This presentation aims to examine the reasons which have prompted Russia to seek closer gas cooperation with Asia Pacific countries (mainly China), as well as hightlight its current gas pipeline and LNG projects in the East.

1. Russia’s gas pivot to Asia: a short-sighted policy or
a long-term strategy?
Olga Gerasimchuk
Ph.D Candidate, Europes-Eurasia Research Centre (CREE), INALCO, Paris
Presentation at the 6th International Youth Conference on Energy 2017
21st- 24th June 2017, Danubius Flamenco Hotel, Budapest

2. Introduction and Issues
Russia and the EU tend to have a particularly interdependent relationship in gas sector. Almost 90% of Russia’s total gas exports
are delivered to the European market. Russia is the largest single gas supplier to the EU, accounting for 38% of its total gas
imports.
0
20
40
60
80
100
120
140
160
180
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2004 2006 2008 2010 2012 2014
Others
Turkey
Peru
Trinité-et-Tobago
Nigeria
Lybia
Qatar
Algeria
Norway
Russia
EU’s main gas suppliers and their share in total gas imports, %
BUT
Recent unfavorable market trends in the EU gas market and a rapidly worsening Russia-EU relations have jeopardised the viability
of Gazprom’s traditional model for marketing its gas and prompted Russia to look for Asia and LNG as means to diversify its
export markets, while the U.S and EU economic sanctions, implemented in 2014 in the aftermath of the Ukrainian crisis, have
accelerated this process.
Russian gas exports to Europe, Bcm
Source: BP Statistical Review of World Energy, 2016 Source: Gazprom Export, 2016

3.  Flat demand for gas with an almost continuous decline in gas consumption since 2009 with a sharp drop in gas
prices
 Much higher share of spot indexation in pricing formulas coupled with a constant buyer’s pressure to review long-
term contracts
 EC Antitrust Investigation against Gazprom with regard to “gas market abuse” in Central and Eastern Europe
 Third Energy Package implementation: Unbundling, EU network codes and Third-Part Access (case of Nord Stream
and OPAL pipelines)
 Huge opposition from new EU States against Nord Stream-2 and South Stream
 Expansion of LNG and a growing competition from other gas suppliers
 European policy of diversification of gas supply sources, aimed at reducing EU’s dependence on Russian gas
(promotion of the Southern Corridor and development of LNG infrastructure)
Unfavorable market trends since the 2nd half of 2000s and Russian-Ukrainian 2006/2009 gas
transit crises challenged a more than 40 years’ stable gas supplies
Russia - EU: end of honeymoon?

4. Source: Mitrova (2014)
Contract volumes and supply volumes of Russian gas to Europe, Bcm Monthly average of RUS-GER and WB-NGE gas prices, USD/MMBtu
Source: International Monetary Fund Commodity Data 2017, World Bank Commodities
Price Data 2017,
https://ycharts.com/indicators/europe_natural_gas_price
• Between 2008 and 2014, the giant Russian gas supplier saw its exports drop by 20%: the economic recession in Europe,
combined with milder weather led Gazprom’s clients to buy the minimum volume of gas stipulated in the LTC they had concluded
• Between 2010 and 2013, Gazprom had to revise LTC with its biggest European clients: the minimum volume of gas (MCQ), which
had to be taken under LTC, was reduced from 85% to 75%; Gazprom also had to lower the base price in the pricing formula

5. 0
10
20
30
40
50
60
70
80
90
Share of long-term contracts with oil-linked indexation Share of gas hubs
Gas trade in the EU, %
0 200 400 600 800 1000 1200 1400 1600 1800 2000
NBP, UK
TTF, Netherlands
NCG, Germany
GASPOOL, Germany
ZEE, Belgium
ZTP, Belgium
PEG Nord, France
VTP, Austria
GPN, Denmark
OTE, Czech Republic
POLPX, Poland
MGP, Hungary
Source: International Gas Union Wholesale gas price formation, 2016 Source: Orlova (2017)
Gas trade at EU’s gas hubs in 2014, Bcm
• The expansion of spot indexation in the EU market with new methods to determine gas price challenge Gazprom’s traditional
LTContracts with oil-linked indexation
• In 2015, share of gas sales at gas hubs reached 64%, while the share of gas sold under LTContracts reduced to 30%
• Gas markets of Central and Eastern Europe remain less liquid et less competitive with a limited number of gas hubs, but the
situation changes with new European regulations within the sector

