Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Russia’s Oil&Gas Development and Exports Trends

Alexey GROMOV, PhD, Principal Director on Energy Studies Institute for Energy and Finance

The Eleventh Japan-Russia Energy and Environment Dialogue (JREED) Niigata, Japan 30th January 2019

1 Oil Industry

Global oil market context

Russian oil production and export trends up to 2023

2 Gas Industry

EU Gas market trends

Russian gas production and export trends up to 2023

1 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV OPEC+ Agreement has a crucial role to stabilize the global oil market

90 $/bbl Brent WTI

80

70

60 OPEC+ Agreement Update 50 (June 2018)

OPEC+ Agreement 40 Update (December 2018) OPEC+ OECD commercial Agreement stocks reduction 30 Decrease (December during 2015 2016)

20 01/15 03/15 05/15 07/15 09/15 11/15 01/16 03/16 05/16 07/16 09/16 11/16 01/17 03/17 05/17 07/17 09/17 11/17 01/18 03/18 05/18 07/18 09/18 11/18 • OPEC+ Agreement (December 2016) to cut collective oil production of 1,8 MMb/d supported global oil prices and reduced price volatility in 1Q2017- 1Q2018. • The threat of US sanctions against Iranian oil exports led to OPEC+ Agreement Update in June 2018 (increase collective oil production of 1 MMb/d). • New OPEC+ Agreement Update (December 2018) to cut collective oil production of 1,2 MMb/d has to reduce the oil market volatility in 2019

2

OPEC+ Agreement Update in December 2018 lead to gradually balancing the global oil market in 2019

Changes in global liquid fuels market balance

Mbd 2.0

1.6

1.2 -0,4 -0,4 0.8 -0,8 0,75 0.4 0,7 +0,2 +0,2 +0,4 0,4 0,35 +0,4 -0,1 0,1 0.0 -0,2 +0,3 +1,2 -0,1 +0,3 -0,5 +0,3 -0.4 +0,2 -0,0 +0,2 Доп. рост -0,1 +0,1 -0.8 спроса +0,2 -1.2

-1.6

-2.0 OPECОПЕКNon Не СШАUS ОПЕКOPEC Non Не СШАUS OPEC ОПЕКNon Не СШАUS OPEC ОПЕКNon Не СШАUS ОПЕКOPEC * ОПЕКOPEC* ОПЕКOPEC * ОПЕКOPEC* 4Q СпросD ПредложениеSupply 1Q СпросD ПредложениеSupply 2Q СпросD ПредложениеSupply 3Q СпросD ПредложениеSupply 4Q 2018 2019 2019 2019 2019

СнижениеDecrease in предложенияsupply /Increase/увеличение in demand спроса УвеличениеIncrease in supply/Decrease предложения in/ снижениеdemand спроса

Notes: D - Demand

* Not including US 3 Source: IEF estimates bases on EIA, МЭА, ОПЕК data ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Russiaʼs Role in the OPEC+ Agreement

1Q 2017 – 1Q 2018 Russia’s share in the collective oil production cuts planned in 2017 within OPEC+ Agreement (tbd) • Russia played central role bringing about OPEC and non-OPEC output reduction deals of December 2016 • Russia pledged to gradually lower output by 300,000 b/d during first half of 2017 compared with October 2016 level (largest non-OPEC reduction) • Russia with Saudi Arabia now apparently co- determining OPEC+ policy OPEC+ Agreement Update (June 2018) Level of Russian compliance with initial OPEC+ Agreement • Russia and Saudi Arabia ensured the implementation of ‘Vienna Alliance’ members’ production cut target, 2017-18 decision to increase the collective oil production of 1MMbd in coming months • Russia exceeds October 2016 baseline for production cuts for first time in October 2018, setting new oil output record of 11,6 MMb/d (activating most spare capacity built up during period of output cuts) OPEC+ Agreement Update (December 2018) • Russia played central role to reach new Update for OPEC+ Agreement (restart of collective oil output cuts of 1,2 MMb/d from January 2019)

