Nabucco, European Energy Supply Diversification, and Russia

Vladimir Milov Institute of Energy Policy, Russia FT Gas for Europe Conference Budapest, September 14 th , 2007

South Eastern and Central Europe: the region of Europe most dependent on Russian gas supplies Share of gas imports from Russia in primary energy consumption , 2006, % Slov akia Hungary Turkey Austria Finland Czech Republic Romania Bulgaria Italy Germany Poland Greece The Netherlands UK France 4,6 3,5 3,4 7,3 6,9 17,6 16,0 12,8 15,3 12,0 9,4 10,9 21,0 32,1 35,4 0 10 20 30 40 50 Source: BP Statistical Review of World Energy 2006 (primary energy consumption), Gazprom (gas imports by relevant countries)

Why doubts on Russian gas supply reliability?

• High possibility of gas supply deficit due to underinvestment in upstream gas production sector • Ageing gas pipeline system and increasing risk of pipeline accidents (several recorded this year) • Permanent difficulties with transit countries (Belarus, Poland, Ukraine, Turkey)

Gazprom’s aggressive asset acquisition policy leaves little room for upstream investments Gazprom’s investments during the recent years (billion USD) Cumulative asset acquisitions in 2003-2007 32,1 Cumulative upstream capital expenditures in 1999-2007 0 Source: calculations based on Gazprom data 18,4 25 50

Will Gazprom invest enough in new gas field development to address the supply challenge?

Structure of Gazprom’s investment program for 2007 (billion USD) Financial investments (acquisitions of companies) Main gas transport projects Upstream - current region of production

1,8

Shtokman and Prirazlomnoye

1,1 4,5 6,4

Yamal Peninsula gas fields

1,0

Other purposes

5,3

0 5 Source: Gazprom’s board of directors decisions of January, May, August 2007 10

10,6

A ppr ov ed in Ja n u a r y 2 007 Recen t a m en dm en ts 15 20

Projects delayed in 2007, sacrificed for more asset acquisitions • Investments in development of Shtokman field in 2007 cut from USD 670 million to USD 335 million • Peak production at Kharvutinskaya area of Yamburg field (30 bcm/year) postponed from 2008 to 2010 • Production at Neocomian strata of Zapolyarnoye field (15 bcm/year) postponed to 2011 • Expenditures on modernization of the trunk pipeline system cut by USD 950 million • This is the price paid so far for the acquisitions of “Sakhalin Energy”, “Beltransgaz” (Belarus gas pipeline operator), “Mosenergo” power company

Rapidly ageing gas pipelines Gazprom’s pipelines structured by age, % 100%

17,3% 17,5% 18,9% 30,1% 34,4% 36,6%

50%

38,1% 34,4%

0%

14,4%

2003

13,7%

2004

31,2% 12,9%

2005 Source: Gazprom, “Gazprom Databook 2006”

20,2% 39,2% 27,9% 12,7%

2006 Above 33 years 21-33 years 11-20 years 0-10 years

Can the current area of production deliver substantial new volumes of gas?

Potential of new gas output in the current gas production area, bcm/year Kh a r v u t in sk oy e 30,0 Sou t h Ru ssk oy e 25,0 A ch im ov st r a t a of Ur en g oy field Neocom ia n st r a t a of Za poly a r n oy e field W est Pest sov a y a a r ea of Ur en g oy field Ny din sk a y a a r ea of Medv ezh e field Gu bk in sk oy e field (Nor t h er n ca p) 2,0 2,0 2,0 Y a r ey sk a y a a r ea of Y a m sov ey field 0,5 16,2 15,0 Source: presentation by Gazprom’s deputy CEO A.Ananenkov, Moscow, June 14th, 2007 These volumes are only sufficient to offset the expected cumulative 85-90 bcm decline of gas production at Urengoy and Yamburg fields in the coming 4-5 years.

How much money is required to develop new gas production areas?

