Transcript Slide 1

What Is Russian Gas Insight?
• RGI is a multi-client report that
analyzes volumes, costs and
benefits of all operations with
natural gas that gets into the
pipeline system of Russian gas
monopoly Gazprom.
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At this stage, we consider only
projects that are or will be
connected to the gas pipeline
system of Gazprom.
Isolated LNG projects, like
Shtokman before the link to
Volkhov is built, are out of the
scope of RGI.
• RGI is launched to give answers
to the most important questions
concerning supplies of Russian
gas to domestic and European
markets
www.eegas.com
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Answers to Key Questions
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Would Gazprom’s negotiating position
be stronger or weaker after the
expiration of existing gas export
contracts to Europe?
200
150
$/mcm
• Where and at what cost is Gazprom
going to get the gas volumes in 20152025 to meet its supply obligations and
to implement its ambitious expansion
plans?
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• What is the real future cost of gas
delivered to Europe?
• What is the difference between a
rational investment plan and the
investment plan of Gazprom?
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Rational investment assumes Max
utilization of existing capacities
Governmental agencies tend to focus
on maximum spending
• What are the major threats to security
of supply of Russian gas to Europe?
• Can Gazprom survive a drop in oil
price?
www.eegas.com
2000
2005
2010
2015
2020
2025
Average cost of Russian gas delivered to European markets
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$ billion
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100
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Transmission
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Production
10
8
6
4
2
2005
2010
2015
2020
2025
Gazprom investment - Sample scenario
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The Contents of RGI
• Executive Summary
• Part 1. Russian Gas Business
Environment
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Taxes, wages, prices and tariffs
• Part 2. Gas Balance and Volumetric
Analysis
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Historic and projected sales
Production and import
Gas flows and pipeline bottlenecks
• Part 3. Cost & Benefit Analysis
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Production costs of Gazprom
Transmission costs
Cost of gas delivered to different
markets
Profits and net cash flow
• Part 4. Comments to Financial
Reports of Gazprom
• Part 5. RGI Focus: Russian-Ukrainian
Gas Dispute
www.eegas.com
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Part 1. Russian Gas Business Environment
• In this section, we publish updates
on relevant external factors affecting
Russian gas sector
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Taxation, regulated domestic price
of gas, regulated transmission tariffs
Cost of labor, materials and supplies
Gazprom’s relations with
independent gas producers
• In RGI 2006-1, we comment on the
following issues
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Cost of Russian labor continues to
grow at a very high rate of over 30%
a year (in USD terms)
Huge difference in labor cost by
region and industrial sector – a 17times difference between regions of
Tyumen province, West Siberia
Weak ruble in Gazprom projections
Gazprom is strengthening control
over the FSU market (the way of
Standard Oil of the 1880s)
www.eegas.com
Price of gas in different markets, $/mcm
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Part 2. Gas Balance and Volumetric Analysis
• Gas consumption is addressed by
region and by consumer sector
• We assume a moderate growth of
gas consumption in the service area
of Gazprom in Russia
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In 2003-2005, annual growth rate of
industrial production exceeded 6%,
while consumption of pipeline gas in
Russia was growing 1.6% a year
High energy price will affect gas
consumption in Russia
High share of gas in the fuel balance
of power plants in European Russia
does not give much space for
growth of gas use
Efficiency improvement is a more
likely way of power sector
development
Gazprom plans its domestic gas
sales in 2006 at the same level as in
2005
www.eegas.com
Gas Consumption 1990-2025
400
300
Total Russia via Gazprom pipelines
Power sector via Gazprom pipelines
200
100
0
1990
1995
2000
2005
2010
2015
2020
2025
Russia's Gas Consumption: Sample Forecasts
500
400
300
Gazprom-1994
Korchemkin-1994
Ryazanov-2003
RGI Base Case
200
1990
1995
2000
2005
2010
2015
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Export Projections