Source: IHS Markit 4

1 Oil Industry

Global oil market context

Russian oil production and export trends up to 2023

2 Gas Industry

EU Gas market trends

Russian gas production and export trends up to 2023

5 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Russian oil production back to growth in 2018

. Russian oil production cuts within Russia’ crude oil production, 1989-2018

OPEC+Agreement led to oil production decrease 600 in 2017 up to 546,2 MMt (-0,3% y-o-y), for the first MMt CRUDE OIL LEASE CONDENSATE time in last 10 years 500 400 . But Russian oil production back to growth in 2018 300 and ensured new annual oil output record of 556 MMt (11,35 MMb/d) due to the activation of most 200 spare capacity built up during period of output cuts 100

0 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Russia’ crude oil production by key oil&gas . After 10 years of decline the Western ’ oil regions, 2014-17 output back to growth in 2018 due to increase oil 350 MMt production in Yamalo-Nenets AO lower 1 MMt 1-2 MMt 300 . Greenfield expansion have supported the raise of oil 2-5 MMt more 5 MMt output in the Eastern Siberia (Suzun and Vankor) and 250 on Caspian onshore (Filanovsky’ field) 200 11,4% 10,5% 150 18,6% 18,4% 100

50 32,2% 31,3%

0 2014 2017 2014 2017 2014 2017 2014 2017 Western Siberia Ural-Volga Eastern Siberia and Timan-Pechora Far East

Sources: Rosstat, Russian Ministry of Energy, FIEF 6

Gazprom Neft is the main driver of oil productionʼ increase

. Neft is the main driver of Russian oil Oil output by Russian Oil&Gas Majors, 2008-17 production’ increase (+9 MMt in 2015-17) 600 MMt 77 76 500 65 61 65 69 . continue to develop Vankor oil cluster:oil 48 51 57 62 400 output at the Suzun field raised by 4 times up to 4,14 MMt, 46 47 49 49 50 49 51 54 58 60 62 60 60 61 61 61 61 62 62 61 at the Tagul field – by 9 times up to 0,34 MMt 300 90 92 90 85 84 85 86 86 83 82 200 . Sakhalin PSAs had increased oil output in 2017 as well as 100 204 202 200 222 221 independent Russian producers including JV with Japanese 113 115 116 118 121 0 investors (INPEX, ITOCHU, JOGMEC) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Others Gazprom . Nevertheless, oil production by Rosneft, and Surgutneftegaz LUKOIL decreased during this period due to Bashneft TNK-BP Rosneft OPEC+ cuts and oil output decline at the Western OPEX/bbl in upstream by Russian Oil&Gas Majors, Siberia 2014-18 8 Rosneft LUKOIL Gazprom Neft Tatneft . In 2017-18 OPEX by Russian majors have stabilized at $/bbl the level of 3-4$/bbl 6

. Russian majors have kept their costs at such a low level due 4.3 to pressure on contractors who are forced to reduce prices 4 4.2 even in the face of rising world oil prices and volumes of 3.7 work performed 3.2 2

2014 2015 2016 2017 2018

Sources: Rosstat, companies’ data, FIEF estimations 7 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Idling of wells was the main instrument to achieve 2017 OPEC+ production cuts

. Deactivation of (most likely marginal) wells was Change in Russian idle well count by company, October key method for achieving production cuts in 2017 2016-September 2018 . Russia’s idle well count jumped by over 5,000 between October 2016 and January 2018 . Idle well rate rose from 12,5% in October 2016 to 15,2% in January 2018

. Sharp drop in idle well count in 2018 coincided with main period of Russian oil production growth in 2018

. Russia’s idle well count has fallen over 3,000 since January 2018 . Idle well rate down to 13,2% in September 2018

