EU-Russian Gas Trade: Too Deep and Comprehensive to Fail Sergei Komlev Head of Contract Structuring and Price Formation Gazprom Export Moscow Energy Charter Forum: Cross-Border Trade and Investment Flows as the Backbone of International Energy Security April 3, 2014 WSJ and Economist Claim that EU is less Dependent on Russian Gas than Before Source: Jan Hromadko. Europe Relies Less on Russia Gas Than Before. Wall Street Journal, March 6, 2014 Economist, March 5, 2014: “Russia supplies a far smaller share of Europe’s gas supplies than used to be the case… Gazprom’s share of EU gas imports has diminished from nearly 50% in 2000 (see chart)” Source: Industry briefing Our comment: Eurostat’s value of gas estimate is not representative because it classifies as Russian less than half of its export volumes (less than 60 bcm). The rest falls in the category ‘other’ © ZMB 2 Share of Russian Gas in EU-28 Imports Declined but then Rebounded while its Share in Consumption is on the Rise EU imports of Russian gas Bcm EU consumption of Russian gas % of total Bcm 160 60% 160 28,3% 53,1% 140 50% 43,2% 120 43,0% 80 30% 144,6 60 25,3% 25,9% 25% 22,0% 20% 100 80 15% 144,6 137,5 122,4 118,8 140 30% 120 40% 34,0% 100 % of total 20% 40 60 137,5 122,4 118,8 10% 40 10% 20 0 0% 2000 2005 2010 2013 5% 20 0 0% 2000 2005 2010 2013 Sources: IEA, Gazprom Export estimates © ZMB 3 EU Dependence on Russian Gas in 2013 UK/ Belgium 11,9 Denmark Netherlands 5,0 16,6 7,7 43,2 Germany 100 100 Finland Estonia/ Latvia/ Lithuania 55,5 Poland France Direct imports from Russia as a % of total consumption of natural gas, 2013 82,5 86,2 Czech Republic 59,8 Austria 35,1 Italy 8,5 Croatia Slovakia 63,0 62,3 Slovenia Hungary Romania 9,7 100 66,3 Bulgaria Greece © ZMB IEA, Gazprom Export, re-exports not taken into consideration Sources: 4 Efforts to Diversify Supplies Brought no Fruit Share of suppliers in total imports 2012 HHI = 3536* 4,8% 2,6% 2013 HHI = 4471* 7,1% 2,5% 3,0% 5,5% Gazprom Group Gazprom Group Algeria (incl. LNG) Qatar Algeria (incl. LNG) 9,8% Qatar 12,3% 55,0% Nigeria Libya (incl. LNG) 15,0% 64,3% Libya (incl. LNG) 18,3% Others Nigeria Others HHI points to high dependence of Europe on few suppliers In 2013 HHI hit 4471** despite efforts to diversify gas supplies * Herfindahl-Hirschman index ** 1800 < HHI <10000 – high concentration 1000 < HHI < 1800 – moderate concentration HHI < 1000 – low concentration Sources: IEA, Gazprom Export estimates © ZMB 5 Gazprom is the Most Reliable Supplier to Europe Supply by the largest gas exporters, bcm 2012 2013 Changes Changes, % Gazprom Algeria (incl. LNG) 139.9 46.5 162.7 37.9 22.8 -8.6 16.3% -18.5% Libya (incl. LNG) 6.7 6.2 -0.4 -6.5% Qatar 31.3 24.8 -6.5 -20.7% Nigeria 12.1 7.5 -4.6 -38.0% Supply by the largest European producers, bcm 2012 2013 Changes Changes, % Norway* 121.4 115.4 -6.0 -4.9% UK 43.8 40.9 -2.9 -6.5% Netherlands 72.6 81.5 8.9 12.2% * Volume of pipeline gas and LNG delivered to the European market Sources: IEA, Eurostat, National Statistical Offices, Wood Mackenzie, Lloyd’s, Gazprom Export estimation as of January 2014 © ZMB 6 Removal of Midstream Flexibility Threatens Energy Security 600 MCM/d 500 400 300 200 1998-2005 80-100MCM/d seasonal swing 2005-2013 150-220MCM/d seasonal swing 100 0 Gazprom is the major provider of supply flexibility to Europe as seasonal swing in Russian gas daily deliveries doubled Sources: IEA, Gazprom Export estimates © ZMB 7 LNG Deliveries to EU are not Secure 21,2 25,0 9,7 10,0 2010 0,3 0,7 0,5 2005 2010 2013 0,5 0,4 1,6 2013 2000 2,1 2010 1,3 2,0 4,6 3,1 2000 2,0 3,7 2013 0,4 2,7 5,0 1,8 5,8 6,9 7,1 10,0 6,6 8,5 10,9 15,0 2005 13,7 17,3 20,0 Mt Spain United Kingdom Others France Egypt Italy Norway Belgium Trinidad and Tobago Portugal Nigeria Algeria Greece 2013 2010 2005 2000 2005 2000 2013 2010 2005 2010 2005 2000 2013 2000 2013 2010 2005 2000 2013 2010 2005 2000 0,0 Netherlands Qatar Sources: Wood McKenzie, Gazprom Export estimates © ZMB 8 EU-28 LNG Imports Dropped by 30 mt over the Last Two Years Spain 61,5 United Kingdom France Italy Belgium 44,7 Portugal Netherlands 40,0 Greece 31,9 27,5 Mt 21,8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: Wood McKenzie, Gazprom Export estimates © ZMB 9 Major LNG Suppliers Diverted their Volumes