Russian natural gas supplies to Europe Competition with the US LNG Dr. Tatiana Mitrova Research Scholar, Center on Global Energy Policy (Columbia University) Head of Oil and Gas Department, Energy Research Institute of the Russian Academy of Sciences

Hague September 8, 2016

Decline of oil and gas revenues is a huge challenge for the state budget Federal budget receipts from oil and gas, $ bln

Source: Sberbank CIB

1

Status quo: gas production and exports are stagnating Monthly gas production in Russia in 2013-2015, bcm

Russian gas export dynamics by destination in 2000-2015, bcm

70

250

60 200

50 40

150

2013

30

2014

20

100

2015

10

50

Sources: Rosstat, CDU TEK

December

November

October

September

August

July

June

May

April

March

February

January

0 0

CIS

Europe

Asia 2

Increasing gas bubble in the domestic market Company

Production in 2015, bcm

Unutilized potential and capacities additions under development by 2020, bcm

Gazprom

406

~155

Novatek

52

~48

Rosneft

42

~48

VIOCs (APG)

46

~15

635,5

266

TOTAL

Rosneft and Novatek have extremely ambitious plans on gas production expansion, obligatory utilization of the associated petroleum gas (APG) and its priority pipeline access stimulate VIOCs gas output growth

Gazprom is looking for the external markets

3

Ruble devaluation helps to overcome the negative effect of price decline 160 140 120 100 80 60 40 20 0

90 80 70 60 50 40 30 20 10 0

Brent oil price Source: Bloomberg. Source:

Rubles per U.S. dollar

Oil price (Brent), $/bbl

Russian andoil oilprice: price:inverse inverse correlation during crises Russian ruble ruble and correlation during the crises

Ruble to U.S. dollar exchange rate, right hand scale

KAPSARC's research, Bloomberg data 4

European gas market is strongly over-contracted and locked in the TOP contracts, it is very difficult to expand market share European* gas balance bcm 700 ACQ pipeline gas 600 ACQ LNG 500

MCQ pipeline gas 400 MCQ LNG 300 Indigenous production 200 Demand range 100 Demand 0

* Europe-41 without Turkey Source: ERI RAS

5

Russia has the largest contract portfolio, which guarantees at least 115 bcma of exports up to 2023 bcm

bcm

Russia

Norway

Over TOP

TOP

bcm

Algeria

bcm

Qatar

Supplies in the Baseline scenario

6

Russia is well placed to defend its market share on the European gas market if needed Short run marginal costs to Europe (Russian pipeline gas and US LNG)

Long run marginal supply costs to Europe (Russian pipeline gas and US LNG) 8

Regas

8

7

LNG transportation

7

6

Liquefaction

6

5

Export duty

5

4

Nord Stream transportation

4

3

Transportation to the Russian border

3

15% Henry Hub

2

Henry Hub

1 0 West Siberia-Europe

US LNG-Europe

Production (incuding taxes)

Regas LNG transportation Export duty Nord Stream transportation Transportation to the Russian border 15% Henry Hub

2 Henry Hub 1

Production (incuding taxes)

0 West Siberia-Europe

US LNG-Europe 7

Pipeline uncertainty underlines evolving nature of the Russian transportation strategy and political uncertainty South Stream and Turkish Stream

Nord Stream, Lines 1-4



Russia has adopted a rather opportunistic export pipeline strategy over the past 12-18 months



Focus now appears to be on Nord Stream 2, indicating a focus on market in NW Europe



Black Sea pipeline could materialise, although destination remains unclear – politics a major stumbling block



EU not keen on Nord Stream 2, insistent on maintaining transit through Ukraine



A compromise solution is likely – some Ukraine new pipelines 8

Conclusions  Dominant position of the Russian gas in Europe is fixed by the LTCs.  The EU wants to diversify away from Russia, but there are few alternatives and the EU knows that. Limited gas volumes are available through the Southern Corridor, frozen production in Netherlands, limited capability by Norway to increase production, stagnating production in North Africa.  The next fight for EU gas market share will therefore be a fight between Russian gas and LNG (first of all US LNG). If Russian gas will be threatened, Russia will no longer fight for high gas prices (as in 2009), but for market share, even if this means low prices.  Compared to most of its new competitors, Russia has a lower cost gas supply base and can thus engage on a price war if needed.  Nevertheless Russia would prefer to avoid price war with the US and Qatar LNG in order to maintain export revenues. 9