. Tatneft and Rosneft have registered biggest reductions in idle well numbers in 2018, indicating new brownfield investment focus by this companies

Sources: IHS Markit, FIEF 8

New field development activity up significantly in 2017 despite cuts

Indexes for new oil field activity in Russia, 2016-18 Oil production at new felds inRussia,2016-18

Development drilling at new fields in Russia, 2016-18 New well completions at new fields in Russia, 2016-18

Sources: TEK Rossii 9 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Tax Reform ʻBig Maneuvreʼ is neutral for Russian upstream

. Starting from 2019 theexportdutyonoilwillbe . To compensate budget losses due to the reduction multiplied by a reduction factor of export duties on oil, a new component is . Starting from 2023, theexportdutywillbereset introduced into the MET (DM coefficient)- KMAN, which actually repeats the formula for calculating . Lower oil export duty will lead to higher theexportdutyonoil domestic oil prices (net back), and alignment . of domestic oil prices and world prices (less As a result, the overall tax burden on oil logistics costs) production will not change

Tax reform for mature oil fields: The Samotlor tax break

. Russia’s current oil sector tax system, based on gross revenues of production, particularly burdensome for Samotlor oil production and decline rate mature field producers . Samotlor oil field has obtained (2017) major tax relief package in exchange of Rosneft promise to invest more heavily in this field redevelopment • Finance Ministry agreed to annual MET reduction for Samotlor oil field of 35 trillion rubles (around $0,6 billion) and set to last for 10 years . Finance Minsitry of Russia promised to revisit Rosneft committed to drill about 2,400 new wells and question of comparable tax breaks for other produce an incremental 50 MMt (365 MMbbd) at Samotlor mature fields in three years, after evaluating field during next 10 years impact of Samotlor experiment on federal budget

Sources: Finance Ministry, IHS Markit 10

CAPEX in Upstream: from stagnation in 2016 to acceleration in 2017

. In 2017, investments in oil production increased by CAPEX in upstream by Russian Oil&Gas Majors, 13% y-o-y, reaching 1.9 trillion rubles 2010-17 2,000 . Rosneft became the leader in the dynamics of capital billions rubles investments (+29% y-o-y) 355 300 1,500 377 . LUKOIL significantly increased investments (+11% 199 325 209 208 y-o-y) 271 206 1,000 160 187 228 239 315 166 173 . Other majors reduced investments in oil production 178 284 146 132 292 220 328 500 149 265 786 119 608 330 350 456 188 240 276 0 2010 2011 2012 2013 2014 2015 2016 2017 Others Tatneft Surgutneftegas Gazprom Neft LUKOIL Bashneft TNK-BP Rosneft . The key areas of Rosneft's investments were the CAPEX/bbl in upstream by Russian Oil&Gas maintenance of production at the old fields of Western Majors, 2014-18 Siberia and the development of the Vankor cluster 14 $/bbl . In 2017, LUKOIL continued to increase investments in Rosneft LUKOIL 12 old fields of Western Siberia (116.4 billion rubles, +28.4% Gazprom Neft Tatneft y-o-y) and the shelf (55.9 billion rubles, + 10 35% y-o-y) 7.5 8 7.4

. Some (-9% y-o-y) decline in investment in Gazprom 7.1 6 Neft's production projects was due to the completion of the Novoportovskoye field infrastructure 4 3.3

2

2014 2015 2016 2017 2018

Sources: Rosstat, companies’ data, FIEF estimations 11 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

CAPEX trends up to 2023: growth will continue

. In 2019-23, investments in oil production will grow by 39% (+14% in real terms) due to the implementation of large- CAPEX in upstream (facts and forecast), 2013-23 scale programs for the development of production 3,000 capacities of Gazprom Neft and Rosneft billion rubles Oil related services Upstream 559 . Rosneft plans to increase oil and gas condensate production 2,500 522 481 to 250 MMt by 2025 (+29 MMt by 2017) by introducing new 433 2,000 406 fields in Eastern Siberia and increasing production at old 381 338 fields in Western Siberia (Samotlor) 1,500 329 291 283 . In 2018, Gazprom Neft announced the postponement to 223 1,000 2,337 2,216 2,076 1,895

achieve oil production of 100 MMt from 2020 to 2021-22 1,800 1,708 1,562 1,392 500 1,328

