OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

IEEJ : March 2015. All Rights Reserved.

Russian Gas Export Policy – Asia, LNG,
Europe: fundamental change post-2014?
Professor Jonathan Stern
Chairman and Senior Research Fellow
Natural Gas Research Programme
OIES

INSTITUTE OF ENERGY ECONOMICS, TOKYO, MARCH 4, 2015

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

IEEJ : March 2015. All Rights Reserved.

OIES Natural Gas Research Programme
WE ARE:• A gas research programme at a Recognised Independent
Research Centre of Oxford University, specialising in fossil fuelresearch• The only European academic research group wholly focussed
on natural gas issues

WE PRODUCE: independent research on national and international
gas issues
WE ARE FUNDED BY: sponsorship by 20 companies andgovernments in gas producing and consuming countries
WE ARE NOT:
• consultants, sellers of exclusive, high price business reports

In 2013 and 2014 the Oxford Institute was voted the world’s
No.1 Energy and Resource Policy Think Tank
http://repository.upenn.edu/cgi/viewcontent.cgi?article=1008&context=think_tanks
WWW.OXFORDENERGY.ORG/GAS-PROGRAMME/OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme
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Exports to Asia and LNG

Russia’s LNG and Asian gas export expansion
options at the beginning of 2014
Shtokman
Phase
1? in
- 15mmtpa

Yamal LNG – 16.5mmt
CNPC - 3mmtpa
Negotiations with Europeanand Asian traders

Sakhalin 1 – 5mmt
SODECO – 1mmtpa
Marubeni – 1.25mmtpa
Vitol – 2.75mmtpa–
Pechora LNG
2.6mmtpa ?
Baltic LNG –10mmtpa ?

Sakhalin 2 – 10mmt
Various Asian buyers
Potential for 5mmt
expansion

Chayanda
Altai
Pipeline
S-K-V

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Kovykta
30bcmato China?

38bcmato China

Novatek
20-30bcma
to ChinaGazprom

Vladivostok LNG– 10-15mmt

Rosneft

A significant number of options for Gazprom and others
Diversification to Asia catalysed LNG options, but the example of
Shtokman showed that economics were difficult
Gazprom’s LNG monopoly position abolished; serious competition
from Rosneft and Novatek
4

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The Ukraine crisis and the international response February 2014 – Ukraine president Yanukovich

Natural Gas Research Programmeleaves office and the country March 2014 – Russian invasion, referendum
and annexation of Crimea
 April 2014 – pro-Russian separatists occupy
government buildings in Donetsk andLugansk; military conflict between separatists
and Ukrainian government troops begins
 April 2014 – first US/EU sanctions
 July 2014 - flight MH 17 shot down
 Further US/EU sanctions – Russian countersanctions
 Feb 2015 ceasefire agreement – successful??

5

IEEJ : March 2015. All Rights Reserved.

Targets of International Sanctions

 Travel restrictions on individuals close to

Natural Gas Research Programme

Putin including the CEOs of Novatek andRosneft
 Financial restrictions on:

major banks including Gazprombank
 energy companies including: Lukoil, Rosneft,
Novatek and Gazprom (sanctioned by US but
not EU) Technology sanctions on all finance andequipment for: deepwater (>150m) oil;offshore oil, tight oil, shale oil, hydraulicfracturing

No direct sanctions on the gas sector

6

IEEJ : March 2015. All Rights Reserved.

Impact on Gas Export Projects

Natural Gas Research Programme

DIRECT IMPACTS:
 Inability of Novatek, Gazprombank andGazprom to raise long term finance from theUS; EU financing for Novatek and Gazprom notsanctioned but limited; No $ finance available to Novatek’s Yamal LNG
and all Gazprom’s pipeline and LNG projects
INDIRECT IMPACTS:
 EU refusal to negotiate post-Crimean
annexation led to cancellation of South Stream Gazprom introduced major strategy change
away from downstream investment in Europe
7
and direct sales to customers

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Gazprom is very keen on Baltic LNG but Pechora LNG
project remain more notional than actual
Pechora LNG

