OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

The Impact of the 2008-09
Recession and Economic Crisis onRussian and European Gas Markets
Professor Jonathan Stern
Oxford Institute for Energy Studies
IEEJ, TokyoFebruary 9, 2010

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

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http://www.oxfordenergy.org/gasprog.shtml*Oxford Institute for Energy Studies is an educational charity

2

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

THE RUSSIAN GASMARKET3

420

Highest levels of economic
growth in post-war period

2009f2007

2005

2003

2001

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

1969

196701965

01963

101961

6-6-10-12-20

Soviet times-18-30-24-40Source: Federal State Statistics Service, Ministry for Economic Development-30-50Industrial production (left scale)

GDP (left scale)

Gross Fixed Capital Formation (right scale)

GDP fell by 7.9% in 2009
4% change (y/y)

12% change (y/y)

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian GDP Growth Rates: 1961-2009

530

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100
janfebmar
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may% change (y/y)

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian Industrial Production, 2002-09

-10

2002

2003

2004

2005

2006

2007

2008

2009

-20

-30

-40

Source: Federal State Statistics Service, IEF estimates
Note: seasonally adjusted data-50-60
Metallurgy

Chemical industry

Construction materials

Engineering industry

Industrial output down 10.8% in 2009, but up 2.7% in
the year to December5

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

2009: THE HARDEST YEAR INGAZPROM’S HISTORY
 Gas production 462 bcm, the company’s

lowest ever Big fall in European and CIS export sales
 TWO “GAS WARS”:
January dispute with Ukraine: Gazprom lost
$100m + per day, and its reputation
suffered in EuropeNo Turkmen gas imported from AprilDecember 20096OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian gas production 2004-09 (Bcm)
Source:Gazprom

20042005

2006

2007

2008

2009

GAZPROM

545.1 548.4 556.0 548.6 549.7 462.2*OTHER
PROD’ERS

88.4

TOTAL
RUSSIA

633.5 640.8 656.2 652.7 663.6 582.4*

92.2

100.2 104.1 113.9 120.2**preliminary figures

2009: Russian production fell by nearly >80
Bcm; Gazprom production fell by nearly 90
Bcm; independent production increased
7

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

But Some Companies Increase Production
NOVATEK:
32 Bcm in 2009 – potential to grow rapidly

A powerful new part-owner (Gennady Timchenko)

50.1% of Yamal LNG

Supply contracts with OGK-1 power company

THE OIL COMPANIES:
Priority for associated gas in Gazprom’s pipelines
meant that most maintained production in 2009



Rosneft contesting third-party access caseIs the Russian government making spacefor non-Gazprom output to increase?
8

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Production and import projections 2009-12
Bcm
GAZPROM

2008

2009 2010 2011 2012actualprelim

549.7 462.2

529532542

663.6 582.4

643655669

OTHER RUS.
PRODUCTION***

113.9

120.2

114

123

127

CENTRAL ASIAN
IMPORTS*

61

33.6

32.8

33.9

37.9

(Source: Gazprom*)

TOTAL RUSSIA(Source: MinEcDev’t**)*Gazprom investment forecast 11.09; ** December 2009 = +20 cf
September 2009, Interfax Dec 10-16, 2009, p.14 ***residualGazprom/Russian production does not regain
2008 levels till 2012
9OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammeCentral Asian supplies
TURKMENISTAN:Chinese exports have started (~ 6bcm in 2010)

$10bn (Chinese and Middle Eastern) investment
agreed for Yolotan



Exports to Iran could increase‘Up to 30 Bcm’ to Russia in 2010 = 10 Bcm, probably

UZBEKISTAN AND KAZAKHSTAN:
Uzbekistan: 15.5 Bcm to Russia in 2010

These purchases fit with Russian foreign policy

Russia/Gazprom retains a strategic interest... but in the early 2010s has limited need forCentral Asian gas
10OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Balancing Supply with Demand Medium term Gazprom’s production

increase will depend on Yamal Peninsula(Bovanenkovskoye field) development
 Gazprom has announced :a one-year delay for Yamal – now end-2012(instead of 2011) and a 3-year delay for Shtokman
HOW MUCH additional supply will Gazprom
need AND WHEN?
 Answer depends on when demand for
Russian gas recovers: in Russia, in CIS, inEurope...
 and on independents’ role11

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Yamal-Nenets GasFields andPipelines

12

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Shtokman Field and Nord Stream Pipelines

Rethink on Shtokman due to US price outlook?13

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Demand for Russian Gas in 2009
DOMESTIC DEMAND: fell between -4% to 6.6% = 21-28 Bcm
CIS MARKET: Ukraine alone down 15-20
Bcm; Belarus 3-4 Bcm, Moldova another 11.5 Bcm
Russia and CIS demand fell 40-55 Bcm in2009
WILL 2010 BE BETTER?