(mainly due to the OPEC+ cuts), while production in Russia 1,146 990 will total 75-80 MMt. The main production gains will be 0 ensured by new projects in the Yamalo-Nenets AO (Taz, 2013 2014 2015 2016 2017 2019 2020 2021 2022 2023 North Samburgskoe) 2018* Average CAPEX/bbl in upstream by companies, 2015-17

. Capex/bbl for Russian majors remains significantly Total 26.8 Chevron 25.7 lower than that of the largest international oil BP 19.3 companies, as in the portfolio of Russian majors' projects Statoil 19.0 16.4 are still dominated by traditional oil fields (Western Siberia, 15.6 PetroChina 15.5 Eastern Siberia) with relatively low exploitation costs ExxonMobil 15.1 14.4

Gazprom Neft 9.0 Russia (2023) 8.2 LUKOIL 7.4 Russia (2015-2017) 6.3 Rosneft 5.1 $/bbl Tatneft 3.4 0 5 10 15 20 25 30

Sources: Rosstat, companies’ data, FIEF estimations 12

Russian oil production outlook up to 2023

Russian crude oil production (facts and forecast), 2013-23 Crude oil production by Rosneft, MMt 600 MMt 250 млн т 500 200 150 400 250 100 221

300 50 556 561 566 569 571 573 522 526 535 548 546 0 Crude oil production by LUKOIL, MMt 2017 2022 200 100 млн т 100 80 60 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 40 82 86 20 0 2017 2022

Crude oil production by Gazprom Neft, MMt

80 млн т 60

40 75 60 20

0 2017 2022

Sources: Rosstat, companies’ data, FIEF estimations 13 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Crude oil exports: growth will continue

. In 2018, crude oil exports from Russia stagnated after Crude oil exports from Russia, 2014-18 the rally 2014-2016 and amounted to 256.9 MMt (+0.2% 25 y-o-y) MMt

. North-Western Europe (via Primorsk) is the main export 20 market for Russian crude oil (76.7 MMt) 15 . The Druzhba oil pipeline delivered more than 51 MMt of Russian crude oil to Central & Eastern Europe 10 . Supplies to the Mediterranean (31 MMt) and Asia-Pacific 5

countries via Kozmino (32 MMt) stagnated at the level of 0 2017 2013 2014 2015 2016 2017 2018 . Pipeline’ oil deliveries to Сhina was the only one PRIMORSK DRUGHBA' PIPELINE CHINA KOZMINO NOVOROSSIYSK OTHERS growing for Russian crude oil exports in 2017-2018 Crude oil exports by companies, 2014-17

. In 2014-17, the largest Russian Oil&Gas Majors seriously 150 MMt increased crude oil exports due to the refinery Eurasian Economic Union Others production' optimization 120

. In 2017 "Rosneft", "LUKOIL", "Gazprom" and 90 "Tatneft" has put for export 194 MMt (77% of total Russian exports) 60 113 100

30 26 34 18 15 0 8 9 2014 2017 2014 2017 2014 2017 2014 2017 Rosneft LUKOIL Gazprom Neft Tatneft