Baltic LNG







Gazprom has rekindled the idea of the Baltic LNG project – a 10mmt
scheme due online by 2018 that Miller is keen to promote
Rosneft has partnered with Alltech at Pechora LNG (2.6mmt)
although project has not received export approval yet
Cost of supply could be very competitive if based on net forwardfrom Russian domestic price8

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Yamal LNG will be the first (only?) new project, with gas
going west as well as east

Yamal LNG project to access eastern and western markets
Yamal LNG production forecast









The Yamal LNG project: 3 trains totalling 16.5mmtpa with first gas
coming in 2017/18 – construction is well underway
Contracts signed to cover majority of LNG output – Gas Natural(2.5mtpa), Gazprom (2.9mtpa), project partners (9.4mtpa); gas will betransported to Asia for up to 5 months of the year
Technical complexity and the harsh environment could cause somedelay, financing of total $27 billion budget remains biggest problem
CNPC as a 20% partner and LNG purchaser

9Two scenarios for Russian gas exports in Asia
The LNG export scenario

Alternative pipeline export strategy
140

120

120

100
100

East Siberia Pipe

80

bcma

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Yamal LNG

60

Vladivostok LNG
40
20

2010









60
40

Sakhalin Expansion

20

Sakhalin Current

0
2010

0



80

Sakhalin 1

2015

2020

2025

2030

2015

2020

2025

Sakhalin 2Power of Siberia

Altai Pipe

SKV to China

Sakhalin 2 Expansion

Yamal LNG

2030

Pipeline sales important because they generate export tax revenues
Potential to increase export sales, but more focussed on one market
so higher risk
Sanctions could reduce Russian LNG exports to just current Sakhalin
2 project
Novatek still highly motivated to complete Yamal LNG, but could befurther delayed
Rosneft may now view its gas strategy, including Sakhalin 1 LNG, as
lower priority given financial constraints

10

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Sakhalin 2 and 3: slow progress?



Sakhalin 2 infrastructure is ready for athird train; Shell and Gazprom have finallyagreed to progress plans
Sakhalin 2 fields



Sakhalin 2 partnership will not be keen to
see third train as a tolling plant for
Sakhalin 3 gas

Sakhalin 3 gas reserves approaching
800bcm, but oil now an issueGazprom owns Sakhalin 3 with 100% interest,
while it has 50.1% in Sakhalin 2
Shell (27.5%) and the Japanese consortium (22.5%)
unlikely to countenance Gazprom’s use of 3rd train
without their involvement in equity gas

Will the gas go to VLNG, stay on Sakhalin or bedelivered by pipe to China?

Gazprom’s
Kirinsky fields on
Sakhalin 3 licence

Gazprom has to date been reluctant tooffer IOCs equity in Sakhalin 3
Direct sale of gas to China may be the preferred
option if Gazprom remains 100% owner
11

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Rosneft’s plans for “Far East LNG” may be deferred
due to financial constraints
Rosneft’s Far East LNG concept for Sakhalin 1 gas










Rosneft had planned to compete with Gazprom to export gas from
Sakhalin, following liberalisation of LNG exports in Dec 2013
MoU’s with Far Eastern buyers have been signed for a 5mtpa project
However, partnership with Exxon would be undermined by sanctions andRosneft can hardly afford the project at present
Location of LNG terminal not yet decided and pipeline access remains an
issue
Project likely to be deferred with continuing uncertain outlook

12

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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From LNG to Pipelines: the strategy change beganin Asia in mid-2014

Russia and Gazprom have had a long term objective to
become a key LNG player to access new markets and toincrease flexibility to complement EU pipeline sales Geo-political significance for Russia and for Gazprom
as a global gas major But financial sanctions, and unwillingness of Asians tosign new long term contracts have undermined LNG
prospects….
 and lower oil prices have led to a review of overall
strategy among the key Russian gas companies
 All Russian LNG projects (except Yamal) now in somedoubt

Pipeline exports are the key focus again, especiallyinto China

13

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Power of Siberia, Altai and other pipelines







