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Russian Gas Exports and the “Perfect Storm” in Global Gas

Russian Gas Exports and the “Perfect Storm” in Global Gas. Thane Gustafson, Senior Director Russian and Caspian Energy IHS Cambridge Energy Research Associates. Key Points: The Dramatic Winter of 2009-10. The “shale gale” in the U.S. is blowing strongly, limiting the market for imported LNG

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Russian Gas Exports and the “Perfect Storm” in Global Gas

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  1. Russian Gas Exports and the “Perfect Storm” in Global Gas • Thane Gustafson, Senior Director • Russian and Caspian Energy • IHS Cambridge Energy Research Associates Moscow June 2010

  2. Key Points: The Dramatic Winter of 2009-10 • The “shale gale” in the U.S. is blowing strongly, limiting the market for imported LNG • LNG poured into Europe in the winter of 2009, lowering spot prices to as little as half of Russian contract prices • A combination of recession and LNG imports put unprecedented pressure on the structure of long-term oil-linked contracts • The Russians have responded a series of orderly and pragmatic responses • Which were effective in relieving the pressure—for last winter at least Moscow June 2010

  3. The “Shale Gale” Continues Moscow June 2010

  4. 4 Unconventional Gas Has Led to Very Rapid Production Increases in the US Moscow June 2010

  5. US Natural Gas Reserves and Resources Have Doubled Source: EIA, PGC, and IHS CERA. 00112-27 Moscow June 2010

  6. 6 6 Shale Gas is Widely Distributed—Including in the Northeast US • North American Consumption: • 27 Tcf per year • High Commercial Resource: • 520 Tcf (19 years) Horn River 90Tcf – 16.0 Bcfd - $2.74 Montney 96Tcf – 17.1 Bcfd - $3.96 Mancos 20Tcf - 5Bcfd Marcellus 149Tcf – 26.6 Bcfd - $3.29 Granite Wash 10Tcf – 1.6 Bcfd - $2.20 Fayetteville 7Tcf – 1.3 Bcfd - $2.57 Woodford 9Tcf - 3Bcfd - $3.64 Haynesville 92Tcf – 16.4 Bcfd - $3.10 Eagleford 28Tcf – 5.0 Bcfd - $2.07 Barnett 28Tcf - 5Bcfd $5.24 FWS & $3.89 SB Source: IHS Cambridge Energy Research Associates. 90902-4 Moscow June 2010

  7. 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

  8. Henry Hub Price Outlook Keeps Dropping Source: IHS CERA. Moscow June 2010

  9. With Limited Market in North America,LNG is Going into Europe Moscow June 2010

  10. Europe’s Supply Sources in 2009 11 LNG imports increased by 24% despite depressed demand LNG contributed to push back Russian gas under minimum bill Million Tons Equivalent Source: IHS CERA. 60501-44_061107 Moscow June 2010

  11. 0 2008 2009 2010 2011 2012 LNG Supply to European Markets Expected to Grow Strongly through 2012(millions tons) UK Belgium Other Europe Total Europe France Italy Greece Portugal Spain Turkey Source: IHS CERA. Moscow June 2010

  12. 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. 13 Bcm 2015: 350+ Bcm? 2012: 205 Bcm 2010: 167 Bcm 2008: 115 Bcm 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. Moscow June 2010

  13. 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. 14 Forecast Source: IHS CERA. Central Europe = Czech Republic, Hungary, Poland, and Slovakia. Moscow June 2010

  14. Lingering Supply Overhang in Europe Moscow June 2010

  15. Unprecedented Demand Drop Across Europe in 2009 16 16 Gas demand change 2008–09 - 4% - 5% • 6% - 7% - 6% + 2% - 3% - 2% - 10% : Main LNG markets - 8% - 11% Source: IHS CERA. 60501-44_061107 Moscow June 2010

  16. 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 17 Moscow June 2010

  17. Europe Contractually Oversupplied 18 The oversupply is estimated at 50 Bcm (36 million tons) between 2009 and 2011 Bcm Source: IHS CERA. 60501-44_061107 Moscow June 2010

  18. 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

  19. The Russians React Moscow June 2010

  20. Russia Adjusts on All Fronts • 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? Moscow June 2010

  21. Russian Exports to Europe European imports10 Bcm lower than minimum bill Minimum bill level ≈ 7 Mtpa Source: IHS CERA. Moscow June 2010

  22. The Dilemma in Gas Pricing: Oil Link or Spot? Hub-related pricing subject to manipulation in the long run by dominant (oligopoly) sellers 23 23 • Maintaining oil-linkage preserves integrity of the commercial relationship, but loses customers Gas Marketer Solution—a mix of price and volume concessions Moscow June 2010

  23. What Next? Moscow June 2010

  24. 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

  25. LNG Balance Asia PacificTightening supply-demand balance post-2012 opens up opportunities, but large pipeline of planned projects makes competition fierce 26 * Supply from Existing and Committed Liquefaction projects at an average 93% utilization rate Moscow June 2010 Source: IHS Cambridge Energy Research Associates.

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