Sources: Rosstat, companies’ data, FIEF estimations 14

Russian crude oil exports outlook up to 2023: jump to Asia- Pacific

. In 2017, 75.2 MMt (+4.2% y-o-y) were sent from Russia to Russian crude oil exports in Asia Pacific (facts and Asia-Pacific, mainly to China (59.7 MMt), Japan (8.1 MMt) forecast), 2010-23 and South Korea (7.0 MMt) 100 млн т MMt 6 10 . We expect the Russian crude oil exports to Asia-Pacific will 80 10 grow up to 93 MMt by 2023 (+24% to 2017) 6 6 11 10 60 10 25 9 7 7 10 . ESPO is the main supply channel for Russian crude oil 7 40 8 16 17 17 deliveries to Asia-Pacific: in 2017, 48.2 MMt were pumped 9 9 16 16 through the oil pipeline, including to China - 17 MMt 15 45 20 9 13 30 32 32 21 25 14 15 16 . In 2017, Russia became the largest oil exporter to China, 0 ahead of Saudi Arabia (52.2 MMt). In the coming years, 2010 2011 2012 2013 2014 2015 2016 2017 2023 Sakhalin 2 Sakhalin 1 China (via Kazakhstan) China (ESPO) Kozmino Russian oil supplies to the Chinese market will continue to grow Пригородное Де-Кастри Китай ( через Казахстан) Китай (ВСТО) Козьмино duetotheincreaseinoilproductioninEasternSiberiaandthe Russian crude oil exports by directions (facts and expansion of ESPO. By 2020, the capacity of the pipeline on the forecast), 2008-23 Taishet-Skovorodino section will grow from 70 MMt to 80 MMt, 300 MMt on the Skovorodino-Kozmino section - from 44 MMt to 50 MMt 20 250 18 18 18 41 23 35 . Japan and South Korea depend heavily (over 85% of all imports) 23 30 28 200 43 32 52 47 37 34 37 30 50 on oil deliveries from the Middle East. The US-China tensions in 49 54 51 150 54 64 62 55 51 51 the South China sea will force these countries to diversify oil 59 61 75 68 70 100 61 69 supplies more actively, increasing imports from Russia and the 58 77 64 71 63 70 72 US. By 2022-23, oil supplies from Russia to Japan could 50 93 67 71 75 83 43 42 47 57 reach 10 MMt, from Russia to South Korea – 10-11 MMt 22 24 35 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2020 2023 ASIA PACIFIC REGION NORTH-WESTERN EUROPE CENTRAL & EASTERN EUROPE MEDITERRANIAN BELARUS OTHERS

Sources: ВР, Wood Mackenzie, FIEF estimations 15 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Russian products output and exports outlook up to 2023

. In 2018, Russian refinery industry shifts to growth after Russian petroleum products output three years of decline (facts and forexcast), 2015-23

. In 2018, the primary oil refining increased to 286.9 MMt MMt Others Fuel Oil Gasoil/Diesel Gasoline (+2.5% y-o-y) 300 . The return to growth was facilitated by the recovery of 100 world oil prices (as a result, the oil refining margin 113 118 124 128 129 126 122 117 200 increased) 72 57 51 44 39 36 33 30 . In 2019-20, the primary oil refining will stabilize at the 47 100 88 level of 290-293 MMt, but since 2020, it will again begin 76 76 77 77 80 82 84 86

to fall 39 39 38 [ЗНАЧЕНИЕ] 41 42 43 44 45 0 . The main causes are high competition with refineries from 2015 2016 2017 2018 2019 2020 2021 2022 2023 the Middle East and oversupply of petroleum products in Russian petroleum products exports the domestic market (facts and forecast), 2015-23 . In 2019-20, the exports of petroleum products will 200 MMt stabilize at the level of 150 MMt, but since 2021, the Others Fuel Oil Gasoil/Diesel Gasoline 27 exports of petroleum products will decline following the 150 31 fall of refinery production 30 36 38 37 35 33 28 . We expect the most significant decrease in the supply of 100 89 72 fuel oil up to 36 MMt to 2023, while the exports of diesel 63 56 52 48 44 40 36 and gasoline will grow slightly 50 59 51 49 51 54 56 57 57 58

