Gazprom’s competition on the domestic market increases its reliance on European sales
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This document discusses the changing structure of the Russian natural gas market and Gazprom's position within it. It notes that Gazprom's domestic market share has declined from 90% in 2006 to 73% in 2013 as independent producers have increased production. It also discusses the challenges Gazprom faces from political rivals in Russia, the rising role of independent producers, and Gazprom's efforts to expand export markets while maintaining its position in Europe.
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Gazprom’s competition on the domestic market increases its reliance on European sales
- 1. www.icis.com Gazprom markets – future directions Elizabeth Stonor Russian market specialist, European Gas Markets
- 2. www.icis.com Russian gas – a changing scenario • Structure of Russian gas market and increasing importance of independent producers • Challenge to Gazprom’s position in Russian domestic market from political rivals • Gazprom pricing policy and relations with European customers • Gazprom production and impact of recent supply deal with China
- 3. www.icis.com Russian gas – key facts • Russian total gas production 2013 668bcm of which: Gazprom 487.4bcm Independents 180.6bcm • Gazprom share of production 2013 73% • Gazprom share of production 2006 90% • Russian gas consumption 2013 456.2bcm • Gazprom production capacity (end-2013) 570bcm
- 4. Who are Russian independent gas producers? • Novatek – second largest gas producer in Russia • Oil companies like Rosneft, Lukoil, Surgutneftegaz • Independents with Gazprom participation such as Nortgas www.icis.com (now 50% Gazprom), Severenergia (50/50 Gazprom Neft/Novatek) • Producers with foreign participation- Achimgaz (Wintershall), Sakhalin-1 (ExxonMobil), Sakhalin-2 (Shell, Mitsubishi) • Around 15 small producers supplying local areas, including JKX in Southern Russia
- 5. Rise of Russian independents • Competitive due to lower cost of production than Gazprom • Independents wish to continue increasing production volumes because of : a) better gas price environment within Russia following steady increases in regulated gas prices from 2000 b) improved access for independents to Gazprom’s pipeline system • Depleting production in older fields is freeing up transport capacity for independents in Gazprom transport system www.icis.com •
- 6. www.icis.com Pipeline access in Russia · Gazprom is pipeline monopolist in Russia · Transport tariffs are regulated by Russian Federal tariff service · Pipeline tariffs are point-to-point comprising usage fee and capacity charge (Rb/kcm/100km) · Gazprom uses unregulated internal transport tariff within Russia · Hitherto independents sold gas close to their production areas to avoid expense of long distance transport to areas of high demand. New methodology will help independents by reducing pipeline access costs for long distance transport.
- 7. www.icis.com The regulated gas price in Russia 120 4000 • Insert graph The regulated gas price in Russia (from p 1 100 80 60 40 20 0 3500 3000 2500 2000 1500 1000 500 0 197 198 19 20 201 202 203 204 205 206 207 208 209 2010 201 2012 2013 US$/mcm RUR/mcm RUR/mcm US$/mcm Graph sourced from The Oxford Institute of for Energy Studies
- 8. Comparitive prices for domestic gas in Russia 18% 16% 14% 12% 10% www.icis.com 8% 6% 4% 2% 0% -2% -4% 4000 3500 3000 2500 2000 1500 1000 500 0 2007 2008 2009 2010 2011 2012 2013 Novatek Premium/Discount Realised Gas Price (R/mcm) NVTK End Consumer GZP End Consumer NVTK Premium Graph sourced from The Oxford Institute of for Energy Studies
- 9. Gazprom’s burden in Russia • Gazprom is obliged to supply socially sensitive and residential customers in Russia with gas • Non-payment for gas is significant – by 1 April 2014 Russian gas debt to Gazprom marketing affiliate Mezhregiongaz Group reached Rb141.6bn ($3.4bn/€2.97bn). • 75% of the overdue debt fell to socially sensitive customers – residential users, utility companies and companies financed from the state budget, such as hospitals and the army. www.icis.com
- 10. www.icis.com Gazprom export monopoly under threat • Until 2014, Gazprom was the monopoly gas exporter from Russia - independents were not permitted to export • Changes in legislation at end-2013 lifted Gazprom export monopoly on Liquefied Natural Gas (LNG) allowing independents to export LNG • Gazprom retains export monopoly on piped gas in Russia but government is considering calls to lift this in Russian Far East
