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© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Russian Gas Exports and the “Perfect Storm” in Global Gas
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Moscow June 2010
Thane Gustafson, Senior DirectorRussian and Caspian EnergyIHS Cambridge Energy Research Associates
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Key Points: The Dramatic Winter of 2009-10
1. The “shale gale” in the U.S. is blowing strongly, limiting the market for imported LNG
2. LNG poured into Europe in the winter of 2009, lowering spot prices to as little as half of Russian contract prices
3. A combination of recession and LNG imports put unprecedented pressure on the structure of long-term oil-linked contracts
4. The Russians have responded a series of orderly and pragmatic responses
5. Which were effective in relieving the pressure—for last winter at least
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Moscow June 2010
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The “Shale Gale” Continues
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Moscow June 2010
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Unconventional Gas Has Led to Very Rapid Production Increases in the US
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Moscow June 2010
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6
US Natural Gas Reserves and Resources Have Doubled
Source: EIA, PGC, and IHS CERA.00112-27
Moscow June 2010
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77
Source: IHS Cambridge Energy Research Associates.90902-4
Haynesville92Tcf – 16.4 Bcfd - $3.10
Woodford9Tcf - 3Bcfd - $3.64
Montney96Tcf – 17.1 Bcfd - $3.96
Horn River90Tcf – 16.0 Bcfd - $2.74
Mancos20Tcf - 5Bcfd
Marcellus149Tcf – 26.6 Bcfd - $3.29
Fayetteville7Tcf – 1.3 Bcfd - $2.57
Shale Gas is Widely Distributed—Including in the Northeast US
Barnett28Tcf - 5Bcfd $5.24 FWS & $3.89 SB
North American Consumption: 27 Tcf per yearHigh Commercial Resource: 520 Tcf (19 years)
Eagleford28Tcf – 5.0 Bcfd - $2.07
Granite Wash10Tcf – 1.6 Bcfd - $2.20
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Moscow June 2010
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8
Half of Identified Shale Gas Plays are Economic at Henry Hub Prices of $4/MMBtu
Source: IHS CERA.Note: Proved, possible, and potential resources.00112-6 Moscow June 2010
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Henry Hub Price Outlook Keeps Dropping
10
Moscow June 2010Source: IHS CERA.
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With Limited Market in North America,LNG is Going into Europe
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Moscow June 2010
Page 10
© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
0
20
40
60
80
100
120
Russia North Africa Norway LNG
Mtpa
2008 2009
+ 24 %
+ 4 %
- 16 %
- 13 %
12
Europe’s Supply Sources in 2009
Source: IHS CERA.60501-44_061107
LNG imports increased by 24% despite depressed demandLNG contributed to push back Russian gas under minimum bill
MillionTonsEquivalent
12
Moscow June 2010
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© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
13
LNG Supply to European Markets Expected to Grow Strongly through 2012(millions tons)
Source: IHS CERA.
2010
2009
2008
20112012
Total Europe
Turkey
Greece
Italy
PortugalSpain
France
BelgiumUK
17
12 1
4 14
25 4 5 5
2 2 2 3 4
21
19
19 19 20
9 10 10 11 12
13
5 6 71 1 1 1 1
4 4 5 7 8
41
51
60
68 7
3
0 0 0 1 2
Other Europe
Moscow June 2010
Page 12
© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
14
Moscow June 2010
14
Looking Beyond 2012: Planned LNG Regasification Capacity Across Europe Could Transform the Supply Mix
• In the two years from January 2008, LNG regasification capacity in Europe grew by 52 Bcm (45%), mainly in Italy and the United Kingdom.
• If all projects currently planned are built, this could grow to over 350 Bcm by 2015.
Source: IHS CERA.The graph shows all terminals existing, under construction, or currently planned with a likely completion date. Some of the planned terminals may not be built.
United Kingdom
Italy
Spain
France
Netherlands
0
50
100
150
200
250
300
350
400
450
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15
Bcm
Sweden
Cyprus
Ireland
Lithuania
Germany
Greece
Poland
Romania
Belgium
Portugal
Albania
Croatia
Turkey
Netherlands
France
Spain
Italy
United Kingdom
Bcm
2008:115 Bcm
2010:167 Bcm
2015:350+ Bcm?
2012:205 Bcm
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© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
Domestic Production
Russia
LNG
Norway Pipe
Algeria Pipe
Other Europe
Other Pipe
0
100
200
300
400
500
600
700
1992 1995 1998 2001 2004 2007 2010 2013
Bcm
15
Moscow June 2010
15
European Supply Outlook—Growth of LNG Limits Growth of Pipeline Supply
• Large growth of LNG supply into Europe expected to continue following a global supply surge, and the expansion of regasification capacity.
• Russian supply to grow again, after 13% fall in 2009—but may not recover 2008 levels until 2014.
• Norwegian pipeline supplies expected to continue steady growth, as domestic production falls.
Forecast
Source: IHS CERA.Central Europe = Czech Republic, Hungary, Poland, and Slovakia.
