1. Russian Gas Market Perspective Alexey GROMOV Ph.D, Deputy General Director Institute for Energy Strategy 14th December 2011

2. 1. Importance of Russian GAS for Russia and for Europe 2. Current situation in Russian Gas Industry 3. Regulation context 4. Russian gas market perspective

3. Source: IES Energy sectorGas Industry GDP Export revenues Budget revenues GAS industry is not dominate in Russian Economy Russian revenue from fossil fuel exports exceeded $255 billion in 2010 (from which only $46 billion is GAS)

4. …but Russian Economy strongly depends on GAS Domestic primary energy consumption Fuel Mix in the Electric Power Sector Since 1990 till 2010 the gas share in domestic energy consumption has grown with 43 to 54% Since 1990 till 2010 the gas share in fuel mix in the Electric Power Sector has grown with 55 to 69% Source: IES

5. Europe depends on Russian GAS… …but the level of dependence is declined Source: IES

6. … however some European countries can’t do without Russian GAS More than 50% Source: IES The share of Russian gas in national domestic gas consumption, 2010

7. Russian GAS also strongly depends on European gas market The Structure of Russian Gas deliveries, 2010 The Scheme of the Unified Gas Supply System (UGSS) EU-27 provides almost 70% of Russian gas export deliveries in bcm EU-27 provides more than 85% of Russian gas export revenues in $ The current Russian system of Gas pipelines (UGSS) is oriented to the Europe

8. 1. Importance of Russian GAS for Russia and for Europe 2. Current situation in Russian Gas Industry 3. Regulation context 4. Russian gas market perspective

9. Structure of Russian Gas Industry: Gazprom and others… Gas production Gas processing Gas transport Gas distribution Gas export Gazprom (78%) Independent gas producers (70 companies – 9%) Oil companies (9%) PSA-operators (4%) Regional gas companies (less than 1%) Sibur (95% owned by NOVATEK) – more than 50% Gazprom (25%) Oil companies (25%) Gazprom (100%) Gazprom Export (100%) Gazprom (75%) Independent regional companies

10. Resource base : high level of concentration The Structure of Russian gas reserves (ABC1) by companies Distribution of balance reserves of free gas (ABC1+C2,) by territories and offshores, tcm Russia provide more than 23% (1st place) of proven world gas reserves (48,2 tcm) 69% of Russian gas reserves owned by Gazprom 60% of Russian balance (registered) reserves being located in Yamal-Nenets Autonomous Region

11. Natural gas production: crisis is overcome Gas production in Russia, 2000-2010 in bcm and in % to the previous year During the crisis 2008-2009 Russian gas production has fallen to 15% (on 81 bcm)

12. Independent gas producers attack Gazprom Leading companies in the independent sector Since 2000 the share of IGP companies has grown from 10% to 22% in 2010

13. Gas transport system needs renovation… bcm\year 700 600 500 400 300 200 100 0 200520102015202020302025 TFC at reconstruction and new building TFC without reconstruction Capacity decrease up to 230 bcm Age structure of the UGSS*, 2010The dynamics of technically feasible capacity (TFC) of UGSS, 2005-2030 Source: IES The average operating life of major pipelines has reached 25 years TFС of UGSS has fallen to 7-8% compared to design specifications Only current TFS renovation need more than $ 2 billion per year * UGSS – Unified Gas Supply System

14. Domestic gas consumption slowly growing Since 2000 domestic gas consumption has growth to 17% Average annual growth rate is not exceed 2,1% Gazprom provides 75% of domestic gas deliveries Source: CDU TEK, Gazprom

15. Domestic gas consumption structure is stable Domestic gas consumption structure, 2000-2010 Contribution of main consumer groups in gas consumption growth, 2000-2010 Electric power sector is the largest gas consumer in Russia (36%)

16. Russian gas export is stable too… Russian natural gas export, bcm (2000-2010)

17. Europe is the main export destination for Russian GAS Export of Russian gas to Europe by country, 2010 Export of Russian gas to the CIS by country, 2010 Germany, Turkey, Italy, France and Poland accounted for 60% of Russian gas export to Europe Ukraine and Belarus are dominated in the CIS region

18. Russian LNG: first steps to the East 1994Start PSA Project Sakhalin-2 2007Entering Gazprom in the project 2009LNG plant starts in operation 2010LNG export exceeds 10 mt Chronology of the realization of Sakhalin-2 Project Sakhalin -2 Project 6,6% LNG share in Russian gas export 6,6% Share of Asia-Pacific in export Fast growth of LNG export covers the export decrease to the Europe

19. 1. Importance of Russian GAS for Russia and for Europe 2. Current situation in Russian Gas Industry 3. Regulation context 4. Russian gas market perspective

20. GAS export regulation: one export channel Federal law about ONE EXPORT CHANNEL (on 20th July 2006) grants the exclusive right for gas exports to the organization that owns the UGSS or its subsidiary, i.e. Gazprom (Gazprom Export) LAW excludes the concurrence between Russian companies in the international gas market The unified rate of the custom duties is 30% (except the gas deliveries to the countries of Custom Union – Belarus, Kazakhstan) The average level of taxes in the gas industry essentially is less than in the oil industry Transit regulation (transit rate through territory of Ukraine is $ 2,89 per 1000 cm per 100 km in 2011) The total volume of transit payment for Ukraine exceed $ 3,6 bln The average cost price of Russian GAS (1000 cm) to the German border, 2011 Gas extraction Gas transport Taxes and custom duties $15$30$24 Transit payment $33 $102 Average cost price