away from EU Qatar 61,5 Algeria Nigeria Trinidad and Tobago Norway 44,7 Egypt Others 40,0 31,9 27,5 MMt 21,8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Sources: Wood McKenzie, Gazprom Export estimates © ZMB 10 US Companies’ Costs Exceeded Revenues on a Unit Basis • The main drivers of the declining all-in costs were yearover-year decreases in operating, general and administrative (G&A). Finding and development (F&D) costs and interest expenses were relatively flat year over year. • Companies still have an urgency to increase oil reserves and produce existing oil and liquids reserves, which increases all-in costs. © ZMB 350 312 300 $/Mcme Produced • Weighted average all-in costs for the group in 2012 were $225 per thousand cubic meter equivalent (Mcme), representing a 10.2 percent year-over-year decrease from 2011. 247 250 131 207 101 104 139 146 148 2005 2006 2007 200 150 68 251 252 225 217 157 69 76 74 41 100 50 181 175 148 116 151 0 2008 2009 2010 2011 2012 Cash Costs (incl Tax) F&D Costs Full Cycle Costs (incl Tax) Realized Gas Prices Wtd. Avg. Oil & Gas Prices Henry Hub Price of Gas $ Per Mcme Operating Costs G&A Interest Current Tax Cash Costs (incl Tax) F&D Costs Full Cycle Costs (incl Tax) Realized Gas Prices Wtd. Avg. Oil & Gas Prices Henry Hub Price of Gas 2005 91.84 11.42 11.06 24.50 138.82 68.04 206.86 248.99 256.77 307.13 2006 94.05 13.85 12.20 25.85 145.95 100.70 246.64 218.27 234.71 233.43 2007 98.71 13.71 14.93 20.42 147.78 104.22 252.00 216.41 236.24 248.82 2008 127.93 15.52 11.05 26.70 181.20 130.78 311.98 279.12 303.13 309.85 2009 92.07 14.18 9.78 0.00 116.03 40.51 156.53 188.17 204.31 139.85 2010 116.28 14.61 6.80 10.22 147.91 69.35 217.26 176.72 212.67 154.32 2011 141.05 14.00 7.30 12.66 175.01 75.84 250.85 158.30 220.87 139.31 2012 132.30 12.59 7.33 (1.14) 151.07 74.26 225.34 106.90 203.35 97.27 Note: Cash Costs and Current Tax in units of production. F&D costs are in units of reserve additions. Source: Company 10-Ks Notes:“Full cycle” or “All in” costs are defined herein as the sum of operating costs (on a unit of production basis) plus the cost of acquiring, exploring for, and developing new reserves (on the basis of an equal unit of new reserves identified). The annual presentation of costs incurred in property acquisition, exploration and development activities (collectively referred to as “costs incurred”) is an SEC requirement for publicly listed oil and gas companies. Such an accounting, however, is not required, and is typically not reported, on a quarterly basis. Thus, this interim update will not discuss 2012 YTD all-in costs. 11 American Dry Gas Industry is the State of Coma Indicating that Shale Gas Price Anomaly will not last for Long 1600 1400 Number of rigs 1200 1000 800 Oil 600 Gas 400 200 Jan-14 Nov-13 Sep-13 Jul-13 May-13 Mar-13 Jan-13 Nov-12 Sep-12 Jul-12 May-12 Mar-12 Jan-12 Nov-11 Sep-11 Jul-11 May-11 Mar-11 Jan-11 Nov-10 Sep-10 Jul-10 May-10 Mar-10 Jan-10 Nov-09 Sep-09 Jul-09 May-09 Mar-09 0 Henry Hub price does not cover dry gas production costs estimated to be USD 6 per MMBTU on average for more than five years. Production of dry gas because of the depressed prices is possible only as by-product of gas liquids of shale oil. This situation is not sustainable and will eventually lead to the Henry Hub price rise above the USD 6 MMBTU levels. There are already no major increases in shale gas output from September 2011 there are predictions that dry gas output may fall unless price adjustments takes place. HH-linked tolling contracts are structured in a way that risk of such price adjustments fully stays with the buyer. Price adjustments will make deliveries of American LNG to Europe loss-making. Sources: Baker Hughes, Gazprom Export estimates © ZMB 12 Gap is Widening Between European Indigenous Production and Consumption 900 800 700 Volume, bcm 600 500 +165 bcma 400 +222 bcma 300 200 100 Production forecast spread Production consensus forecast 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 0 Consumption forecast spread Consumption consensus forecast Source: Consensus projections derived from consultants, companies and governmental bodies © ZMB 13 THANK YOU FOR YOUR ATTENTION! © ZMB 14
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