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Lingering Supply Overhang in Europe
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Moscow June 2010
Page 15
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171717
Unprecedented Demand Drop Across Europe in 2009
Source: IHS CERA.60501-44_061107
UnitedKingdom
Italy
Austria
Czech Republic
DenmarkGermany
Belgium
France
Spain
- 2%
- 4% - 5%
- 6%
- 10%
- 3%
- 7%
+ 2%
Turkey
- 11%
Poland
- 6%
- 8%
Gas demand change 2008–09
: Main LNG markets
Moscow June 2010
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© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
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Moscow June 2010
18
Evolution of European Demand
• Total decline of 35 Bcm (6%) in 2009, driven by recession-led falls in industrial production and GDP
• Expected increase of 23 Bcm (4%) in 2010—but 6-9 Bcm of this is due to the cold first quarter
• Future growth to come from:
— Gas-fired generation capacity build
— Growth of residential consumption in emerging markets
— Post-recession recovery of industrial production
300
350
400
450
500
550
600
650
1994 1997 2000 2003 2006 2009 2012 2015
Bcm
2000-2009
2009-2015
Trendline
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© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
19
Europe Contractually Oversupplied
Source: IHS CERA.60501-44_061107
Domestic production (excluding
contracted exports)
LNG-contract
Other pipeline
Netherlands
Algeria-pipeline
Norway
Russia
0
100
200
300
400
500
600
700
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Gas demandMinimum bill
supply
The oversupply is estimated at 50 Bcm (36 million tons) between 2009 and 2011
Bcm
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Moscow June 2010
Page 18
© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.
$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
Jan
Mar
May Ju
lS
epN
ov
2004 2005 2006 2007 2008 2009 2010 2011 2012
US
Do
lla
rs p
er
MM
Btu
Henry Hub
Oil Parity (JCC)
Term Japan LNG
Term Europe
20
Will a Persistently High Oil-Gas Spread Cause the Oil Link to Break Down and Endanger the Long-Term Contract Structure?
Source: IHS CERA. Moscow June 2010
Page 19
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The Russians React
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Moscow June 2010
Page 20
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Russia Adjusts on All Fronts
1. Investment Priorities Altered: Yamal Peninsula— June 2009: Production from Yamal postponed to 2012— September 2009: Pipeline construction halted, but drilling program
maintained
2. Atlantic LNG Phased Back:— February 2010: Shtokman postponed to 2016 (pipeline phase) and 2017
(LNG phase)— March 2010: Gazprom does not acquire Trinidad LNG asset
3. Shift to Asia Stepped Up:— February-March 2010: Gazprom Marketing and Trading expands its
Singapore office— Reallocates 1 mt of Sakhalin LNG intended for Costa Azul on west coast of
Mexico to trade elsewhere in Pacific Basin— Investment in Sakhalin-Khabarovsk-Vladivostok pipeline continues
4. Renewed emphasis on primacy of pipeline exports to Europe:— Russians accept 15% spot component and lower minimum bills— In effect, Russia has assumed the role of market balancer
5. Shale Gas: Take a Stake in a US Shale Gas Producer?
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Moscow June 2010
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23
0
20
40
60
80
100
120
2008 2009
Mill
ion
to
ns
pe
r ye
ar
European imports10 Bcm lower than minimum billRussian Exports to Europe
≈ 7 Mtpa
Minimum bill level
Source: IHS CERA. Moscow June 2010
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242424
The Dilemma in Gas Pricing: Oil Link or Spot?
• Hub-related pricing subject to manipulation in the long run by dominant (oligopoly) sellers
• Maintaining oil-linkage preserves integrity of the commercial relationship, but loses customers
Solution—a mix of price and volume concessions
Moscow June 2010
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What Next?
25
Moscow June 2010
Page 24
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CERA’s View:
Good News in the Near Term: European Gas Market Expected to Stabilize in 2012-3
— European gas demand to return to 2008 levels by 2012-13, as industrial production increases
— Large-scale additions of gas-fired electricity generation on the way— Residential gas demand to grow strongly in emerging markets,
especially Turkey
But Longer-Term Outlook Could be Problematic:— Financial crisis and austerity programs will constrain GDP growth— Long-term de-industrialization of Europe threatens industrial demand— Efficiency improvements could limit residential gas demand— LNG surge could resume in 2016 after pause in 2014-2015
26
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0
50
100
150
200
250
300
350
Mil
lio
n T
on
pe
r Y
ea
r
Pacific Basin Demand
Potential supply from Extra-Regional Producers*
Un-contracted Supply from Pacific Producers*
Firm supply contracts for delivery in Pacific Basinfrom Pacific and Middle East Producers
Proposed Liquefaction Projects in Pacific Basin
LNG Balance Asia PacificTightening supply-demand balance post-2012 opens up opportunities, but large pipeline of planned projects makes competition fierce
27
* Supply from Existing and Committed Liquefaction projects at an average 93% utilization rate
Source: IHS Cambridge Energy Research Associates.
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Moscow June 2010