Natural Gas Research Programme Research Gas Natural Russian Exports to Asia and LNG Natural Gas Research Programme Gas Research Natural James Henderson Natural Gas Programme, OIES OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD SEPTEMBER 2014 OXFORD INSTITUTE FOR ENERGY STUDIES STUDIES ENERGY FOR INSTITUTE OXFORD Russia has clear motivation to turn to Asia Growth in Asian gas demand, especially in China Significant gas resources in East Siberia and Far East of Russia Uncertainty over future of export sales to Europe and FSU Gazprom’s declining share of Russian domestic market Natural Gas Research Programme Gas Research Natural Need for increased tax revenues from export sales Geo-political demonstration to western powers that Russia has alternative markets Key questions: Can Gazprom fulfil its role as the major gas exporter to the East? Will Rosneft and/or Novatek take an increasingly important role Has Russian gas to China set a benchmark for gas prices in Asia? Will Russian LNG be developed as a major new source of gas supply in the East OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD 2 Russia has large gas resources in its eastern regions and has turned towards Asia for export growth Exports to Asia are part of the Energy Strategy Russia has significant gas resources in the East 300 ABC1 C2 250 Reserves Reserves Resources Total bcm bcm bcm bcm 200 Siberian Federal District 2600 3600 31700 37900 Far East Federal District Onshore 1400 1100 12000 14500 150 Asia Europe Sakhalin 900 300 5400 6600 ExportsCIS (bcma) - 100 East Siberian and Laptev Seas 5600 5600 Non Chukchi and Bering Seas 2700 2700 50 Natural Gas Research Programme Gas Research Natural Total 4900 5000 57400 67300 0 2005 2008 2015 2022 2030 Gazprom’s and Russia’s expectations for western markets have been undermined by competition and politics, and as a result Asia can offer useful diversification Russia’s East has significant gas resources which can be monetised, and exports can also catalyse infrastructure construction and regional development Sakhalin 2 LNG has been in production since 2009, but further expansion is likely to involve piped exports as well as further LNG projects Asia has now become the new frontier in Gazprom’s competition both with global OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD producers and with its domestic rivals 3 Russia’s Eastern strategy is closely related to the ultimate completion of the gas pipeline to China Natural Gas Research Programme Gas Research Natural Source: Gazprom Pipeline infrastructure is the key to opening up Russia’s vast eastern resource base Fields in Irkutsk and Yakutia are effectively stranded unless “Power of Siberia” is constructed Sakhalin strategy closely linked to timing of arrival of East Siberia gas in Vladivostok Rosneft plans on Sakhalin and in East Siberia could conflict with Gazprom OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD 4 Economics of Eastern Gas Programme Natural Gas Research Programme Gas Research Natural Chayanda capex - $13.5bn, Kovykta capex - $15.5bn, Power of Siberia pipeline capex - $26bn – total initial capex = c.$55bn Vladivostok LNG – c.$13.5bn for a 10mmt plant, although costs may be split with Russian state Other costs include Blagoveschensk processing facility (c.$17bn) and extension of Power of Siberia to Kovykta (c.$6bn) OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD Overall suggests breakeven price of c.$10.5/mmbtu (10% real IRR) 5 Has the Gazprom-CNPC deal set a benchmark price for Asian imports? 30 year contract, with peak flow of Profile of Russian gas sales to China 38bcma 40 35 30 Ramp up period of five years, 25 starting in 2019 20 bcm bcm 15 80% ToP Natural Gas Research Programme Gas Research Natural 10 Miller quoted as saying that total 5 value of contract is $400bn 0 However, there are still a lot of uncertainties about the details of Range of prices in Russia-China gas deal US$bn 400 390 380 370 360 350 the contract Volume 1032 1032 1032 1032 1032 1032 $/mcm 388 378 368 359 349 339 US$/mcf 11.0 10.7 10.4 10.2 9.9 9.6 US$/mmbtu 10.9 10.6 10.3 10.0 9.8 9.5 Range of prices is $10-11/mcf US$/mmbtu* 11.8 11.5 11.2 10.9 10.6 10.3 * possible outcome assuming lowe Russian gas CV $/mmbtu value could be as high kwh/m3 North Sea 11.6 as $11.8 depending on calorific Russia 10.8 value of Russian gas OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD 6 Price appears to be reasonable for Russia