0 2015 2016 2017 2018 2019 2020 2021 2022 2023

Sources: Rosstat, FIEF estimations 16

1 Oil Industry

Global market trends

Russian oil production and export trends up to 2023

2 Gas Industry

EU Gas market trends

Russian gas production and export trends up to 2023

17 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV EU gas demand outlook: the recovery will continue up to 2023

. According to preliminary estimates, in 2018, the growth EU gas demand (facts and forecast), 2007-30 of gas demand in the EU continued and amounted to 494 600 bcm (+0.6% y-o-y) Bcm 17 . In the next 5 years, power sector will remain the main 500 2 driver of gas demand in the EU 400

. In the longer term, the gas demand in the European 300 542 transport sector also will slightly increase 491 494 492 200 . However, in the long term the total EU gas demand will 100 not increase significantly due to the continued raise of renewable energy use, as well as energy efficiency 0 2010 2011 2012 2013 2014 2015 2016 2017 2018* improvements 2030 П ENTSO-G (ST scenario) WEO NPS BP Energy Outlook 2018 EU power industry gas demand (facts and forecast), . In June 2018, the EU approved legally binding targets for 2010-23 the development of RES up to 2035 200 . The main goal is to achieve the share of RES in the EU Bcm final energy consumption at the level of 32% by 2030 150 . According to the European Commission, in 2016 the share of RES in the EU final energy consumption was 17.04% 100 186 171 164 159 161 165 . This decision may have a negative impact on the long-term 145 147 156 151 152 129 121 123 prospects of gas demand in the EU 50

0 2010 2011 2012 2013 2014 2015 2016 2017 2019 2020 2021 2022 2023 2018*

Source: European Commission 18

1 Oil Industry

Global market trends

Russian oil production and export trends up to 2023

2 Gas Industry

EU Gas market trends

Russian gas production and export trends up to 2023

19 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV Gazprom is the leader in Russian gas production growth in 2018

. In 2018, Russian gas production reached a new all-time Russian gas production by months, 2016-18 record of more than 725.2 Bcm (+34 Bcm or +4.9% y-o-y) 70 . The main increase in production was provided by Gazprom Bcm 2018 2017 2016 65 (+30 Bcm or +6,5% y-o-y) Historical range 2011-2017 60 . Independent gas producers and oil companies maintained the gas production at 2017’ level 55 50 . In 2018, according to our estimates, domestic gas demand 45 (including the needs of the gas transportation system and gas injection into UGS) increased by 4.0% y-o-y 40 July May April June March August January October February November December . In 2018, Gazprom's gas supplies to the domestic market September also increased significantly, mainly due to a reduction in gas Russian gas production by companies, 2012-18 supplies from independent gas producers Bcm 725 . After the launch of Yamal LNG project, 750 655 669 691 reoriented the significant part of gas deliveries from the 641 636 641 domestic market to LNG exports 600

. Rosneft faced difficulties in increasing production and was 450 forced to conclude an agreement with Gazprom for the 476 441 470 purchase of gas of 5 Bcm 300 482 432 406 406

. We expect that Russian domestic gas demand will remain 150

stable in the range of 470-480 Bcm in the forecast perspective 0 2012 2013 2014 2015 2016 2017 2018 Oil companies (total) Gazprom NOVATEK Other producers (incl. JVs) PSA (Sakhalin 1 & Sakhalin 2)

Sources: TEK Rossii, companies’ data, FIEF estimations 20

Russian gas production outlook up to 2023

. In 2019-2023, Russian gas production will grow slightly Russian gas production (facts & forecast), 2008-23 faster than predicted before and will reach the range 744-755 Bcm by 2023 (+2,6-4,1% to 2018) 775 Bcm 755 750 . In the coming years, Gazprom's production in the Western 725 725 744 Siberia will be supported by launching the spare capacity of Nadym-Pur-Taz fields, especially Zapolyarnoye and 700 Urengoy fields 675 650

