The emergence of the gas independents : a game changer for Russia? Danila Bochkarev Senior Fellow, EastWest Institute

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1 The emergence of the gas independents : a game changer for Russia? Danila Bochkarev Senior Fellow, EastWest Institute Platts 7 th European Gas Summit September 2013 Vienna, Austria

2 Independents and Russia s Natural Gas Output Non-Gazprom companies are the key driving force of Russia s gas sector. The share of independents increased from 9.6 % (55.5 bcm) in 2010 to 26.9 % (176.2 bcm) in 2012 (TsDU TEK). Gazprom s output fell from bcm in 2011 to 487 bcm in 2012 (5 % decrease), BUT Russia s natural gas output decreased ONLY by 2.3 % to 655 bcm. Decrease in Russia s gas output was offset by increase in non-gazprom production. Novatek s production increased by 7.1 % on year-on-year basis and reached bcm (2012) or 16.2 % of domestic sales.

3 Independents: M & A Strategy Rosneft took over TNK BP (13.19 bcm in 2012) and Itera (est. 13 bcm in 2013). Rosneft s deal to buy ALROSA s gas assets (Geotransgaz and Urengoy Gas Company, est. max. production 6 bcma and 1.2 mt of condensate) may be closed within weeks. In 2010, Novatek bought 25.5 % of SeverEnergia (reserves 1.3 tcm, 155 mt of condensate) and in 2011 received 4 E & P licenses in Yamal. In 2012, Novatek also acquired 49 % of NorthGaz (reserves 1.7 billion boe). Novatek managed to get into the gas distribution infrastructure. E.g. in 2011, the company bought 100 % of Mezhregiongas Chelyabinsk and in 2012, majority stake of Gazprom s Mezhregiongas Kostroma.

4 New Customers 40 % of Gazprom's domestic supply contracts (88 bcma) will expire by the end of Independents are (still) successful in replacing Gazprom s contracts by offering more attractive supply conditions. Novatek secured $8.5 billion gas deal to supply E.ON Russia (2012), Sibur (510 bln. RUR, 2011), EnBW (20 bcm in ), etc. Novatel also became the key supplier of Uralkali and Mosenergo (27 bcm in ). In 2012 Rosneft signed supply deals with E.On Russia and Fortum (180 bcm in ). Both companies hold talks over LNG export supply.

5 Domestic Developments New gas flaring law has led to the increase in oil companies associated gas output from 68.5 bcm in 2011 to 71.8 bcm in Gas flaring law and economic slowdown both in Europe and Russia have contributed to the emergence of the gas glut (30 bcm in 2012, according to Gazprom Magazine s estimates, 12/2012). Gas glut favored independent gas production not restricted by the FTS regulations. Powerful shareholders/managers (Sechin, Timchenko, among others) able to lobby for tax breaks (MET, etc.) and favorable legislation.

6 External Challenge: From Sellers to Buyers Market Unconventional oil & gas revolution => oil/gas peak (resource scarcity) discussion becomes irrelevant. Gas glut, unconventional production and new discoveries help major importers (EU, but also China) to increase their bargaining power vs. major suppliers. Norway accepted new market rules (e.g. EEA Agreement 1994, switch to spot, etc.) Would Gazprom be able to adapt? Are independents part of Russia s new European game?

7 Gazprom in the EU: Challenging Environment Necessity to comply with the host market regulations (3 rd Package). Difficult access to downstream for the vertically-integrated companies. Unbundling/TPA issue affects Gazprom s investment in Europe (South Stream, OPAL, Lietuvos Dujos). DG COMP investigation challenges Gazprom s contract & pricing model. Gazprom s gas is unwelcome in Europe? Would independents help Russia to re-gain lost market share in Europe?

8 Why Independents are Important for Russia? Russia s LNG plans require input from Rosneft & Novatek. Gazprom alone will not be able to increase production to 40 million tons by Independents expansion may contribute to the federal budget and increase positive competition in the domestic gas market. Independents will access new market segments. The IGP are more compatible with the EU Internal Energy Market.

9 Major Outcomes Gradual liberalization of the Single Export Channel (2006 Law). New legislation is under discussion (2013). Gas market dominated by large players (Gazprom, Novatek and Rosneft). Gazprom will receive the right to sell gas at a lower price than the regulated level set by the FTS. Independents will participate in domestic gasification. MET, export duties likely to increase (for independents). Export regulators in Russia will get more power!!!

10 THANK YOU! Q & A