1. Nabucco, European Energy Supply Diversification, and Russia
Vladimir Milov Institute of Energy Policy, Russia
FT Gas for Europe Conference Budapest, September 14th, 2007

2. South Eastern and Central Europe: the region of Europe most dependent on Russian gas supplies
Share of gas imports from Russia in primary energy consumption, 2006, %
Source: BP Statistical Review of World Energy 2006 (primary energy consumption), Gazprom (gas imports by relevant countries)

3. Why doubts on Russian gas supply reliability?
High possibility of gas supply deficit due to underinvestment in upstream gas production sector
Ageing gas pipeline system and increasing risk of pipeline accidents (several recorded this year)
Permanent difficulties with transit countries (Belarus, Poland, Ukraine, Turkey)

4. Gazprom’s aggressive asset acquisition policy leaves little room for upstream investments
Gazprom’s investments during the recent years (billion USD)
Source: calculations based on Gazprom data

5. Will Gazprom invest enough in new gas field development to address the supply challenge?
Structure of Gazprom’s investment program for 2007 (billion USD)
Source: Gazprom’s board of directors decisions of January, May, August 2007

6. Projects delayed in 2007, sacrificed for more asset acquisitions
Investments in development of Shtokman field in 2007 cut from USD 670 million to USD 335 million
Peak production at Kharvutinskaya area of Yamburg field (30 bcm/year) postponed from 2008 to 2010
Production at Neocomian strata of Zapolyarnoye field (15 bcm/year) postponed to 2011
Expenditures on modernization of the trunk pipeline system cut by USD 950 million
This is the price paid so far for the acquisitions of “Sakhalin Energy”, “Beltransgaz” (Belarus gas pipeline operator), “Mosenergo” power company

7. Rapidly ageing gas pipelines
Gazprom’s pipelines structured by age, %
Source: Gazprom, “Gazprom Databook 2006”

8. Can the current area of production deliver substantial new volumes of gas?
Potential of new gas output in the current gas production area, bcm/year
Source: presentation by Gazprom’s deputy CEO A.Ananenkov, Moscow, June 14th, 2007
These volumes are only sufficient to offset the expected cumulative bcm decline of gas production at Urengoy and Yamburg fields in the coming 4-5 years.

9. How much money is required to develop new gas production areas?
Gazprom’s estimates of Yamal Peninsula gas field development costs (billion USD in current US dollars)
Source: Gazprom’s “Complex program of Yamal Peninsula gas fields industrial development”, 2002

10. Central Asia – the great uncertainty
No guarantees of gas supplies from Turkmenistan to Russia beyond 2009 exist
Despite announcements made in May 2007, no “specific agreements” on gas supplies through “Caspian” gas pipeline were reached by September 1st, 2007
Turkmenistan pursues alternative gas pipeline projects (with pipeline to China being the most potentially realistic option)

11. Can the growing gas demand be satisfied with this type of investment strategy?
Gazprom’s gas demand projection to 2030 (bcmpa; best case scenario)
Source: Vedomosti ( April 16th, 2007

12. Gazprom will be able to meet it’s supply commitments only if the domestic demand will grow below 1% a year to 2010 and below 0,5% a year in
If the domestic gas demand in Russia will grow faster, even if independent gas producers increase production to bcm by 2010, the deficit of gas will occur
The average growth of gas demand in Russia in had been 3% a year (6,7% only in 2006)
Additional gas for Nord Stream, South Stream, “Altai” pipeline to China – where is it going to come from?

13. Why Nabucco is sometimes viewed with skepticism?
Unclear resource base
The perspectives for a Trans-Caspian pipeline, putting aside the U.S. optimism, appear bleak due to unresolved Caspian seabed division dispute
Without this, the supply capabilities of Shah-Deniz gas field in Azerbaijan will be only partially sufficient for Nabucco
The Trans-Iranian pipeline (the most potentially realistic and viable option for transportation of Turkmen and Iranian gas to Europe) will be most likely blocked by the U.S.

14. Russian gas in Nabucco?
Probably this will be a “soft solution” in the end
However, Russia will most likely reject supplies to an “unfriendly” pipeline on political grounds
In the same manner, participation in Baku-Tbilisi-Ceyhan oil pipeline was rejected by Russia back in 2002
Putin’s Kremlin takes “no prisoners” when it comes down to gas transit geopolitics
Also, the dependence on Russian supplies increases

15. South Stream: viable?
Cost of construction? (Involvement of Gazprom and ENI suggests that the costs would be excessive…)
Where’s the gas?
Map source: ENI & Gazprom

16. South Stream: potential rationale
Bypassing the “problem” transit countries – Ukraine, Turkey
Potential target markets – Italy and Baumgarten gas hub in Austria
If both Nabucco and the South Stream will be build, this will create excessive pipeline capacities in the South Eastern Europe region
…Which is probably not bad for the European energy security

17. Conclusions
Successful implementation of the Nabucco project may help mitigate the risks of dependence on Russian gas supplies for the countries of South Eastern and Central Europe
The risks of Russian gas supplies in the forthcoming future severely increase due to:
(a) abandoning the Gazprom restructuring plans, and
(b) the strategy of building up a “global energy company” which diverts financial resources away from investments in core business development
Nabucco may be a good risk mitigation option, but it’s viability remains uncertain
Competition with the South Stream: South Eastern Europe doesn’t need two new gas pipelines