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Prof. Dr. Andrey A.Konoplyanik , Advisor to Director General, Gazprom export LLC,

Российский газ: Сотрудничество со странами ЕС и АТР - эволюция подходов Russian gas: cooperation with EU & Asia Pacific - evolution of the model. Prof. Dr. Andrey A.Konoplyanik , Advisor to Director General, Gazprom export LLC,

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Prof. Dr. Andrey A.Konoplyanik , Advisor to Director General, Gazprom export LLC,

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  1. Российский газ: Сотрудничество со странами ЕС и АТР - эволюция подходовRussian gas: cooperation with EU & Asia Pacific - evolution of the model Prof. Dr. Andrey A.Konoplyanik, Advisor to Director General, Gazprom export LLC, Professor, Chair “International Oil & Gas Business”, Russian State Gubkin Oil & Gas University www.konoplyanik.ru Presentation at Plenary Session 2 “New Choice of Russia: domestic market or export-oriented policy, East or West?”. – VI International Conference “ENERGETIKA XXI: economy, policy, ecology” “Russian energy: choice for XXI century strategy”,Saint-Petersburg, 29 November 2013

  2. Disclaimer • Views expressed in this presentation do not necessarily reflect (may/should reflect) and/or coincide (may/should be consistent) with official position of Gazprom Group (incl. Gazprom JSC and/or Gazprom export LLC), its stockholders and/or its/their affiliated persons, and are within full personal responsibility of the author of this presentation. A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  3. Russia - EU A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  4. New RF models for EU • Diversification of delivery routes: at least two pipelines to each key market • Risk evaluation/mitigation: from state planning & direct control of single supply routes - to competitive choice of multiple routes (costs X risks) • Economic justification of new pipelines: not new gas but to exclude transit monopoly (by-passes) • Changing contractual structures & pricing mechanisms: • To live in new architecture of the EU gas market (from chain of 3 bundled LTC to E-E unbundled zones with VTP) • Capacity market: to live in unbundled gas market (as a shipper only) • Commodity market: to live in oversupplied market (gas-to-gas competition) A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  5. New modelfor EU #1: diversification of delivery routes • Adaptation of the model which has been in place since 1968 & have been effectively working till 2009 (single route + 3 LTC to each market) • From single transport/pipeline route (UA GTS) + LTC Groningen type with oil/PP-indexation to multiple routes (min 2 routes to each key EU market): • To NWE (to Vaidhaus – same DP) = UA GTS + (Nordstream + OPAL + Gazelle): • Jan’06 + Jan’09 UA transit crises • To SE (new DP - moved from Baumgarten to Italian border) = UA GTS + South Stream (offshore + onshore): • (i) Jan’06 + Jan’09 UA transit crises + • (ii) Dec’05/May’07 TAG auction as result of Oct’03 trilateral GP/ENI/CEC agreement on “destination clauses” A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  6. Ukrainian by-passes: alternative gas pipelines to major RUS markets in EU (2 routes for each market) • Delivery points: • Baumgarten • Waidhaus • Saint Katarine • Mallnow 1 2 3 4 4 3 2 1 1 2 • Bottlenecks at UA route to Southern EU (justification for South Stream): • UA transit crises