14

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian domestic gas prices 2008-09
Russian Fed’n Avge Group 4, all data ex. VAT), assuming $1 = 29RR

2008
INDUSTRY:

2009

Rubles $US Rubles $US
Price/mcm

2059

71

2389

82

Price/mcm

2030

70

2388

82Netback European Price*4349

1506642229

Gazprom EU price**

10202

352

11485

396

HOUSEHOLD:*FTS formula equalising domestic and export prices for Nizhnegorodsk oblast **10/08-7/09
Source: Russian Federal Tariff Service

Russian domestic prices remain around one
third of netback export prices (even using
FTS methodology). But subsidies have been
largely eliminatedOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Gazprom Exports to CIS Countries 2003-08 (Bcm)
2003 2004

2005 2006* 2007* 2008*Ukraine

26.0

34.4

37.6

59.0

59.2

56.2

Belarus

10.2

10.2

19.8

20.5

20.6

21.1

Moldova

1.5

1.9

2.8

2.5

2.7

2.7

Caucasus

0.5

0

6.9

7.6

3.1

2.8

Kazakhst’n-0.8

4.0

6.5

10.0

9.6

TOTAL CIS

38.2

47.1

71.1

96.1

95.6

92.4

Sources: Gazprom in Figures 2004, p.30, Annual Reports: 2004, p.47; 2005, p.55;
2006 p.49; 2008 p.51. *includes RosUkrEnergo re-exports; statistical basis ofdata is different to previous years

2009 exports were less than 60 Bcm
16

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russia/Ukraine: another gas war in 2010?
REASONS FOR:

Ukraine could reopen price negotiations

Yanukovich could resurrect RosUkrEnergo(unlikely)

The IMF-backed cash flow could be interrupted

REASONS AGAINST:The IMF will likely still see Ukraine as a “dominothat must not fall”, whoever is president

The new president will be less antagonistic toRussiaUkraine is paying European netback prices. But
it will struggle to pay at this level without IMF
assistance
17OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Russian Export Prices to CIS Countries($/mcm)2007 2008 2009 2010
actualestimatedUkraine 130 180 231 295*
Belarus 118 127 151 168
Moldova 170 236 238 233*
*Q1 Prices only

Export prices intended to reach “European”(netback) levels by 2011 – for Ukraine 2010;
2-3 times higher than Russian domestic
pricesOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Gazprom’s Gas Exports to Europe:
consolidated and actual (Bcm)
WesternEurope
EasternEuropeBaltic
States
TOTAL

1995
75.1

2000 2005 2006
90.3 113.2 118.0

2007
128.6

2008
141.0

42.3

38.7

42.9

43.5

39.4

42.5

4.4

4.7

5.0

5.2

5.3

4.1

121.8 133.7 161.1 166.7

173.8

188.5

147.0 151.1

150.5

158.8

(consolidated)*

Actual***consolidated IAS figure including all gas sold by Gazprom affiliates in Europe; **actual
Russian gas volumes exported to Europe

2009 – 140.2 Bcm actual (preliminary)
2010: 160.8; 2011: 163.5; 2012: 170.9 Bcm

19OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Short term outlook post-recession
 Recovery of gas sales/exports andproduction – depends on economic/gas
demand recovery
 Gazprom’s short term decisions:
Hold back Yamal development and allow
independents/Central Asia to fill any gap?
 Raise prices to CIS countries and accept
demand reduction?
 Maintain traditional European price formulaand see others take market share?
Even if Ukraine problems do not recur, thisis a bleak short term outlook; Gazprom
must take very difficult decisions

20

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Medium/longer term outlook
 Yamal development and independent

production: no major availability problem?
 Caspian/Central Asia will be strategicallyimportant but volumes much less than
expected at least up to 2015
 Realistically before 2020 no significant
Russian gas to China or North America(unless market conditions change radically)
Gazprom “export diversification” strategy
looks doubtful before 2020, but domestic
and CIS markets could look more attractive
than in the past21

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

EUROPEAN GASMARKETS

22

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Demand in Europe 35 - 1990 to 2008

Source: A. Honore, forthcoming 2010, Oxford University Press

Slow down of gas demand growth pre-dated recession

23

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Gas demand slowed in mid 2008, declined inlate 2008… and continued to fall into 2009

Source: IEA

Countries: 18 (Aus, Bel, Cz Rep, Den, Fin, Fra, Ger, Gre, Hun, Ire, Ita, NL, Pol, Por, Spa, Swe, Tur, UK)24

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Certainty about the future gas demand has changed
over the past few years... What about 2008-2015 ???
MtoeWEO 09???
???

