian Gas Market Development
• Geopolitical Consequences
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Much More Serious than a Cut Off
• Cut off-a day or two.
• Fundamental Financial Incentive to sell to EU
• No Pipelines to China
• Chinese cannot pay EU rates with EU scale
• Deficit-’we want to but we cannot’
• Much More Serious Supply Security Issue.
The University for businessand the professions
Switch to Alternatives• LNG Gasification Plants
• LNG Hubs?
• Alternative Pipelines-
Nabucco
• Switch to Domestic Coal
• Issue of Speed
• Delay Closure of Nuclear
Power Stations
The University for businessand the professions
Pipeline Questions• If Gas Deficit how
valuable Russian
Pipeline plans?
• Southstream a pipeline-
but what about the gas?
• Reliance on Nabucco
and LNG Instead?
The University for businessand the professions
Impact on Energy Market Liberalisation
• Liberalisation: A EU Solution to Gas Supply Shortages
• Physical Interconnection and Legal Right to Trade Bring Enhances Gas Security
• Advantage of Increased LNG Facilities Across EU can be maximised
• Liberalisation will bring more investment into energy market.
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Impact on German Liberalisation Debate
• Leaves Ms Merkel
Worried
• Germany Heavily
Dependent on Russian
Gas
• Particularly Vulnerable
largest Western
Customer
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Impact Bulgarian Energy Development
• Importance of Nabucco
for Bulgarian Gas Market
• Vital Importance of
interconnection other gas
markets
• Role of Coal
• Role of Nuclear
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Geopolitical Consequences• Weaken Russian ‘Energy Power’
• Energy Superpower ‘out of gas’
• Encourage alternatives which will stimulate competition to Russian Gas
• Encourage liberalisation across EU
• Increase incentive for Bulgaria and rest of SEE to build themselves into EU energy markets
• Make Central Asia & LNG Sources Vital.
The University for businessand the professions
Market Lessons for EU & Russia
• EU Big Energy Players E.ON & GDF
• Favour-Vertical Closed Energy Market with-LTSC
• Seen to Fail to Deliver
• Failure of Gazprom- Force Re-assessment
• Time to Liberalise the Russian Gas Market?
The University for businessand the professions
You Cannot Buck the Market!