Russia Has Multiple Options for Gas Exports Via LNG and Pipeline

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme RussianExports Asiaand to LNG Natural Gas Natural James Henderson James SEPTEMBER2014 Programme

, OIES ,

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme        Gazprom’s declining Gazprom’s declining share Russiandomestic of market Uncertaintyover ofexportfuture to Europe salesFSU and Significant gasin East resources Siberia and Far EastRussia of in Growth Asiangas demand, especially in China Keyquestions: markets Geo Need increasedtax for revenuesfrom export sales     Russia has clear motivation to turn to Asia turn to to motivation clear has Russia Will Russian LNG be developed as a major new source of gas supply in the East the in supply gas of source new as amajor developedbe LNGRussian Will Asia?in gas prices for benchmarka set China to gas Has Russian role importantan increasingly Novatektake and/orRosneft Will East? theto exporter gas major as the role its fulfil GazpromCan - political demonstration to western powers that Russiahas alternative

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme     Total and Chukchi Seas Bering and East Laptev Seas Siberian Sakhalin Far EastDistrict Onshore Federal District Federal Siberian Russia Russia has significant gas resources in the East producers and with its domestic rivalsdomestic its and with producers global with both competition Gazprom’sin frontier new thebecome has now Asia projectsLNG further as well as exports piped involve to likelyis expansion further but 2009, since productionin has been LNG 2 Sakhalin developmentregionaland construction infrastructurecatalyse also can exportsand monetised,be can which resources gas significanthas East Russia’s diversificationuseful can offer Asiaa result as and politics,and competitionby underminedhavebeen markets western for expectationsRussia’s and Gazprom’s Russia Russia has large gas resources in its eastern regions and has Reserves turned towards Asia for export growth ABC1 bcm 4900 1400 2600 900 Reserves bcm 5000 1100 3600 300 C2 Resources 57400 12000 31700 2700 5600 5400 bcm 67300 14500 37900 Total bcm 2700 5600 6600

Exports Exports to Asia are part of the Energy Strategy

Non-CIS Exports (bcma) 100 150 200 250 300 50 0 2005

2008 2015 2022

2030

Europe Asia

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme     Gazprom with conflictcould Siberia East in and Sakhalin on plans Rosneft Vladivostokin gas Siberia East of arrivalof timing to linked closelystrategy Sakhalin constructed is Siberia” of “Power unless stranded are effectivelyYakutia and Irkutsk in Fields baseresource easternopeningupRussia’svast key tothe is infrastructurePipeline Russia’s Eastern strategy is closelystrategyRussia’sEastern to the related ultimate ultimate completion of the gas pipeline to China

Source: Gazprom

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme     Overallsuggests breakevenprice c.$10.5/mmbtu of (10%real IRR) extension of Power of Siberia to Kovykta(c.$6bn) Other costs include split Russianwith state VladivostokLNG pipeline capex Chayandacapex Economics ofEastern Programme Gas -

$26bn - –

$13.5bn, Kovyktacapex

c.$13.5bn for a 10mmt plant, although costs maybe Blagoveschensk –

total initial total initial capex= c.$55bn

processing facility(c.$17bn) and -

$15.5bn, Power $15.5bn, Power of Siberia

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme       Has the HasGazprom 2019starting in Ramp period offive up years, 38bcma 30 yearcontract,peakwith flow of valueof Russiangas as depending $11.8on calorific value $/mmbtucould be as high Range ofpricesis $10 the contract uncertainties thedetails about of However,arethere stilla of lot valueof contractis $400bn Miller as quoted sayingthat total

- - 11/ CNPCdealset aprice for benchmark Asian imports? mcf

* possible outcome assuming lowe Russian gasRussian CV lowe outcome assuming * possible US$/mmbtu* US$/mmbtu US$/mcf $/mcm Volume US$bn Russia North Sea

Range of prices in Russia bcm 10 15 20 25 30 35 40 0 5 Profile Profile of Russian gas sales to China kwh/m3

1032 11.8 10.8 11.6 10.9 11.0 388 400 1032 11.5 10.6 10.7 378 390 1032 11.2 10.3 10.4 368 380 - China gas deal 1032 10.9 10.0 10.2 359 370 1032 10.6 349 360 9.8 9.9

