1. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 1 Natural gas for Ukraine, Russia and Europe: where next? Simon Pirani Senior Research Fellow Oxford Institute for Energy Studies International Security Forum, Lviv, 16 April 2010

2. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme MAIN POINTS The impact of economic crisis on the European gas market The effect of crisis, and recovery, on Russia and other CIS producers Ukraine’s gas trade after the 2009 ‘gas war’ Prospects for international cooperation 2

3. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Observed gas demand, OECD Europe (bcm) It may return to pre-crisis levels only in 2013-14 Source: IEA

4. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Changes in the European market Oil-linked prices may not be with us forever Source: Howard Rogers (OIES), Atlantic Basin LNG / Argus, Gas Matters 4

5. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Natural gas imports to OECD Europe first nine months of the year, Bcm 5 Russia lost market share

6. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 6 A very different outlook for Russia and Gazprom Worries about a ‘supply squeeze’ have gone. Now there are questions about long-term demand. Gazprom’s big projects are being delayed... Gazprom will face competition in Europe from LNG... Russia’s dominance in central Asia has been undermined by the Turkmenistan-China pipeline... In Russia, Gazprom is under pressure from the oil companies and Novatek...

7. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 7 Main sources of supply to Russia’s gas balance, 2008-2009 (bcm)

8. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 8 Turkmen gas exports, 2008-2011 (bcm)

9. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 9 Ukraine after the January 2009 ‘gas war’ Nord Stream will be built and Ukraine’s bargaining power will be reducedNord Stream will be built and Ukraine’s bargaining power will be reduced Ukraine will pay European-linked prices for importsUkraine will pay European-linked prices for imports Gas consumption must be cut – by energy-saving, not industrial slumpGas consumption must be cut – by energy-saving, not industrial slump Production could be increasedProduction could be increased

10. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 10 Russian gas export capacity to Europe up to 2015: transit via Ukraine could be reduced

11. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Ukraine’s demand collapse, 2009 monthly consumption, as % of same month in 2008 11 Demand destruction concentrated in industry, but slowly recovering since the spring

12. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Volume of imports PriceImport bill 2009 (est)28.51 Bcm $231.12 (average) $6.59 billion 2010 (proj’n)**32.5 Bcm $290-300 (average) $9.42-9.75 billion Ukraine’s 2009 gas imports problem was converted into a cash problem... the IMF counted $3bn Naftogaz operating deficit as part of Ukraine’s fiscal shortfall * Source: energy ministry, Naftogaz. ** Assuming oil at $70/bbl But what will happen in 2010?

13. OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 13 Europe, Ukraine and Russia: areas of possible cooperation TRANSIT AND STORAGE: How could a consortium work to the benefit of all? Could Ukraine become a storage provider? REDUCING CONSUMPTION: In industry, it will depend on sourcing investment Municipal services reform is hard (in Russia too) What about price reform, and Naftogaz structure? INCREASING GAS PRODUCTION IN UKRAINE: What type of investment environment? The more transparency, the better