Power of Siberia to stop at Blagoveshchensk
Altai pipeline negotiations ongoing – contract in 2015?
Pipe exports to NE China from Sakhalin a possibility
Pipelines to Korea and Japan also mentioned
14

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Impact of lower oil and gas prices on RussiaChina pipeline contracts

Power of Siberia:
 a 30 year contract, with peak flow of 38bcma; ramp up period offive years, starting in 2019
 Miller quoted as saying that total value of contract was $400bn
 Oil-linked price in the range $10-11/MMbtu (@$100/bbl), implying$12-13/MMbtu on east coast equivalent to rough estimate of the US LNG export price andemerging Chinese domestic price Gazprom has ordered the pipe and started work
Altai pipeline: can also reach markets in China at similar price levels
 unclear whether Chinese side will want to sign another large
contract so quickly

Major analytical problems: capex must be calculated inrubles not $; at oil-linked gas prices of $60/bbl neither
project is viable but significant gas flow not until 2020 15

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme
IEEJ : March 2015. All Rights Reserved.

Exports to Europe

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

IEEJ : March 2015. All Rights Reserved.

Gazprom’s long term take or pay contracts
with European customers to 2030
Source: ERI RAS in Henderson
and Pirani (OIES 2014)

Even at 70% ToP, Gazprom’s average annual sales
exceed 100 Bcm/year until the mid-2020s17

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Gazprom Long Term Contract Exports to
Europe (Bcm)
2009 2010

2011

2012

2013 2014*

WesternEurope109.8 103.6 115.9 111.4 133.6

Eastern***EuropeBalticStates

38.5

44.5

40.7

39.6

40.8

4.4

3.9

5.1

4.8

4.2

Total LTC** 142.8 138.6 150.3 139.9 166.0 147.2
Total (Group) 152.7 152.0 161.7 155.8 178.6*preliminary **volumes exported to Europe under long term contracts, excluding Baltic states***Includes “other countries

Sources: Gazprom in Figures 2009-2013, p.67. Gazprom Export Press Conference June 2014.

2013 recovery mainly due to three countries: Italy,
Germany, UK; 2014 sales fall back18

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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The August-December 2014 Delivery
Shortfalls (within contractual limits)

Purpose was to: Restrict reverse flow to Ukraine Support hub prices and eliminate gaming bybuyersStrategy abandoned due to:• Gazprom penalties for not meeting
nominations doubling in 2014
• Failure to stop either reverse flow or
gaming by buyers
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OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Gazprom’s Long Term Contract Renegotiations,
Arbitrations and the EU Competition Case

2012-14 renegotiations:
 base price reduction combined with rebate mechanism
whereby if the contract price exceeds the hub price by
5-15%(?), Gazprom refunds the difference at end of
periodOngoing arbitrations: E.ON (most important);
Lithuania, DONG
 DG COMP case (running since 2012 due to reportvery soon) may find that oil-linked pricing is anticompetitive

Fall in crude oil prices will bring long term contract
prices much closer to hub prices but not until Q3 2015
20

450

70%

400

60%

350

50%
40%

300

30%

250

20%

200

10%

150

0%

100

-10%

50

-20%

0

-30%
2005 2006 2007 2008 2009 2010 2011 2012 2013
Gazprom Price to Non-FSU

NBP Spot

Gazprom Premium/DiscountRussian Export Prices Relative to NBP

US$/mcm

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Q1
Q2
2014 2014

Gazprom Premium/DiscountSource: Henderson/OIES (based on Gazprom financials)

By 4Q/13, Gazprom prices were within 5% of NBP, this is
the major reason why Gazprom sales increased in 2013
After reaching parity in Q1 2014, Gazprom prices were 17%
above NBP in Q2 following collapse in European prices
21

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Gazprom/BASF Asset Swap
Gazprom/BASF asset swap:
 Four years in the making
 Would have given Gazprom 100% control ofWingas (downstream sales and marketing) in
exchange for upstream assets
 Abandoned in December 2014 possibly due to:political pressure from the German government) Russian fears of expropriation of EU assetsImpression is that Gazprom is that withdrawing
from European involvement and focussing juston sales22

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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The Nord Stream Pipelines