6. Exports of Russian gas to FSU countries including Ukraine, Bcm Domestic gas consumption in Russia and Gazprom’s gas sales
volumes/revenues in domestic market, Bcm and U.S dollars
Source: Rosstat, Gazprom in Figures (2006-2010), (2011-2015) Source: Gazprom in Figures (2006-2010), (2011-2015)
0
20
40
60
80
100
120
Other FSU Ukraine
0
5,000
10,000
15,000
20,000
25,000
30,000
0
50
100
150
200
250
300
350
400
450
500
Domestic gas consumption in Russia
Gazprom's natural gas sales volumes in Russia
Gazprom's gas sales revenues
• FSU gas markets: between 2011 et 2015, Russian gas exports dropped by 43% from 72.5 Bcm to 41 Bcm/year, the main
reason for this decline being the sharp drop in exports to Ukraine, which went from 40 Bcm to 7.5 Bcm/year
• Domestic market: a demand for gas experiencing stagnation since 2008 economic crisis (exception in 2011) and an almost
continuous decline from 2012
FSU gas markets and domestic market could hardly serve as substitute markets, and are not sufficiently big enough to replace Russia’s
gas exports to Europe

7. Between Europe and Asia: a gas strategy based on pipelines and LNG
• Russia wants to become a swing producer between Europe and Asia, so that it is able to redirect gas flows at any time to the
market with the most attractive price
• Russia’s gas pivot to the East aims to open up an alternative route for Russian gas exports, which in turn could generate
additional financial resources for the State budget, but also simultaneously strengthen Russia’s negociating power with its
traditional European customer base, notably with regard to issues over the gas price
• Unlike gas pipeline, LNG projects should provide Russia with more flexibility with its exports, and should permit it not to limit
itself to single Chinese market
0
20
40
60
80
100
120
140
160
180
Europe Asia
Russian gas exports to Europe and Asia, Bcm
Source: Central Bank of the Russian Federation, last updated June 25, 2015

8. Russia and the Chinese gas market: pipelines a priority?
Chayanda gas field
Kovykta gas field
Urengoy gas field
Power of Siberia
Altai
Kirinsky gas field
SKV Pipeline
+ New Far East Pipeline
Altai Pipeline Power of Siberia New Far East Pipeline (with SKV
Pipeline)
Distance 2 800 km 4 300 km 1 822 km
Capacity 30 Bcm/year 60 Bcm/year 30 Bcm/year
Total cost From USD 14 billion From USD 25 to USD 70 billion From USD 11 to USD 25 billion
Unit cost From 5MM$/km From 6 to 16MM$/km From 6 to 14MM$/km
Resource base West Siberia East Siberia Sakhalin
Commissioning Possibly later 2020 From 2019 September 2011
Delivery point Xinjiang Autonomous region North-east China North-east China
Challenges Competition with Turkmen gas Possible delays in commissioning
 May 2014: first Sino-Russian gas sales agreement on
38 Bcm/year of gas by 2019 delivered through Power
of Siberia pipeline via Eastern route. Construction
began in Sept 2014
 October 2014: MOU on additional gas exports to
China via Altai route, but since NO progress -???
Source: Author

9. Russian LNG projects
• Eight large scale LNG-projects were proposed in Russia from early 2000s, with a total liquefaction capacity of more than 100 Mtpa
• Four of them could potentially supply the Asia-Pacific countries: Sakhalin-2, Yamal-LNG, Vladivostok-LNG and Sakhalin-1 and are
scheduled to start exporting between 2017 and 2023
• All these projects have benefited from new regulation, adopted in December 2013, which liberalized the export of LNG outside
Russia
0
10
20
30
40
50
60
70
80
90
2015 2020 2025 2030
Sakhalin-2 Yamal-LNG
Sakhalin-2 Expansion Yamal-LNG Expansion
Baltic LNG Arctic LNG
Far East LNG Vladivostok LNG
Existing and planned LNG projects in Russia, Mtpa
Low feed gas and transportation costs coupled with a unique geographical situation make Russian projects more competitive

10. Gazprom: Sakhalin-2 and its expansion
Consortium of investors: Gazprom, Shell, Mitsui, Mitsubishi
Project capacity: 10-11 Mtpa (≥5× 2)
Resource base: Piltun-Astokhskoye, Lunskoye fields
Commissioning: February 2009
Main export markets: Japan (72%), South Korea (24%), Taiwan (2,5%), China (1,5%)
June 2015: Gazprom ans Shell agree on a 3rd production train with a target capacity of up 5
Mtpa
Advantages:
 Low feed gas and transportation costs
 Geographical proximity to key Asian markets
BUT
 Competition with pipeline supplies for a limited resource base
The expansion of Sakhalin-2 makes economic sense and is logic within low carbon prices
environment, but resource base remains the main stumbling point
• U.S and EU sanctions implemented after the Ukrainian crisis in March 2014 hit Russia’s
ability to raise long-term finance on Western markets. In August 2015, the U.S imposed new
sanctions against Gazprom’s major fields on the Sakhalin shelf, including Yuzhno-Kirinskoye
field, this latter regarded as the main resource base for the 3rd train
• Gas from the Sakhalin-1 project operated by Rosneft and ExxonMobil, has been seen by
Gazprom as an alternative resource base (and the cheapest one!), but until now the
company has failed to reach any agreement with Rosneft over gas price
FID required to be taken before 2018 to meet growing LNG demand after mid-2020s
Source: Gazprom

