Transcript Slide 1

The Economics of the South Stream Pipeline
in the Context of Russo-Ukrainian Gas
Bargaining
Chi-Kong Chyong
Judge Business School & Electricity Policy Research Group
University of Cambridge
30th USAEE/IAEE North American Conference – 11 October 2011
Thanks to ESRC (UK) and NearCO2 (EU) for funding
www.eprg.group.cam.ac.uk
Contents
I.
The context
II. The South Stream System
III. South Stream Cost
IV. South Stream Value
V.
South Stream and Ukraine’s transit profits
VI. Conclusions
2
www.eprg.group.cam.ac.uk
The context
• EU-Russia gas trade is important for
– Russia:
• Gas exports generate 4.5% of Russian GDP or half of Gazprom's revenue
• Tax receipts from gas exports amount to 30% of Russia's defence budget
– and for Europe:
• 25% of European consumption is covered by Russian gas
3
www.eprg.group.cam.ac.uk
The context (2)
The EU-Russia gas trade is highly dependent on Ukraine
4
www.eprg.group.cam.ac.uk
The context (3)
• Several transit disruptions through Ukraine since the fall of
the USSR raised concerns about its realiability…
5
www.eprg.group.cam.ac.uk
The context (4)
Gazprom’s solution: Export route diversification strategy since
early 1990s
6
www.eprg.group.cam.ac.uk
Research question
• Given that Nord Stream is under contruction
Will South Stream be built?
7
www.eprg.group.cam.ac.uk
Contents
I.
The context
II. The South Stream System
III. South Stream Cost
IV. South Stream Value
V.
South Stream and Ukraine’s transit profits
VI. Conclusions
8
www.eprg.group.cam.ac.uk
The South Stream system
•
Off-shore pipeline under the
Black Sea (A-B):
Total Capacity: 63 bcm;
Length:~900 km
•
Northern route:
1.
2.
3.
4.
5.
Source: based on South-stream.info
•
Southern route:
1.
2.
3.
•
Bulgaria-Serbia (B-F):
~960km;
Serbia-Hungary (F-G):
~530km
Hungary-Slovenia (G-H):
~610km
Hungary-Austria (G-J):
~350km
Slovenia-Austria (H-I):
~220km
Bulgaria-Greece (B-C):
~416km
Greece (C-D): ~690km
Greece-Italy (D-E): ~200 km
Cost estimates:
–
Gazprom (2010): €15.5 Bn
9
www.eprg.group.cam.ac.uk
The South Stream System in Russia
•
South Stream would begin
at Pochinki
•
From Pochinki to
Beregovaya (South Stream
offshore):
1.
2.
Existing fields
•
Possible gas sources:
1.
2.
3.
•
Existing lines ~ 32 bcm;
A new pipeline from Pochinki
to Beregovaya ~ 32 bcm
Fields in operation: NadymPur-Taz (NPT) region
Yamal Peninsula (GryazovetsPochinki bi-directional
pipeline ~ 36 bcm)
Central Asia
Total anticipated pipeline
expansion in Russia ~2200
km
Source: adapted from eegas.com
10
www.eprg.group.cam.ac.uk
Contents
I.
The context
II. The South Stream System
III. South Stream Cost
IV. South Stream Value
V.
South Stream and Ukraine’s transit profits
VI. Conclusions
11
www.eprg.group.cam.ac.uk
South Stream Construction Cost
15
27
14
26
23
22
11
Based on
engineering
model (WB,
2010)
21
20
10
3
Gazprom’s most
recent estimate
19
•
Total
Cost of offshore
pipelines:
–
2
1
•
0
ly
e
Gr
e
ec
e-
Ita
ec
-G
re
ia
lg
ar
Monte-Carlo
simulation with
key assumptions
Bu
ni
a
-A
us
tr
ia
ni
a
Sl
ov
e
Sl
ov
e
yng
ar
Hu
ng
ar
y-
Au
s
tr
ia
y
un
Hu
-H
Se
r
bi
a
ia
lg
ar
Bu
ga
r
bi
a
-S
er
ho
re
of
fs
am
St
re
Based on
econometric
estimation
Project-related
uncertainties:
–
So
ut
h
US$ Bn
12
24
US$ Bn
90% Conf.
interval
Cost of onshore
pipelines:
–
25
Average
13
•
12
www.eprg.group.cam.ac.uk
Transporting gas to Germany and Italy
•
On average, it is cheaper to use the
Ukrainian route to export gas to
Germany and Italy
•
Transporting gas from Azerbaijan is
cheaper through South Stream
13
www.eprg.group.cam.ac.uk
Transporting gas to Southern Europe
14
www.eprg.group.cam.ac.uk
Contents
I.
The context
II. The South Stream System
III. South Stream Cost
IV. South Stream Value
V.
South Stream and Ukraine’s transit profits
VI. Conclusions
15
www.eprg.group.cam.ac.uk
Deriving South Stream value
•
•
South Stream value = changes in Gazprom’s profit
when South Stream is built versus when it is not
built.
A computational, strategic gas market model
(Chyong & Hobbs, 2011) is used to calculate the
South Stream value under:
1.
2.
•
Different demand scenarios, and
Different values of transit fees through Ukraine
Major assumptions:
1.
2.
