1. RUSSIAN DOMESTIC GAS MARKET Dr. Tatiana Mitrova 21 June, 2016 39th Annual IAEE International Conference Bergen, Norway 420 West 118 th Street, New York NY, 10027 | @ColumbiaUEnergy | energypolicy.columbia.edu | energypolicy@columbia.edu

2. Russia`s GDP expectations are revised downwards 2 Russian GDP dynamics, (2012=100%) Source: Russian Economic Ministry

3. Domestic gas consumption is stagnating Russian gas demand dynamics by sector in 1990-2013 Sources: Rosstat, ERI RAS, Energy Ministry 3 bcm

4. Increasing gas bubble in the domestic market 4 CompanyProduction in 2015, bcmUnutilized potential and capacities additions under development by 2020, bcm Gazprom406~155 Novatek52~48 Rosneft42~48 VIOCs (APG)46~15 TOTAL635,5266 Rosneft and Novatek have extremely ambitious plans on gas production expansion, Obligatory utilization of the associated petroleum gas (APG) and its priority pipeline access stimulates VIOCs gas output growth

5. Estimated gas sale prices of the main Russian gas producers, 2013 Aggressive price wars are becoming the only way to secure market niche, but Gazprom is obliged to supply at higher regulated prices 5 Source: Source: T.Mitrova, G.Molnar “Russian Gas Market: Entering New Era”, Cedigaz 2015 RUB/mcm Two-sector gas market model Regulated prices Free prices >

6. Domestic gas prices are frozen again 6 Russian average weighted wholesale gas prices for industrial consumers in 1998-2016 Sources: Rosstat, Federal Tariff Service of the Russian Federation, ERI RAS, RUB/mcm$/mcm

7. At oil price below 45 $/bbl, the price of equal profitability is below the regulated price 7 Source: ERI RAS calculations There is increasing pressure for domestic gas price freeze or even reduction from the global market dynamics and growing domestic oversupply Equal profitability price in Moscow at different oil prices compared to the regulated price

8. Saint-Petersburg Exchange: more than 12 bcm sold on spot basis since 2014 mainly under regulated prices 8 Number of gas sellers Number of gas buyers Source: SPMEX Trading volumes

9. There are increasing imbalances in the stakeholders positions 9 IGPs Gazprom Infrastructure investments Responsible for security and flexibility of supply Higher taxes, non-flexible regulated prices Social responsibility No access to the export markets Problems with pipeline and storage access Gazification State Gas producers Obligations to supply “social consumers” Responsibility for economically unattractive investments in gazification Regulated low prices make new investments not attractive Worries about gas affordability and social stability Wants to control export projects for geopolitical reasons Needs higher tax revenues

10. Stakeholders interests: Russian State is the major stakeholder with extensive agenda, regarding gas as an important domestic and international political tool 10 StateGazpromIGPsConsumers  Security of gas supply for the domestic consumers including sensitive regions and social groups  Low transportation tariffs  Low gas prices affordable for the industry and for the population  Ensure politically important infrastructure projects and external gas policy  Ensure tax revenue growth from the gas industry  Company`s profitability and financial sustainability  Stable production volumes  Company`s profitability and financial sustainability  Access to the new markets domestically and abroad  Non-discriminatory pipeline and storage access  Stable production volumes  Acceptable (low) gas and electricity prices  Reliable supplies (including for the non-payers)  Gazification  Transparent and easy access to gas supply services

11. Gas market reform options All national gas production, transportation, sales and export under control of a single national gas company Nationalization of the gas industry No changes Status quo Gradual improvement of the transportation tariff methodology, access to the underground storages, liquidation of the most obvious contradictions. Gradual improvement of the market mechanisms UGSS unbundling into a number of competing private gas producers, selling their gas on the wellhead and a separate state-controlled company, responsible for domestic and export supplies and being the “guarantying supplier”. Upstream competition with centralized transportation, storage, domestic sales and export UGSS as a separate state-controlled company, production and supply performed by the competing private companies. Proportional export (through a single export channel?). Transportation unbundling Complete Gazprom`s unbundling, complete gas export liberalization. Pricing at the gas exchange. Complete Anglo-Saxon type gas market liberalization

12. All gas market reform options seem unattractive and risky, especially in the crises environment, so any profound changed are postponed 12 Inefficiency Supply security threats  Complete gas industry nationalization  Competition in production and state-owned company responsible for transportation, supply and export  Gazprom`s unbundling and creation of “Transneft”-type transportation company  Complete Anglo-Saxon type market liberalization  Status-quo and minor adjustments of the institutional framework

13. Thank you For more information contact Mitrova Tatiana Email: tm2845@columbia.edu