• RGI considers only exports via
Gazprom pipelines, including transit
of Central Asian gas
250
200
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150
100
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FSU
Europe
0
1990
1995
2000
2005
2010
2015
2020
2025
250
200
150
100
Without transit fees
Belarus
Ukraine
50
2000
2005
www.eegas.com
2010
2015
2020
2025
LNG projects that are not connected
to the existing pipeline system of
Gazprom are out of the scope of RGI
• High energy price is likely to affect
gas consumption in the FSU
• European exports are broken down
by country and by terminal
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Velke Kapusany
Drozdowichi
Beregovoe
Satu Mare
Izmail
Vyborg Finland
Brest
Kondratki
Blue Stream
Vyborg NEGP
Primorsk LNG
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Sample Production Forecast of Gazprom, bcm
www.eegas.com
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Gazprom Production Breakdown
• All reservoirs are broken down by
cost category
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Cenomanian-1 – old low-cost giant
and super-giant fields of W. Siberia
Cenomanian-2 – medium-cost West
Siberian reservoirs commissioned
after 2000 or to be commissioned in
the future
Cenomanian-3 – high-cost fields of
Yamal and Gydan peninsula
Deep & small – Neocomian,
Valanginian, Achimov and other
deep reservoirs of West Siberia and
all fields of Severgazprom and
Gazpromdobycha-Kuban’
High sulfur – Orenburg (1.5% of H2S)
and Astrakhan (25.7% of H2S)
Shtokman
• In regional breakdown, net input into
gas pipelines is shown by field and
by company for regions of Russia
www.eegas.com
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Gazprom Production: Seasonal Swing
• RGI addresses seasonal swing of
producing branches of Gazprom
• Urengoygazprom and
Yamburggazdobycha have high
winter peaks
1.4
1.2
1.0
0.8
0.6
1 = Annual / 365 (or 366)
0.4
0.2
UrengoyGP
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YamburgGD
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
• In European Russia, winter peaks of
production are very small
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1.4
1.2
1.0
0.8
0.6
1 = Annual / 365 (or 366)
0.4
0.2
Gazprom outside of
W.Siberia
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West Siberian gas producers have
30% of production capacity
dedicated for winter peaks
Low well flow and high cost
• Independent gas producers do not
have winter peaks
• The record high daily production of
1700 mmcmd, reached on January
22, 2006, discloses actual capacity of
pipelines in West Siberia
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We will address this issue in RGI
2006-2
Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04
www.eegas.com
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Independent Gas Production Forecast
Production investment
requires incentives
www.eegas.com
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Import and Transit from Central Asia
• Imports and transit are broken down
by country and by terminal
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Turkmenistan
Uzbekistan
Kazakhstan
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Aleksandrov Gai
Karachaganak-Orenburg
Makat-Northern Caucasus
• About 2 bcmy (6 mmcmd) of Central
Asian gas is delivered via the old
Bukhara-Urals pipeline
(commissioned in 1963)
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This small volume is added to the
volumes delivered to Aleksandrov
Gai
We expect the Bukhara-Urals
pipeline to be decommissioned soon
www.eegas.com
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Cross-Regional Gas Flows
• We calculate
regional balances
for regions of
Russia and the
FSU states
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Annual
balance
Daily balance
(winter)
• Based on historic
daily flow data,
we calculate daily
flows across the
state and regional
borders from
Europe to West
Siberia
• Spare capacity or
capacity deficit is
calculated for all
pipeline sections
by year
www.eegas.com
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Daily Flows and Consumption
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300
mmcm/day
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200
150
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Total Uzhgorod
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Velke Kapusany
million cubic meters per day
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500
400
300
200
From Russia to Ukraine
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0
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06
Jan-00
From Ukraine to Europe
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
800
1400
700
Center
800
Volga
Urlas
600
N.West
400
W.Siberia
200
Euro-stor.