Gazprom’s estimates of Yamal Peninsula gas field development costs (billion USD in current US dollars) Tota l in v estm en ts r equ ir ed

85,4

Ya m a l-m a in la n d g a s tr a n spor ta tion sy stem Bov a n en ko a n d Kh a r a sa v ey g a s fields Obska y a a n d Ta zov ska y a ba y s a n d Ka r a sea g a s fields

7,2 17,6 48,1

A u x ilia r y in fr a str u ctu r e

5,5

A lloca ted for Bov a n en ko a n d Kh a r a sa v ey in 2 007

1,0

0 50 100 Source: Gazprom’s “Complex program of Yamal Peninsula gas fields industrial development”, 2002

Central Asia – the great uncertainty • No guarantees of gas supplies from Turkmenistan to Russia beyond 2009 exist • Despite announcements made in May 2007, no “specific agreements” on gas supplies through “Caspian” gas pipeline were reached by September 1 st , 2007 • Turkmenistan pursues alternative gas pipeline projects (with pipeline to China being the most potentially realistic option)

Can the growing gas demand be satisfied with this type of investment strategy?

Gazprom’s gas demand projection to 2030 (bcmpa; best case scenario)

1000

LNG Pipeline gas to Europe and Asia CIS and Baltic states Russian domestic gas consumption

500

Domestic gas consumption: growth below 1% per year until 2010, below 0,5% per year until 2030

0

2006 Source: Vedomosti (www.vedomosti.ru), April 16 th , 2007 2010 2030

• Gazprom will be able to meet it’s supply commitments only if the domestic demand will grow below 1% a year to 2010 and below 0,5% a year in 2011-2030 • If the domestic gas demand in Russia will grow faster, even if independent gas producers increase production to 140-150 bcm by 2010, the deficit of gas will occur • The average growth of gas demand in Russia in 2002 2006 had been 3% a year (6,7% only in 2006)

Additional gas for Nord Stream, South Stream, “Altai” pipeline to China – where is it going to come from?

Why Nabucco is sometimes viewed with skepticism?

• Unclear resource base • The perspectives for a Trans-Caspian pipeline, putting aside the U.S. optimism, appear bleak due to unresolved Caspian seabed division dispute • Without this, the supply capabilities of Shah-Deniz gas field in Azerbaijan will be only partially sufficient for Nabucco • The Trans-Iranian pipeline (the most potentially realistic and viable option for transportation of Turkmen and Iranian gas to Europe) will be most likely blocked by the U.S.

Russian gas in Nabucco?

• Probably this will be a “soft solution” in the end • However, Russia will most likely reject supplies to an “unfriendly” pipeline on political grounds • In the same manner, participation in Baku-Tbilisi Ceyhan oil pipeline was rejected by Russia back in 2002 • Putin’s Kremlin takes “no prisoners” when it comes down to gas transit geopolitics • Also, the dependence on Russian supplies increases

South Stream: viable?

• Cost of construction? (Involvement of Gazprom and ENI suggests that the costs would be excessive…) • Where’s the gas?

Map source: ENI & Gazprom

South Stream: potential rationale • Bypassing the “problem” transit countries – Ukraine, Turkey • Potential target markets – Italy and Baumgarten gas hub in Austria • If both Nabucco and the South Stream will be build, this will create excessive pipeline capacities in the South Eastern Europe region • …Which is probably not bad for the European energy security

Conclusions • Successful implementation of the Nabucco project may help mitigate the risks of dependence on Russian gas supplies for the countries of South Eastern and Central Europe • The risks of Russian gas supplies in the forthcoming future severely increase due to: (a) abandoning the Gazprom restructuring plans, and (b) the strategy of building up a “global energy company” which diverts financial resources away from investments in core business development • Nabucco may be a good risk mitigation option, but it’s viability remains uncertain • Competition with the South Stream: South Eastern Europe doesn’t need two new gas pipelines