21. Long term contracts and export prices Dynamics of average export prices of Russian natural gas, 2000-2010 ($ per 1000 cm) Prices at the NGC spot trading site (Germany) and the prices of Gazprom’s long term contracts at the German border, 2009-2011 The base of Russian gas export are long term contracts (for 20-25 years) “take or pay” The price of Gazprom’s long term contracts is linked to the world oil price with a delay of 6 months Long term contracts are predicted and reliable, but aren't flexible

22. Domestic gas market is still regulated… The federal law of the Russian Federation «About natural monopolies» from August, 17th, 1995 №147-ФЗ; The federal law of the Russian Federation «About gas supply in the Russian Federation» from March, 31st, 1999 №69-ФЗ; The governmental order of the Russian Federation (with changes and additions) «About measures on streamlining of state regulation of the prices (tariffs)» from March, 7th, 1995 №239; The governmental order of the Russian Federation «About state regulation of the prices for gas and tariffs for services in its transportation for territories of the Russian Federation» from December, 29th, 2000 №1021; The governmental order of the Russian Federation «About an order of an establishment of special extra charges to tariffs for transportation of gas for financing of programs of gasification» from May, 3rd, 2001 №335; The governmental order of the Russian Federation «About carrying out of experiment on realisation of gas on an electronic trading platform» from September, 2nd, 2006 №534; The governmental order of the Russian Federation «About perfection of state regulation of the prices for gas» from May, 28th, 2007 №333; The governmental order of the Russian Federation «About perfection of state regulation of the prices for gas» from December, 31st, 2010 №1205. Domestic gas market legislation Domestic gas market Regulated Sector 70% Unregulated Sector 30%

23. Domestic gas market: regulated sector Average wholesale gas prices for Russian consumers, 2000-2011 (roubles per 1000 cm) Gas prices are set by the Federal Tariff Service (FTS) Prices are differentiated by price zone and consumers categories (industry and households) Average prices for the industry are above than for the households

24. Domestic gas market: unregulated sector Unregulated sector Free contractual (negotiated) prices Electronic trading floor (2007-2008) Independent gas producers (IGP) and oil companies Prices are linked to the Gazprom’s prices Contractual prices is a commercial secret Gazprom, IGP and oil companies Total sales volume of gas is 13,25 bcm Number of sellers is 14 Number of buyers is 59 Number of contracts is 3120 Average contract price for 38% above the average regulated price Experiment with electronic trading floor will be continued in 2012-2014

25. 1. Importance of Russian GAS for Russia and for Europe 2. Current situation in Russian Gas Industry 3. Regulation context 4. Russian gas market perspective

26. Program of long- term development of the fuel and energy complex of the Russian Far East Eastern Gas Program General scheme of development of the gas industry for the year 2030 (GS-2030) Conception of the state program for exploration and exploitation of the continental shelf of the Russian Federation Energy strategy up to period 2030 (ES-2030) Investment programs of oil&gas companies System of strategic documents to develop the Russian gas industry Federal Level Industrial Level Regional Level Business level ES-2030 is an ideology of development GS-2030 is an industry roadmap of development Investment programs are the concrete realization of development

27. Russian gas production up to 2030 Potential gas production is sufficient to meet any demand Gas production up to 2030 (according to ES-2030 and GS-2030) ES-2030 (min) ES-2030 (max) GS-2030 (min) GS-2030 (max) Source: ES-2030, GS-2030 bcm

28. new areas Changes of Russian gas production map New areas (Yamal, Eastern Siberia and Far East) will provide more than 40% of Russian gas production up to 2030 8

29. Targets of gas export: shift to the East

30. 30  Nord Stream-2 (end 2012)  South Stream (projected) Preservation of the occupied share in the European gas market (more than 30% in EU-27) Increase of gas export revenues (275 bln USD in 2010) Security of Russian gas deliveries to Europe, including transit questions Maintenance of status quo in Caspian Region Using of Russian gas infrastructure to export Caspian gas to EU-27 Western gas policy in ES-2030: key projects & goals

31. Eastern gas policy in ES-2030: key projects & goals  LNG Projects in Sakhalin  Natural gas Export to China Share of Eastern Siberia and the Far East in gas production – 14-15% LNG share in gas export – 14-15% Share of the countries of the Asia-Pacific Region in the structure of gas export – 20%

32. Export expectations vs. reality Risk of decrease in export on 15-20% 15-20% Russian Gas Export forecast up to period 2030 Factors of decrease in export expectations Europe:  Competition growth US:  refuse of future Russian LNG (the boom of shale gas production) Asia-Pacific:  competition growth (Central Asia)

33. Domestic gas market: shift to net-back prices Tariff regulation in 2011-2015 will change as follows: – Transfer to long term tariffs – Synchronisation of investment programs of the natural monopolies – Regulation of reliability and quality of services offered – Information disclosure by natural monopolies (their activities) – An increase in energy efficiency of electricity, gas, heat and water consumption – Increasing the effectiveness and transparency of the regulatory bodies activities for gas industry - a transfer to equal profitability prices for domestic and external consumers (net- back prices) - abolishment of cross-subsidising in the wholesale and retail gas markets - a transfer to equal profitability gas prices has a smooth transitional character, to avoid price shocks for domestic consumers

34. Conclusions Main goals Preserving the leading role on the European gas market The increased trust between Gazprom and its customers in Europe and CIS Take more than 10% of the Asia-Pacific gas market Get into the LNG market of South Asia and South America Main risks Stabilization of demand for Russian gas in Europe The high investment and price risks in China The high level of competition on the LNG market Main opportunities The quality of presence on the market is more important than quantity Exit on new level of relations with the EU (US-Canada, EU-Norway etc.) The aggressive policy in the LNG market

35. Thank you for your attention www.energystrategy.ru Alexey GROMOV Deputy General Director Institute of Energy Strategy, Moscow The Energy of the Future in our Hands