500
Euro-pipe
400
Injection
300
Russia
Ukraine
200
100
0
Jan-03
600
South
1000
mmcm/day
mmcm/day
1200
Jul-03
Jan-04
www.eegas.com
Jul-04
Jan-05
Jul-05
Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05
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Sample Scenario: New Pipelines in 2006-2025
www.eegas.com
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Part 3. Cost & Benefit Analysis
• Detailed analysis of production costs
by different reservoir category
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Labor
– Depreciation
Taxes
– Interest
Other costs
• Production investment requirements
by reservoir category by year
• Detailed analysis of transmission
costs of Gazprom
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Labor
– Depreciation
Fuel gas
– Taxes
Interest
– Social cost
Other costs
• Pipeline investment requirements by
project and by pipe diameter, including
replacement pipe
• Cost of transit out of Russia
• Cost of sales and cost of gas delivered
to different markets
• Gazprom’s profit by market segment
and net cash flow from gas operations
www.eegas.com
Anything can fly at $70/bbl
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Sample Cash Flow Projections
• Growth of internal costs of Gazprom
is more dangerous than a drop in oil
price
In 2006-2008, cost growth rate = Base Case + 10%
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$ billion
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Base Case
Cost growth +10%
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2005
2010
2015
2020
2025
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Source: East European Gas Analysis
• We believe that Base Case
assumptions are too optimistic
From 2007, export price = $150/mcm; Base Case = $175/mcm
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$ billion
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6
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Base Case
Export price $150/mcm
2005
2010
2015
2020
Base Case assumes that internal
costs grow 25% in 2006 and 10% in
2007-2008
High Cost Case (red line) assumes
that in 2006-2008 cost growth rate is
10% higher
In 2009-2025, cost growth rate is the
same for both cases
2025
Cost of Gazprom are more likely to
follow the High Cost scenario
• NPV of net cash flow from gas
operations under Base Case is $71
billion versus $45 billion of the High
Cost Case (at 10% discount rate)
Source: East European Gas Analysis
www.eegas.com
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Part 4. Comments to Financial Reports
• Financial reports of Gazprom are
transparent enough to reveal some
serious discrepancies
• Expenses of production and
transmission segments of Gazprom
are reported inaccurately
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Very often quarterly and accrual
numbers do not add up with the
difference reaching $200 million
Current negligence in financial
reporting is unacceptable
• Since January 2004, Gazprom is
effectively overpaying export duties
by over $0.7 billion a year
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Recent deal with RosUkrEnergo
shows that Gazprom could legally
cut payments of export duties
• Reports indicate that Gazprom gives
unfair advantages to RosUkrEnergo
• The risk of successful lawsuits from
Western shareholders of Gazprom is
extremely high
www.eegas.com
Gazprom reported the growth of tax payment
as one of its major achievements in 2004
(Gazprom: Annual Report 2004, page 9)
Source: www.gazprom.ru
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Part 5. Russian-Ukrainian Gas Dispute
• Shareholders of Gazprom benefited from giving
Ukrainian exports to Itera in 1998
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Many analysts believe the opposite
Sales of transit services to Itera were a way more
profitable for Gazprom than deliveries of gas to
Ukraine without being paid
• Eural Trans Gas was and RosUkrEnergo is a
loss for Gazprom
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A fully-owned foreign subsidiary of Gazprom, like
ZMB, could have been a better intermediary for all
shareholders of Gazprom, including the state
• Gazprom gives RUE a huge profit margin
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In Jan-Sep-2005, RUE made a profit of $500
million with half of it transferred to private
accounts in Switzerland
Apparently, the most profitable business –
exports of Kazakh gas to Europe – formerly run
by ZMB, is now given to RUE
Now RUE is making a daily profit of $6 million
Russian and Gazprom officials insist on RUE
staying in business
• The new transit agreement causes Gazprom a
loss of about $1 billion a year.
www.eegas.com
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Dominating Political Factors Increase
Uncertainty of Supplies of Russian Gas
• For the first time in the history of gas
exports, Russia deliberately stopped the
gas flow
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The gas transit conflict with Ukraine has
caused an economic loss to Gazprom
The conflict is far from being solved
• Russia’s vision of the future of
European gas markets is absolutely
different from European views
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Gazprom would like to have a Standard
Gas Company of Europe (like Standard
Oil) controlled by Gazprom
• President Putin’s vision of European gas
market is explained in his letter
(“Energy egotism – road to nowhere”)
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Competition is counterproductive
Gas price should be regulated
• Lack of competition leads to inefficiency
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Are European consumers supposed to
pay for Gazprom’s inefficiency?
www.eegas.com
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www.eegas.com
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