- 11. Political rivals challenge Gazprom’s position in Russia • Russian government backing was crucial to progress achieved in market liberalisation in past two years. Igor Sechin, ceo of Rosneft, and Gennady Timchenko, member of Novatek council of directors, are close to president Putin. They backed: • Significant improvement in pipeline access for independents • Lifting of Gazprom export monopoly for LNG at end-2013 • Proposals currently under consideration for lifting of monopoly on piped gas exports from new fields in Eastern Siberia and Russian Far East www.icis.com
- 12. · Russian domestic market represents half of Gazprom Group’s total gas sales volumes, significantly higher than European export volumes: · Gazprom group sales volumes 2013 % of total • Russian domestic market 228.1bcm 50.6 • Europe+Turkey 161.5bcm 35.8 • FSU/Baltics 59.4bcm 13.1 • LNG sales 2.02bcm 0.5 www.icis.com Gazprom sales volumes 2013
- 13. www.icis.com Gazprom Group average sales prices 2013 • Gazprom sells at much higher prices to Europe than to FSU or Russian domestic market • Average European price (incl. Turkey) $387/kcm • Average FSU price $272/kcm • Average Russian domestic price $106.6/kcm (Rb3393/kcm*) (*$1=Rb31.8) •
- 14. Gazprom’s proceeds from gas sales 2013 • Gazprom’s European and FSU exports covered 77% of gas earnings www.icis.com last year: • Europe +Turkey $53.0bn (Rb1687.3bn) • FSU $13.3bn ( Rb423.5bn) • Russian domestic sales $24.3bn (Rb774.0bn)
- 15. Gazprom relations with European customers • Gazprom insists on maintaining oil-indexation principle in www.icis.com long-term contracts preferring to introduce concessions on case-by-case basis • Increased year-on-year European sales in 2013 may be anomalous and due to long cold spring in 2013 and reduction in alternative supply such as LNG. • However trend continues in 1H 2014 with Gazprom export sales at 80.8bcm in 1H 2014, up 2.5% year-on-year – more flexible pricing may be behind this
- 16. www.icis.com Gazprom and Asia-Pacific markets • 30-year supply contract signed last May with China for 38bcm/yr gas to be delivered from 2018 through planned Power of Siberia gasline • China potentially a big new market for Gazprom - current Chinese gas demand of 170bcm/yr expected to grow rapidly. But Chinese project will be expensive - $55bn estimated cost. • Gazprom holds majority share in Sakhalin-2 selling LNG into Japan and Korea and plans other LNG projects
- 17. www.icis.com Separate markets, different gas • China/Asia-Pacific deals will not affect Russian gas availability to Europe – they are separate markets • Europe/CIS/European Russia to be increasingly supplied from new production in Yamal peninsula connecting into existing transmission grid • China/Asia Pacific to be supplied from new production at Chayanda and Kovykta fields located far from existing infrastructure. New Power of Siberia line and other infrastructure being built to transport the gas to China.
- 18. www.icis.com Conclusions • Gazprom is willing to concede market share in less profitable Russian market to independents • Russian independents Novatek and Rosneft are outpacing Gazprom on developing LNG sales outside Russia • Development of Gazprom’s gas supply to China will be expensive and only bring earnings in the longer-term • Loss of Ukrainian sales has significantly dented Gazprom’s export volumes to former Soviet Union - future of Ukrainian sales uncertain against political dispute • Europe will remain best market in medium term but Gazprom will need to be price competitive • Political tensions around Ukraine and western sanctions could affect development of production in Russian Far East both for Gazprom and the independents, especially Novatek-led Yamal LNG project
- 19. www.icis.com Find the full webinar at: www.icis.com/resources/webinars/
Editor's Notes
- Gazprom’s gas production has flatlined over the past two years around 487 billion cubic metres with the company’s latest 2014 projections showing an increase to 496.4bcm. This is well below the company’s gas production capacity of 560-570bcm/year (as at end-December 2013). Gazprom’s production has not been rising because demand has not been rising in its home market in Russia.