Jan’06/Jan’09 • TAG auctions Dec’05/May’07 1 2 A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  7. New model for EU #2: Evolution of gas value chain & pricing mechanism of Russian gas to EU (1) Past (Pre-2009) – growing EU market Oil-indexation Oil-indexation Gazprom Wholesale EU buyers/ resellers End-use EU customers Common interests Nowadays (Post-2009) – oversupplied (in NWE segment - ?) EU market with not yet clear future trends Request for hub-indexation where hubs are rel.liquid Gazprom as price-taker from oil market Gazprom as price-taker from oil market Gazprom as price-taker from OIL market Hub-indexation Oil-indexation End-use EU customers Gazprom Wholesale EU buyers/ resellers EU hubs Non-EU customers (f.i. reverse flows to CIS/UA) Request for hub-indexation both where hubs are relat.liquid & where there is no hubs (under threat of arbitration) Common interests A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  8. New model for EU #2: Evolution of gas value chain & pricing mechanism of Russian gas to EU (2) Future (“NO GO” contractual scheme under any (?) supply-demand scenario) Hub-indexation Hub-indexation End-use EU customer Gazprom Wholesale EU buyer / reseller Traditional flexibility for buyer (TOP) Common interests – downgrading price spiral for (RUS) gas Gazprom as price-taker from GAS BUYER’s market (with no participation on it)? => NO GO Future (what competitive niche for oil-indexed LTC in DELIVERIES to EU?) Oil-indexation Hub-indexation Role of DG COMP? Wholesale EU buyer / reseller (delivery) End-use EU customers (delivery) Gazprom Oil Gazprom as one of price-makers at EU market? Hub-indexation EU hubs (trade) Direct supplies to EU end-users Common interests A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  9. Russia – Asia Pacific A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  10. New RUS modelfor Asia Pacific: proactive approach? • Adaptation of the model which is not in place and is just being developed • From single transportation route (pipeline to China)/economic model (one exported good) to multiple: • Oil:from transportation of crude to also dev’t of petrochemical cluster in East Siberia (PP) => demand for innovations, infrastructure & industrial development of East Siberia + PP price rent • Gas: from pipeline to China (Gazprom) to both pipeline and/or series of LNG plants (GP + Independents): Sakhalin-2 (Gazprom) + Sakhalin-1 (Rosneft) + Vladivostok LNG (Gazprom) + Yamal LNG(Novatek) +… A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  11. Two options of Russian gas export to China: which price is higher • Export by pipeline: • Delivery point: cross-border RF-China (North-West of China) • Pricing: replacement value => replacing fuel = (i) coal or (ii) imported LNG • Contract price formula: • (i) coal-indexation (China) vs oil-indexation (RF/EU); • (ii) LNG CIF coast less transportation costs from SE to NW China (LNG price linked to JCC or HH) • Export by LNG: • Delivery point: China coastal area (South-East China) • Pricing: replacement value => replacing fuel = imported LNG • Contract price formula: LNG CIF coast SE China • => Russian LNG export price to China should be higher than pipeline export price due to specific configuration of Russia-China economic geography (?) A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  12. Thank you for your attention!www.konoplyanik.ruandrey@konoplyanik.rua.konoplyanik@gazpromexport.com