and is competitive with cost of supply of alternative gas Comparative cost of Eastern Russian gas supply Comparative cost of supply to Asia 16.00 16.00 15.00 14.00 14.00 13.00 12.00 12.00 10.00 11.00 10.00 8.00 9.00 6.00 8.00 US$/mmbtu 7.00 4.00 6.00 2.00 5.00 4.00 0.00 3.00 Breakeven Breakeven Price (US$/mmbtu) 2.00 Natural Gas Research Programme Gas Research Natural 1.00 0.00 Sak 2 Yamal LNG Combined Sak 3 to China Pipe Sak 1 VLNG expansion China Pipe VLNG Only Stand Alone + VLNG Alone FOB Transport Despite the high costs of Russia’s gas export projects to Asia they can be competitive on cost with other global exporters The proximity of the Russian East to Asian markets keeps transport costs down The price of the China deal appears to have been struck to allow Gazprom a reasonable (10-12% real) rate of return, as long as it enhances synergy benefits OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD 7 Export sales based around LNG and piped gas Four LNG projects could export 40mtpa Pipeline exports could take total to c.100bcma 45 120 40 100 35 East Siberia Pipe 30 Yamal LNG (5 mths p.a.) 80 Sakhalin 1 25 Vladivostok LNG 60 Yamal LNG Sakhalin 1 bcma mmtpa 20 Vladivostok LNG Sakhalin 2 Expansion 15 40 Sakhalin Expansion Natural Gas Research Programme Gas Research Natural Sakhalin 2 Current 10 Sakhalin Current 20 5 0 0 2013 2017 2020 2025 2010 2015 2020 2025 2030 Russia has multiple options for gas exports via LNG and pipeline By 2025 total Eastern exports could reach 100bcma, or two thirds current exports to Europe The China pipeline export route could match current gas sales to Germany However, decisions about the prioritisation of projects and the sources of gas for liquefaction remain uncertain until full extent of China deal is confirmed and OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD construction of pipe comences 8 The growing competition between Gazprom and the Independents is now playing out in the Asian export markets Shtokman - 15mmtpa in Phase 1? Yamal LNG – 16.5mmt CNPC - 3mmtpa Negotiations with European Sakhalin 1 – 5mmt and Asian traders SODECO – 1mmtpa Marubeni – 1.25mmtpa Pechora LNG Vitol – 2.75mmtpa – 2.6mmtpa ? Sakhalin 2 – 10mmt Chayanda Various Asian buyers Leningrad LNG Potential for 5mmt expansion Natural Gas Research Programme Gas Research Natural – 10mmtpa ? S Kovykta - K - V Gazprom Novatek 38bcma Vladivostok LNG to China Rosneft – 10-15mmt A significant battle is taking place to become the leader of Russia’s LNG strategy The ending of Gazprom’s monopoly on LNG exports signifies government support for 3rd party exporters – Rosneft and Novatek are actively competing with Gazprom for customers Managed competition is the Russian government target, but Rosneft is becoming more assertive – asking for TPA in export pipelines and has formed JV with CNPC OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD in East Siberia 9 Western export route to China Negotiations about the export of gas The Altai Pipeline to western China have begun again Would create a link for 30bcm of West Siberian gas to Asia Natural Gas Research Programme Gas Research Natural Competition with Central Asian gas arriving in Xinjiang Price would have to compensate for long transport distance to east coast of China $9.50/mmbtu would be competitive and could generate profitable netback for Gazprom Russia creating a global gas hub? OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD 10 Conclusions Russia has a number of clear incentives to promote gas exports to Asia, which have been heightened by the current events surrounding Ukraine Expansion into Asia has been a long-term Russian goal, and the country’s eastern regions have significant reserve and production potential The exact strategy for export (and domestic) sales will now depend upon Natural Gas Research Programme Gas Research Natural the construction of Power of Siberia and Gazprom’s strategy to capture synergy benefits Gazprom is under some pressure to deliver, as competition is increasing from international and domestic peers Rosneft appears to have an aggressive marketing strategy that involves eastern LNG and discussions about access to piped export sales Gazprom could further enhance its own position by developing a second pipeline to China, but its price expectations need to be realistic Russia’s shift to Asia could create significant disturbance in global gas OXFORD STUDIES FOR INSTITUTE ENERGY OXFORD market 11 .