WEO 09WEO 09???

Source: Source: A. Honore, forthcoming 2010, Oxford University Press, from WEO 2000,2002, 2004 ,2006, 2008 and 200925

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

EC scenarios for natural gas demand in
EU27 by 2020 (bcm)
700
600
500

+13%

400

-0.5%

-10.3%-22.5%

30020010002005

2020e

Observed demand
EC Baseline 100$/bbl
EC New Energy Policy Proj. 100$/bbl

2020e

2020e

2020e

EC Baseline 61$/bbl
EC New Energy Policy Proj. 61$/bbl

Sources: EC (2008), 2nd Strategic Energy Review (COM(2008) 781 final), Annex 1, p.19

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Gas Supply and Import Capacity
 European domestic gas production is flator declining BUT:
 Major pipeline infrastructure is underconstruction: Nord Stream, Medgaz
 More pipelines planned: South Stream,Nabucco, Galsi
 Major new LNG capacity has just opened
or is under construction in: UK, France,
Italy, Netherlands and others
Weak and uncertain demand makes itvery difficult for buyers to sign new longterm take or pay contracts

27

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammeOversupply/weak demand highlights a lackof economic logic in gas pricing
CONTINENTAL EUROPE long term
contracts: traditional netback market pricing based(largely) on oil products is no longer
logical because:
gas and oil product markets have diverged
 very little switching capacity remains
 gas prices are under increasing pressure

due to supply surplus
Market growth requires change in pricing;but major producers do not want change!

45
40
3530
25
20
15
105

Jan-09

Jan-08Jan-07

Jan-06

Jan-05Jan-04Jan-03Jan-02Jan-01

0Jan-00

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

NBP and German Import Prices
2000-2010 (Euros/Mwh)

Oil linked prices likely to rise above Euros
20/MWh in 1H/10, hub-based prices likely toremain steady or even fallGas Prices
4540
Henry Hub

3530
€/Mwh

25NBP

201510AGIP

5Jan-09

Jan-08Jan-07Jan-06

Jan-05Jan-04Jan-03Jan-02Jan-01

0Jan-00

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

US Henry Hub Compared with Europeanprices (Euros/Mwh)

For LNG to divert to US, Henry Hub must be>40c higher than NBPOXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research ProgrammePossible Steps in the Transition Away
from Oil-Linked Pricing
 Hub based pricing seems the most likely

outcome:either NBP-based or average of NW Europe What kind of contractual transition

measures are most likely:
an increasing % of spot gas in the baseprice and index;
“temporary relief” envisaging return to oillinkage in the future; relaxation of Take or Pay?
The trade-off for producers/exporters isbetween accepting lower base prices/indexation to spot prices, or relaxing Take orPay and allowing buyers a choice of sources 31

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Short term outlook post-recession
GAS SURPLUS DUE TO:
 Likely weak demand recovery in 2010-11
 Surge of new LNG supplies; north west
Europe already increased LNG imports in2009 due to price differentials
THIS WILL CAUSE: Take or Pay problems in long term gas
contracts until 2011-12• Increasing competition means that major importers
can no longer force LTC gas on customers at twice theprice of spot gas• Oil-indexation is becoming an increasing problem

OXFORD INSTITUTE FOR ENERGY STUDIESNatural Gas Research Programme

Medium and longer term outlook
 Indigenous production and ACQ levels ofcontracted pipeline gas can cover demand
up until 2014 Long term contract pipeline gas+LNG below
demand post 2016
 Uncertainties on future demand recovery(crisis & 20/20/20 policies), but post 2014,
supply/demand balance tightens due to:accelerating decline in Europe production
 plateau in pipeline import potential (~2014),
 post 2014-15 is also the period when LNG
supply growth slows downAround 2015 market may change from surplus toshortage (perhaps within a short time?)