80% ToP 80% bcm

1032 10.3

339 350 9.5 9.6 6

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Comparative cost of Eastern Russian gas supply    Breakeven Price (US$/mmbtu) 10.00 11.00 12.00 13.00 14.00 15.00 16.00 0.00 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 down costs transport keeps markets Asianto East Russian the of proximityThe exporters global other with coston competitive be can Asiatheyto projects export gas Russia’s ofcosts highthe Despite reasonable (10 reasonable a Gazprom allow to struck been haveto appears deal Chinathe of price The competitive with competitive with costof supplyof alternativegas Price appears to Price appears be reasonable and for Russia is expansion Sak 2

Yamal Yamal LNG China Pipe Combined + VLNG - 12% real) rate of return, as long as it enhances synergy benefitssynergyenhances as it long as return, of rate real) 12% Sak 3to VLNG China Pipe Only Alone Stand Sak 1 Alone VLNG

US$/mmbtu 10.00 12.00 14.00 16.00 0.00 2.00 4.00 6.00 8.00

Comparative cost of supply to Asia FOB Transport

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme    

mmtpa 10 15 20 25 30 35 40 45 Four LNG projects could export 40mtpa construction of pipeof construction and is confirmed deal Chinaof extent full until uncertain remain liquefaction gas for of sources theand projects of prioritisation the about decisions However, Germany to sales gas current matchcould route export pipelineChina The Europe to exports current thirds two or 100bcma, reach could exports Eastern total By2025 pipelineand LNG viaexports gas for options multiplehas Russia 0 5 2013

Exportsales based around LNG and piped gas

2017 2020 2025 comences Sakhalin 2 Current Sakhalin Expansion 2 Sakhalin 1 Sakhalin LNG Vladivostok mthsp.a.) (5 LNG Yamal

bcma Pipeline exports could take total to c.100bcma 100 120 20 40 60 80 0 2010 2015 2020 2025

2030 Sakhalin Current Sakhalin Expansion Sakhalin LNG Vladivostok LNG Yamal 1 Sakhalin Pipe Siberia East

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme    The growing competition between Gazprom and the Independents is in East Siberia East in assertivemore becomingis Rosneftbut target, governmentRussian the is competitionManaged customers for 3 for support governmentsignifies exportsLNG on monopolyGazprom’sof ending The strategy LNGRussia’s of leader the becometo place taking is battle Asignificant – Leningrad LNG

10mmtpa 10mmtpa ?

party exporters party Phase 1? - Shtokman

15mmtpa 15mmtpa in

– Pechora LNG

now now playingout in the Asian export markets

2.6mmtpa 2.6mmtpa ?

–

asking for TPA in export pipelines and has formed JV with CNPC JV with formed has and pipelines export TPAin forasking and tradersAsian NegotiationsEuropean with CNPC Yamal LNG

–

- Rosneft and Novatek are actively competing with Gazprom with competing are activelyNovatekand Rosneft

3mmtpa –

16.5mmt

Kovykta

Chayanda to 38bcma China

– Vladivostok LNG

15mmt

V - K - S expansion Potential for 5mmt Various Asian buyers Sakhalin 2 Vitol Marubeni SODECO Sakhalin 1

–

2.75mmtpa

– – – –

1.25mmtpa 1mmtpa 10mmt

5mmt

Rosneft Novatek Gazprom

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme       Competition with with Competition AsianCentralgas West Siberian gas Asia to Would create a link of for 30bcm to western China have againbegun Negotiations about ofgasthe export Russia creatinggasa global hub? netback forGazprom and could generateprofitable $9.50/mmbtuwould be competitive of China long transport distance east coast to Price would haveto compensatefor arrivingin Xinjiang

Western export route to Western exportroute to China

The Pipeline Altai

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme        the construction of Power of the construction Power of Siberia and Gazprom’s strategyto capture The exactstrategy for export(and domestic) salesdepend now upon will eastern regions significant have reserveproduction potential and Expansion into Asiahasa long been havewhich beenheightened the currentbysurrounding eventsUkraine Russia ofclear has anumber incentives topromotegasexportsAsia, to market Russia’s to Asia shift createcould disturbance global significant in gas pipeline China, but its to priceneed expectationstobe realistic Gazprom could furtherposition enhance itsown bya second developing easternLNG and discussions about access to piped export sales Rosneft appearstohavean aggressive marketing strategythatinvolves from international and domestic peers Gazprom is under some pressureto deliver, as competition is increasing synergybenefits

Conclusions - term Russianand thecountry’sgoal,