- I Sakhalin-1ndependents often have some Gazprom ownership now, but still classed as independents.
- Gazprom average production cost 2013 was Rb1232/kcm ($38.72/kcm) The rise of the independents has been a gradual process. They produce gas at lower cost than Gazprom and this will continue as Gazprom production moves increasingly to difficult fields in the Yamal Peninsula. Rosneft alone is planning on raising gas production to 100billion cubic metres/year (bcm/yr) by 2020. In 2013 the company produced 38.17 bcm with 2014 production looking to exceed 55bcm according to Rosneft ceo Igor Sechin. The biggest Russian independent, Novatek, produced 36.3bcm in the first 7 months 2014, a year-on-year increase of 7.5% according to the Russian central dispatching unit CDU-TEK.
- and the government now wants any increases in tariffs to keep in step with gas price increases – this means there will be no increase in the transport tariff in 2014 in line with the freezing of regulated gas tariffs in 2014. In 2015 and 2016 any transport tariff increase will be in line with inflation. Gazprom uses its own internal tariffs for transporting gas in Russia. The FTS has now formulated a new methodology for setting transport tariffs aimed at reducing transport costs for independents wanting to take gas long distances. Roughly speaking there would be one charge to take gas from production areas located far from the main western areas of consumption to a point west of the Urals, with a zonal charge thereafter, Stern told ICIS
- Regulated gas prices in Russia have been raised annually since 2007 in a government-supported bid to reach netback parity with export prices, but the idea seems to be on the back burner now. While regulated prices for years did not cover costs, around 2009 they became profitable for both Gazprom and the independents. Gazprom itself also buys gas from the independents, generally at a discount from regulated prices. Polishchuk estimated that whereas Gazprom had in the past bought gas from the independents at discounts of around 40%, these had now dropped to only around 20%, indicating better revenues for the independents from this business. Gazprom’s obligation to sell gas at regulated prices has now made the company uncompetitive with independents who can sell at market price and currently undercut regulated prices to their end-user customers. This has led to Gazprom asking the government to change the regulations to allow it to sell at up to 15% discount to the regulated price.
- A crucial problem for Gazprom in the Russian domestic market is that of non-payment for gas - on a heroic scale. Though Gazprom can cut off non-paying customers the company also has a statutory duty to supply socially sensitive and residential customers which make this difficult in practice. The customers concerned know this and make the most of it – particularly the utility companies. In 2013 unpaid debt of all consumer groups to Gazprom’s domestic marketing affiliate, the Mezhregiongaz Group, rose by Rb32.8bn from 2012 to reach Rb115.8bn in 2013, Gazprom figures show. During Q1 2014 this debt grew by another Rb25.8bn, taking the debt to Rb141.6bn ($3.4bn/€2.97bn). 75% of the overdue debt fell to socially sensitive customers – residential users, utility companies and companies financed from the state budget, such as hospitals and the army. The army seems to have been a major offender - Gazprom said that as at 1.4.2014 the Russian ministry of Defence owed Rb5.4bn and was therefore responsible for most of the Rb6.5bn debt of the budget group of debtors. The debt of utility companies, totalling Rb46.2bn as at 1.4.2014, is due to a number of factors. These include the presence of intermediaries which take payment from end-users for district heating but don’t pass it on to the gas supplier, private companies set up overnight as district heating suppliers going bankrupt and not paying for gas supply and district heating tariffs in some regions being set too low to cover costs.