Nord Stream is built by 2013 (55 bcm)
Ukraine’s transit fee is fixed exogenously
Low
Demand
case
Base
case
High
Demand
case
Western and
Southern Europe
-0.2%
+0.7%
+1.9%
Central and
Eastern Europe
-0.2%
+0.8%
+1.9%
Balkan
Countries
-0.2%
+0.8%
+1.9%
Demand Scenarios: 2011-2030
Source: Base and Low Demand cases - IEA (2009)
High Demand case - IEA (2000-2007)
Short-run
transit cost
0.50
Current
transit fee
2.07
High transit
fee
5.11
Transit fees through Ukraine ($/tcm/100km)
16
www.eprg.group.cam.ac.uk
South Stream Value
Average
90% Conf.
interval
17
www.eprg.group.cam.ac.uk
Contents
I.
The context
II. The South Stream System
III. South Stream Cost
IV. South Stream Value
V. South Stream and Ukraine’s transit profits
VI. Conclusions
18
www.eprg.group.cam.ac.uk
Ukraine’s transit profits
19
www.eprg.group.cam.ac.uk
Ukraine’s net benefit of not raising the transit fee over 30 years
An impatient Ukraine would raise
its transit fee, triggering the
construction of South Stream
Naftogaz’s WACC*
*Source: (Vitrenko, 2008; Kovalko&Vitrenko, 2009)
20
www.eprg.group.cam.ac.uk
Conclusions
•
The value of South Stream investment is only positive when:
–
–
Gas demand in Europe is expected to be very high (+1.9% p.a.), or
When Ukraine raises its transit fee considerably
•
Naftogaz’s corporate governance issues make its discount rate
very high, which explains its willingness to bargain with Russia
•
If Ukraine bargains to raise its transit fee sufficiently high, then
South Stream would be built leading to the undesirable longerterm outcome of being completely bypassed by Gazprom
•
To avoid this outcome, Ukraine would need to find ways to
reduce the very high discount rate of Naftogaz, perhaps via
restructuring and privatization
21
www.eprg.group.cam.ac.uk
THANK YOU
22
www.eprg.group.cam.ac.uk
Back-up slides
23
www.eprg.group.cam.ac.uk
The Economics of Nord Stream
• Nord Stream investment is
profitable :
– The Nord Stream route is
shorter than the Ukrainian
one
– If Ukraine lowers its transit
fee, the Nord Stream value
would increase significantly
– The Nord Stream security of
supply value is marginal
The paper can be downloaded from www.eprg.group.cam.ac.uk
24
www.eprg.group.cam.ac.uk
Methodology & assumptions
Onshore pipeline costing
Source: (World Bank, 2009)
Assumptions
1.
2.
Offshore pipeline costing
3.
4.
Shareholding structure: Gazprom 51%
Financing strategy
•
30/70 equity-debt financing
•
Cost of equity financing:
•
Gazprom 9-15%;
•
Non-Gazprom: 9-10%
•
Cost of debt financing: margin+EURIBOR
(1.24-5.4%)
O&M costs (fraction of initial investment cost):
•
For compressors 4% p.a.
•
For pipelines – 0.3% p.a.
Taxation and depreciation based on national
25
laws
www.eprg.group.cam.ac.uk
Model Description
Market structure
COUNTRY A
1. Producers, traders and transit
countries maximize profits
COUNTRY B
TSO
Producer
A
Supplier
B
2. Producers’ behaviour:
1.
Supplier
A
COUNTRY D
Producer
B
Market B
Supplier
D
2.
LNG
Liquefaction B
Market A
3. Pipeline transmission & LNG
terminals -> Competitive (Tariff
+ “Congestion Price”)
Market D
COUNTRY C
TRANSIT COUNTRY
Pipeline gas
LNG
LNG Regasifier
C
Oligopoly -> Cournot game
(against traders’ derived
demand)
Perfect competition
Producer
C
4.
Supplier
C
Traders have two options for
behaviour:
•
Market C
•
5.
Oligopoly -> Cournot game
(against Consumer demand)
Perfect competition
Transit countries: 'conjectured
transit demand curve'
26
www.eprg.group.cam.ac.uk
Model Description
Representing market power in the gas supply chain
• Producers anticipate traders’ reaction (Asymmetric/Leader-Follower
game)
• Traders and Producers: Cournot Game (i.e., game in quantities) -> the
player believes that if he changes his output (gas sales), his competitors
will maintain sales by cutting or raising their prices
• Market power of transit countries:
– transit market power is represented by the conjectured transit demand curve
approach, which assumes that large transit countries (e.g., Ukraine and Belarus)
believe that they face a declining effective demand curve for their services with an
assumed slope (exogenous parameter)
• Consumers are represented by aggregate inverse demand functions of
each market in the model
27
www.eprg.group.cam.ac.uk
Current Model
Other features
Consuming countries
Finland
Slovak Republic
Baltic States*
Czech Republic
Austria
Hungary
Belgium
Romania
Spain and Portugal Poland
France
Turkey
Netherlands
Italy
UK
Germany
Slovenia
Bulgaria
Balkan States**
Croatia
Greece
*Baltic States: Estonia, Lithuania, Latvia
Producing countries
Algeria
Romania
Azerbaijan
Russia
Denmark
Trinidad and Tobago
Egypt
Turkmenistan
Germany
UK
Hungary
Ukraine
Italy
Uzbekistan
Kazakhstan
Libya
Netherlands
Nigeria
Norway
Oman
Poland
Qatar
**Balkan States: Serbia, Bosnia and Herzegovina, Macedonia and
Albania
•
Model data set:
–
25 gas markets from Western, Central
and Eastern Europe and from the FSU
–
27 producing regions (FSU, Europe,
MENA)
–
Detailed presentation of the FSU gas
network
–
Production costs: various sources
–
Production capacities and outlooks:
IEA, EIA and other public data
–
Details on transmission network in
Europe: ENTSOG
–
Details in (Chyong and Hobbs, 2011)
28
www.eprg.group.cam.ac.uk