  13. Reserve slides A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  14. New RUS model for EU gas market: reactive approach • Reason for changes: new gas world since 2009: • Demand-side (economic crisis + subsidized RES + coal vs gas competition + reaction to high GP oil-indexed prices) • Supply-side (US shale gas revolution domino effects; Qatari “garbage gas” prior to Fukushima) • Institutional (3rd EU Energy Package) • Political (RF-UA gas transit crises => consequences for EU/Ukraine/Russia) A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  15. Russia-EU-Ukraine’s new circumstances: 22 days vs. 40+ years • “Matrix effect” & “Domino effect”:22 days of interruptions of Russian gas supplies to the EU via Ukraine (3 days in Jan’2006 + 19 days in Jan’2009): • has overbalanced previous 40+ years (since 1968) of stable & non-interruptible supplies=> • Has changed perceptions within all three parties on stability & non-interruptible character of future gas supply through this chain => each party has its own vision & answers • New perceptions => political statements & decisions => legal documents => investment decisions for new equilibrium to be reached => • “No return” points for each party => What are they? Whether they are reached already? A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  16. EU-Ukraine-Russia: in search for new post-2009 equilibrium with different aims & different responds • EU: • to diminish dominant role of Russia as major supplier • Ukraine: • to escape monopoly of Russia as one single supplier • Russia: • to escape monopoly of Ukraine as one dominant transit route A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  17. New risks, new challenges, new responds, “no return” points: the EU (1) • Perception: as if non-reliable future supplies from Russia via Ukraine to EU => • Responds: organization of new internal EU gas market architecture with multiple supplies & (high) flexibility • Multiple supplies by: • Alternatives to Russian gas (supply side): SOS Directive (3 gas supply sources/MS, etc.), LNG, shale gas, UGS=> to diminish dominant role of Russia as major supplier • Alternatives to (RUS) gas (demand side): climate change => decarbonization=> RES, energy efficiency => shrinking gas share in fuel mix => the loser would be a less competitive gas supplier (perception: most distant & costly Russian gas?) A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  18. New risks, new challenges, new responds, “no return” points: the EU (2) • (High) flexibility by: • Diminishing barriers for gas flows: CMP rules (UIOLI, SoP, interconnectors, reverse flows, spot trade, demand for softening LTGEC provisions (TOP), …, new market organization => Third Energy Package • Third Energy Package (03.09.2009 => 03.03.2012): • Set of legal instruments providing multiple supplies & flexibility within EU & Energy Community Treaty area based on new principles of internal market organization • from a chain of 3 consecutive LTCs (1968-2009) – to Entry-Exit zones with Virtual Trading Points (hubs) • New architecture of EU gas market under development => Gas Target Model + 12 Framework Guidelines+ 12 Network Codes + (???) • => “No return” point has been passed by EU !!! A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  19. New risks, new challenges, new responds, “no return” points: Ukraine (1) • UA: Euro-integration vs. CIS-integration => this “no return” point was passed in 2004 => Euro-integration choice => • Since Spring’2004 => UA demand to unbundle supply & transit contracts & to move to “European formulas” in RUS-UA gas trade: • UA expectations: to receive higher transit rates • UA reality: has received higher import prices • Since 2006/2009: UA disagreement on import pricing formula & price level resulted from move to “European formulas”=> transit crises Jan’2006 & Jan’2009 resulted, inter alia, from disagreements on supply contracts • Perception of further RUS supply risks => search for multiple supplies => to escape monopoly of Russia as one single supplier => A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  20. New risks, new challenges, new responds, “no return” points: Ukraine (2) • UA economic & legal motivation to diminish dependence on RUS gas supplies: • Economic: High import price & RUS/Gazprom unwillingness to soften pricing policy (no price review results achieved yet) stipulates UA search for: • alternatives to RUS gas (supply side): domestic production – onshore & offshore, shale gas, LNG import, reverse flows & UGS & • to deviate from (RUS) gas (demand side): switch gas to coal, nuclear, energy saving & improving efficiency • Legal: Euro-integration policy, membership in Energy Community Treaty => implementation of EU energy acquis (Third EU Energy Package) in UA => legal obligations for alternative supplies, interconnectors, reverse flows, unbundling Naftogas Ukraine, MTPA => new & incremental risks for transit via Ukraine • “No return” point is almost reached? If not yet (?)– is it just a matter of time (trend towards “away from Russian gas” is not to be changed?)? A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

  21. New risks, new challenges, new responds, “no return” points: Russia (1) • Transit risks: • Post-2006/2009 – both materialized & perceived risks, • Materialized: not sanctioned off-take of gas in transit (at least 2 episodes – Jan’2006 & Jan’2009) => but: it is RUS supplier who is responsible for gas delivery to EU delivery point => risk of legal claims of EU customer against RUS supplier in case of non-delivery / violation of contract => EU customers has not raised such claims in Jan’2006 / Jan’2009 cases, but what about the future if repeated? • Perceived (to materialize in near future – result of UA accession to Energy Community Treaty): • MTPA vs transit flows (risk of contractual mismatch) • Forthcoming unbundling of NaftogasUA => risk of factual unilateral change (disappearance) of one Contracting Party A.Konoplyanik, ENERGETIKA-XXI, SPB, 29.11.2013

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