Nord Stream 1 commissioned – November 2011; Nord
Stream 2– October 2012; no further expansion likely
23

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Nord Stream 1 & 2 and onshore extensions
 NEL (20 bcm): full capacity by 1 Nov 2013, no exemption
 OPAL (36 bcm):

German 100% exemption capped at 50% by the EC; the EC and Gazprom reached an agreement (after 2 yearsof talks) allowing Gazprom to use 100% unless wanted bya third party (to be determined via auction) but theapproval has been repeatedly delayed due to politics;
 100% exemption agreement expired in December 2014
and was not prolonged by Gazprom which left the 50%
exemption in forceGazprom cannot use more than 50% of OPAL (but it
is assumed that the EC would lift the restrictions in
the event of transit crisis)24

IEEJ : March 2015. All Rights Reserved.

Natural Gas Research Programme“Turkish Stream” Replaces South Stream

25

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Turkish Stream

Natural Gas Research Programme

WHAT GAZPROM HAS ANNOUNCED:
4 lines totalling 63 Bcm: 1 to Turkey, 3 to a hubon the Greek border to be built by 2020
(eliminating transit through Ukraine)
WHAT HAS BEEN AGREED:First line to Thrace (near Istanbul) with acapacity of 15.75 Bcm to start deliveries (all toTurkey) end 2016, full capacity by 2017

WHAT SEEMS LIKELY: 2 lines connecting withthe trans-Balkan pipeline at least initially (prior
to 2020); and POSSIBLE: line 3 to feed TAP;
line 4 ??
26

IEEJ : March 2015. All Rights Reserved.

But what if Gazprom is serious aboutvacating the Ukrainian corridor post-2019?
Natural Gas Research Programme

There will be legal consequences for Gazprom in
relation to the delivery points in long term
contracts but what are the options: EU buyers prefer to take delivery on the
Russian/Ukraine border than on the Greek
border EU buyers opt to reduce delivery obligations
and buy spot gas when available
 EU Southern Corridor (starting with TAP)
becomes the main route for Russian gas tosouthern Europe
Long term Russian contracts with some EU
buyers under threat

27

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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Some Key Unresolved Questions

 How quickly can Gazprom agree and build how

much Turkish Stream capacity?
 Can Turkish Stream gas “reverse flow” toSouth East Europe?
 A “hub” on the Turkey/Greece border: nobody
in Greece knows about this; is Gazprom willingto abandon long term contract obligations todeliver to European customers?
 Is phasing out Ukraine transit by 2020 realistic?
How much of the new European and Asian pipeline
infrastructure can Gazprom finance with the current
sanctions in place?

28

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

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The New Policy is Much Better for Gazprom

 Focus on pipelines (where Gazprom has

experience) instead of LNG (where it doesn’t)
 Focus on Asia (especially China) where gas
demand is increasing instead of Europe where
demand is falling, and EU regulation andpolitics is blocking new pipeline initiatives
WHAT ARE THE LIKELY PROBLEMS/RISKS: Altai pipeline contract may not be signed soon Low oil/gas prices threaten viability of new
projects (especially in Asia)
 Continued sanctions and low oil/gas prices
threaten Gazprom’s ability to finance projects
But are three large pipeline projects before
2020 affordable?

29

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

IEEJ : March 2015. All Rights Reserved.

SUMMARY – in 2015, a new (and more logical)
Russian gas export policy emerged

In December 2014 Gazprom abandoned:
 100% capacity in the OPAL pipeline
 100% ownership in Wingas
 strategy to supply European customers directly strategic energy partnership with Europe, now it’s
“just business”
 Turkish Stream would allow Gazprom to: Focus on its second most important (and only major
expansion) market in Europe
 Avoid most (but not all) of its 3rd package problems
 Reduce (but we think not eliminate) Ukraine transit (Re)Focus on China/Asia as the most important
expansion markets for Russian exports and…
 focus on pipeline exports rather than LNG: Yamal LNG
is the only new LNG project likely to happen
30

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THANK YOU!
jonathan.stern@oxfordenergy.org

Contact : report@tky.ieej.or.jp