Russian Gas Balance

Tatiana Mitrova,Mitrova, Ph. D. Center for International Energy Markets Studies Energy Research Institute of the RAS

Russia and Caspian Energy in the Global Energy Balance Moscow, March 20, 2009 What are the prospects of Russian gas production?

Source: ERI RAS “Crises scenario”...

1 NPT - currently the source of 85% of the Nadym-Pur-Taz country`s gas production - is to peak at 621 bcm in 2011 Gas production forecast at Thereafter decline in the region`s gas Nadym-Pur-Taz region, bcm output will become irreversible: 2015 produc tion w ill come bac k to the 2007 l eve l of 554 bcm Brownfield management, production from new satellite fields (smaller fields with up to 500 bcm reserves located close to the super-giants and to the existing tttit)dfdltransportation routes) and from deep pools in cooperation with foreign partners (like Achimgas) and gas production by independent gas producers and oil Source: General Scheme of Gas Sector companies might slowdown the rates of Development until 2030. decline

2 Ob and Taz Bay and Bolshehetskaya depression

Ob and Taz Bay: potential of 70-80 bcm annual production, located close to the existing infrastructure, can partially be deve lope d us ing hor izon ta l dr illing ons hore Ob and Taz Bay fields contain pure cenomanian gas. Several fields are prepared already for exploratory drilling. The area of Ob-Taz Bay is close to depleting Yamburg field. Hence, gas from new fields will load ttitilddtthtransport capacities released due to the depletion on Yamburg Development of Bolshehetskaya Depression by Lukoil (potential annual production up to 30-40 bcm)

3 Yamal – the main growth driver

Gazprom became extremely focused on Yamal project and spent some $4 bln. last year on Bovanenkovskoye field. This year the figure is to sp ike to $6. 5 bln. Last year Gazprom began laying the Ukhta-Bovanenkovskoye gas pipeline, completed half of the Baidaratskaya Bay 72 km long crossing, drilled the first production well and did much ifttlinfrastructural work It is planned to produce the first 7.9 bcm in 2011. According to the General Scheme of Gas sector the Yamal output was slated to spike to 135-175 in 2020, thus offsetting falling production in NPT

4 Phase one - 23.7 bcm annual output Shtokman project The Shtokman Development Company has approved the project ` s first $800 mln. budget for 2008-2009 and will make a final investment decision this year In June 2008 construction of the first semi-submersible drilling platform started at the Vyygborg Shi pbuildin g Plant The decision will hinge upon oil and ggpas price forecasts and the government`s willingness to provide support for the project With a slowing economy in the intended European and US markets, Shtokman project could now be less a priority

5 Eastern Siberia and Russian Far East

Refuse from Altai project in General Gas Scheme In the medium-term China will receive gas from Central Asia Most attractive markets – Japan and S.Korea – are LNG-focused Sakhalin transforms in a major gas-producing region with “Sachalin-2” Source: General Sc heme o f Gas S ect or D evel opmen t until 2030 . starting LNG supply in several weeks

6 Increasing import from Central Asia

EilikithEuropean price linkage is the best incentive for Central Asian producers to cooperate with Russia Additional 15 bcm from Lukoil in Uzbekistan by 2013 (totaling 30 bcm Uzbek export) January 2009 agreement with Turkmenistan on joint development of South Iolotan Agreement on Pri-Caspian gas piliipeline cons truc tion Alternative routes are facing many difficulties

7 Demand side: Russia and CIS in deep economic recession

Significant decline of the industrial consumption (especially in gas-intensive industries: metallurgy, cement, gas chemistry, glass production) Lower electricity consumption growth rates Lower rates of construction and per capita square meters growth for the residential sector

Source: ROSSTAT.

8 Domestic demand forecasts: reaching the former levels 5-9 years later

With much lower GDP growth rates domestic gas demand is going to be 50 bcm lower until 2030 comparedtd to th e ES2030

Even compared to the “high effi ci ency” scenario of the General Gas Scheme domestic gas demand in 2008-2015 will be considerably lower

9 Uncertain and oversupplied European market

Uncertain gas demand (influence of European Gas Consumption renewables and energy saving, as Forecasts, bcm well as demand slowdown due to the economic recession) Gas bubble on the market due to the oversuppl y Risk of revision of the existing oil price linkage in the long-term contracts Consequences of transit crises and EU strategy of further diversification of ggppyas supply Increase of competition and reduction of suppliers margins

10 Asian Market

China insisting on extremely low prices

Gas demand uncertainties in China (prospects of China`s economic growth, priorities of its energy policy in the crises environment – announced decision to allow gas use only for industrial and residential consumers)

Monopsony for pipeline projects

LNG market will be seeing large additional volumes of supply coming on- stream in 2009 at a time when demand has softened up considerably

Atlantic LNG

LNG market oversupply leading to strong competition

Booming shale gas created the gas glut in US

Much lower gas demand estimates

11 The fear of gas deficit is now displaced by gas bubble

12 Market-oriented flexible approach

Source: General Scheme of Gas Sector Development until 2030.

13 Conclusion: adjusting timelines depending on the economic viability

Finance for Russian gas projects will be cheaper to obtain and will be ppg,jrovided longer term, without a major review of the pjprojects

Russian gas industry will benefit from reduction in material costs which have dropped significantly since March 2008

The crises, deceleration of gas demand on the domestic market and lower demand abroad as well as successful policy in Central Asia will help Russia to be in a less of a hurry to implement its mega- projects

In the short to medium term depending on the market situation production goals can be revised downward. However Russia has sufficient capacity and f lexibility to meet higher demand during economic recovery