- LNG from p91 of Emitent Q1 2014 While Gazprom cedes market share to the independents in Russia it is managing to maintain market share in Europe despite the fact European gas consumption has been depressed by economic stagnation and competition from coal in the power sector. In the first half of 2014 Gazprom affiliate Gazprom Export sold 80.8bcm gas to Europe, a 2.5% increase year-on-year. Increased sales in 2013 and over H1 2014 have been partly due to a more flexible pricing policy on the part of Gazprom, but also due to outside circumstances. A long, cold winter in 2013 increased demand for Russian gas at a time there was a reduction in alternative supplies such as North African and Norwegian gas as well as LNG being redirected to better prices in the Asia-Pacific market. Ironically in 2014 there has been high gas demand for European stock replenishment on the back of anxiety over events in Ukraine.
- Besides Ukrainian routes, Gazprom can still supply most central European hubs via either the Yamal-Europe pipeline – which transits Belarus and Poland – or via the offshore Nord Stream pipe between Russia and Germany. Southern states including Romania, Bulgaria, Greece and Turkey are significantly more dependent on Russian gas transiting Ukraine. Data from German grid operator GASCADE showed that Yamal flows remained unchanged over recent days. At the same time, NEL and OPAL data showed that Nord Stream throughput had decreased a touch with the start of the month. Germany has increasingly become a transit country for Russian natural gas volumes over the course of 2013, with total supply to the country standing 38% higher than consumption, data collected by ICIS shows. This figure is 11 percentage points higher than in 2012, when Germany received about 27% more gas than it used. The most significant change in the supply picture was the commissioning of the Nord Stream pipeline’s second string in October 2012, doubling its capacity to 55 billion cubic metres (bcm)/year. Despite the pipeline still being far from fully utilised, imports through Nord Stream more than doubled year on year, reaching 248TWh (23.04bcm) in 2013, data provided by the two onshore German Nord Stream links NEL and OPAL show. At the same time, imports of Russian gas via the German-Polish and the German-Czech border points Mallnow and Waidhaus also increased year on year, according to Germany’s biggest transmission system operator (TSO) Open Grid Europe (OGE). Imports through Mallnow rose by 22% year on year to 308.28TWh in 2013, while Waidhaus imports increased by 10% over the same period, coming in at 265.52TWh last year.
- While Gazprom cedes market share to the independents in Russia it is managing to maintain market share in Europe despite the fact European gas consumption has been depressed by economic stagnation and competition from coal in the power sector. In the first half of 2014 Gazprom affiliate Gazprom Export sold 80.8bcm gas to Europe, a 2.5% increase year-on-year. Increased sales in 2013 and over H1 2014 have been partly due to a more flexible pricing policy on the part of Gazprom, but also due to outside circumstances. A long, cold winter in 2013 increased demand for Russian gas at a time there was a reduction in alternative supplies such as North African and Norwegian gas as well as LNG being redirected to better prices in the Asia-Pacific market. Ironically in 2014 there has been high gas demand for European stock replenishment on the back of anxiety over events in Ukraine.
- Gazprom is looking to diversify into the Asia-Pacific gas market, both in LNG and piped gas, as well as developing infrastructure to increase gas consumption in the Russian Far East. The big news this year was the signing of a long-awaited piped-gas supply contract between Gazprom and China for the supply of 38bcm/yr gas. The cost of the project has been estimated by Gazprom at $55bn and the Chinese have undertaken to make a $25bn advance payment for the gas before supplies begin through the planned eastern route – the Power of Siberia gas pipeline. Chinese gas demand currently sits at 160-170bcm/year, but rapid growth is expected over the coming years. The deal gives Gazprom an important new market for its gas exports at a time when Europe is trying to reduce its dependence on Russian gas. The Chayanda and Kovykta fields that will produce gas to be supplied to China are located in the Far East of Russia and far from Gazprom’s existing transmission grid to European and Russian markets.These fields will connect into a separate Russian gas transmission system designed to supply the Far East of Russia, China and/or other Asian markets, so they will not soak up production of Russian gas from fields supplying Europe and the main Russian gas market located in the west of the country. In LNG Gazprom already has a majority share in the Sakhalin-2 LNG project selling gas into Japan and Korea . Gazprom’s three other planned LNG projects are Vladivostock LNG in the Russian Far East, the expansion of Sakhalin-2 by a third train and the Baltic LNG project near St Petersburg – though this last is intended to supply gas into Europe.