. NOVATEK plans to develop Utrennee field which will be 625 the resource base for the Arctic-2 LNG Project on Gydan FIEF forecast Ministry forecast (2017) 600 Peninsula 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

. Rosneft gas production is likely to be stable in 2018, while Russian gas production outlook by regions, 2015-23 Rospan full expansion planned for 2019 800 Bcm . After 2021-2022, the main increase in gas production 48 64 76 89 107

will be ensured by Eastern Siberia and the Far East 600 mainly due to the commissioning of the

Chayandinskoye and Kovykta fields, as well as 400 666 685 687 678 664 increasing the production of APG in the oil fields 608 615 656 648 . Gazprom’ current spare capacity (~100 Bcm) will 200 facilitate required production growth in the near to 0 medium term up to 2023 2015 2016 2017 2018 2019 2020 2021 2022 2023 Western Siberia & European part of Russia Eastern Siberia & Far East

Sources: Ministry of Economic Development of the Russian Federation, Gazprom, companies’ data, FIEF estimations 21 ©ERINA Eleventh Japan–Russia Energy and Environment Dialogue in Niigata R1-GROMOV

Russian gas exports : facts & forecast

. In 2018 Russian gas export increased up to 260 Bcm (+7,7% y-o-y) Russian gas exports, 2012-18 275 . Gazprom set a new record with pipeline exports to Europe Bcm 250 26 15 16 reaching more than 200 Bcm (+5,6% y-o-y) 225 32 15 15 30 200 53 14 15 29 . LNG exports (26 Bcm) are expanding fast (+62,1% y-o-y) 175 60 41 34 following the launch of two trains on Yamal LNG 150 125 100 192 201 . Exports to former Soviet republics (CIS) stable, with no 167 179 75 145 154 159 official supply to Ukraine (although deliveries continue to 50 separatist areas in east) 25 0 2012 2013 2014 2015 2016 2017 2018 . Pipeline exports to Europe have been rising since 2014 Europe & Turkey by pipeline Former soviet republics & Baltic states LNG setting records for three consecutive years, emphasizing Russia’s critical supply role with the Russian gas exports by pipeline to Europe (non-CIS) advantage of incumbency in contractual relations, low- cost gas and flexibility of supply

. Offshore section of Turk Stream is finished, Nord Stream 2 is being constructed; but transit through Ukraine will still be required, therefore solution for new transit arrangements must be found before end of 2019

. In 2019-2021, we expect stabilization of exports volumes of Russian pipeline gas at the current level but after 2021 the pipeline gas exports will grow again due to the commissioning of Power of Siberia project oriented to China

Sources: Gazprom, IHS Markit, FIEF estimations 22

Russian gas shift to the East: both pipeline and LNG projects are progressing

. Russia is pushing several options for gas exports to Asia-Pacific markets: total potential almost 200 Bcm/y (95 Bcm/y by pipe to China and South Korea and over 100 Bcm/y of LNG exports) by 2035

. Gazprom’s Power of Siberia project (38 Bcm/y) is being built on budget and on time and expected to begin deliveries in late 2019, in line with agreement. Ramp-up period will depend on Chinese market

. Active negotiation is ongoing about expansion of Power of Siberia and other routes including Power of Siberia 2 (Altay pipeline, 30 Bcm/y) and additional eastern route for Sakhalin gas from Dalnerechensk (6-8 Bcm/y)

. Gazprom and KOGAS have revived negotiations on a new export gas pipeline. Russian gas could become the most competitive source of gas, depending on what pipeline route is selected; the most efficient one involves transit through North Korean territory

. Yamal LNG has launched all three large-scale trains ahead of schedule

. FID for Arctic LNG-2 expected in 2019

. Russia perceives a significant opportunity in global LNG market: it has a potential to develop 100 MMtpa by 2030, capturing half of global incremental demand.

. Long-term success of Russian LNG projects in Arctic targeting Asia-Pacific markets largely depends on commercial navigation of Northern Sea Route

23 ©ERINA