11. Vladivostok LNG
Power of Siberia
Operator: Gazprom
Capacity: 10 Mtpa/year
Resource base: ???
Kovykta and Chayanda gas fields (Eastern Siberia) OR
Kirinskoye and Yuzhno-Kirinskoye fields (Sakhalin-3)
Commissioning: ≥ 2022
Target markets: Asia Pacific countries, China in particular
Advantages:
 Geographical proximity to key Asia Pacific
markets makes this project very competitive
BUT
 High cost of pipeline transportation
 Big uncertainty over gas supply
• The development of gas fields in Eastern Siberia, the construction of the Power of Siberia pipeline and the LNG plant in
Vladivostok was initially regarded by Gazprom as a single integrated project, enabling it to supply the Chinese market via the
pipeline, and increase its exports to Japan and South Korea from Vladivostok. Vladivostok LNG was at the core of this project,
as the economics to develop gas fields and to build the Power of Siberia relied upon LNG exports to Asia Pacific
BUT
• Gazprom’s inability to secure gas supply for Vladivostok LNG following Western sanctions and its limited experience in using
large scale LNG technology, has led to projects’ delays. In March 2017, Gazprom’s senior managers announced that the project
is no longer the company’s priority
Source: Gazprom

12. Novatek: Yamal LNG
Consortium of investors: Novatek (50,1%), Total (20%), CNPC (20%), Silk Road
Fund (9,9%)
Project capacity: 16,5 Mtpa (5,5×3)
Resource base: Yuzhno-Tambeyskoye gas field
Commissioning: 1st train – 2nd half of 2017
2nd train – 2018
3rd train – 2019???
Target markets: Europe and Asia, eventually emerging markets in Latin America
Advantages:
 Abondant resource base
 Low cost feed gas and numerous tax exemptions (Tax MET and
export duty)
 Strong government support (finance and technical support)
BUT
 Difficult transportation of year-round evacuation through Kara Sea
Great success of the project despite low oil and gas prices and economic sanctions regime - effective management and
strong state support
• Project’s external financing estimated at USD 18-19 billion (from a total of USD 27 billion) was secured essentially by Russian and
Asian banks: USD 4.1 billion – Russia’s Sberbank and Gazprombank; USD 12 billion – China Development Bank and the Export-
Import Bank of China; EUR 200 million – Japan Bank for International Cooperation (JBIC)
• Financial and technical support from the Russian State: RUB 150 billion from the Russian National Welfare Fund, numerous tax
exemptions and technical support for the development of infrastructure

13. Rosneft: Far East LNG (Sakhalin-1)
Consortium of investors: Rosneft, ExxonMobil, Sodeco, ONGC
Project capacity: 5-10 Mtpa
Resource base: Severo-Veninskoye and Chaivo gas fields (Sakhalin-1)
Commissioning: ≥ 2023
Target markets: Asia Pacific, mainly China
Advantages:
 Low feed gas and transportation costs
 Close to key Asia Pacific markets
BUT
 Sharp drop in LNG prices and the economic sanctions against Russia have
considerably reduced the project’s attractiveness for foreign investors
Big uncertainties over how to monetize Sakhalin-1 gas have resulted in
project’s delays:
• In 2015, Rosneft failed to get access to the Sakhalin-2 gas pipeline and to bring 8
Bcm/year of gas from its fields in the north of Sakhalin to the planned LNG plant
in the south, meant Exxon Neftegaz was forced to change the site of the future
plant at the port of De-Kastri in the Khabarovsk region
• The company has not yet decided whether it will sell its gas to Gazprom or if it
will use it for its own liquefaction plant
The project is still at the pre-supply stage, with the FID expected at the end of 2017 at the earliest

14. Key conclusions
• Tremendous changes in the EU gas market, - stagnant gas demand, lower oil and gas prices, increased
global availability of LNG, together with increasing price competition – have all seriously undermined the
potential position of Russia in its core market
• Western economic sanctions implemented in the aftermath of the Ukrainian crisis led to a further
worsening in Russia-EU relations. Recent events have created a growing perception that Europe is seeking,
where possible, alternatives to Russian gas
• The further liberalization of the EU gas market had powerfully affected Gazprom experiencing a great
pressure on its sales in the region. This resulted in a significant loss of volumes and revenues over the past
five years
• A significant Asian investor involvement in two Russia’s LNG projects, - Yamal LNG and Sakhalin-2 – reflects
Asia’s strong interest in importing Russian LNG
• Gazprom’s recent failures in LNG projects’ development has led it to look more and more at returning to its
core pipeline business (Nord Stream-2 and Turkish Stream in Europe, and Power of Siberia, Altai and Far
East pipeline in Asia)

15. Thank you for your attention!
Gerasimchuk.olga86@gmail.com
6th International Youth Conference on Energy 2017
21st- 24th June 2017, Danubius Flamenco Hotel, Budapest