Blue Fuel Newsletter | May 2014 | Vol. 7 | Issue 2

BLUE FUELMay 2014 | Vol. 7 | Issue 2

www.gazpromexport.com | [email protected] | +7 (499) 503-61-61 | [email protected] 1

Hub-based Pricing: European Lessons for Asia

Gazprom Export Global NewsletterMay 2014 | Vol. 7 | Issue 2

Page 19

Page 15

Page 5

The Secrets behind the Shale Hype

Sakhalin Energy - 20 Years and Going Strong

Gazprom Export

www.gazpromexport.com | [email protected] +7 (499) 503-61-61 | [email protected]

BLUE FUEL

2BLUE FUELGazprom Export Global Newsletter

Publishers Contact Info:www.gazpromexport.com | [email protected] +7 (499) 503-61-61 | [email protected]

To our Readers: Myth Busting 101 .........................................Pg. 4

Hub-based Pricing: European Lessons for Asia .....................Pg. 5

EU-Russian Gas Trade: Too Deep and Comprehensive To Fail .............................................................Pg. 6

Cooperative Competition is at the Heart of What We Do ........Pg. 9

The Dark Side of Renewable Energy ......................................Pg. 11

GM&T Signs Long-Term Charter Agreement with Sakhalin Energy .............................................................Pg. 12

GM&T Singapore and Petro Vietnam Gas Sign Vietnams First LNG MSPA .....................................................................Pg. 13

New Racing Series Scirocco R-Cup Launched in Partnership with Gazprom Germania ....................................Pg. 14

Sakhalin Energy: 20 Years and Going Strong .......................Pg. 15

VEMEX Opens New CNG Station in Pilsen ............................Pg. 17

The UK Energy Markets Conundrum ....................................Pg. 18

The Secrets behind the Shale Hype .......................................Pg. 19

Photo Wheel Inspires Creativity ............................................Pg. 22

Cambridge Welcomes Gazprom Exports Sponsorship ........Pg. 23

In this issueMay 2014 | Vol. 7 | Issue 2

4The current crisis in Ukraine has triggered an intense debate on the security of European gas supplies. This also happened in 2009 when Ukraine proved to be an unreliable payer and transit country.

Speculation that Gazprom may cut off supplies to Europe has been raising eyebrows. These concerns clearly reflect either naivety or a wilful disregard for the nature of the gas industry. Moreover, Europes plans to rid itself of the allegedly dangerous dependence on Russian gas reflect a very unfortunate misconception of the global energy industry.

The current hysteria is somewhat reminiscent of the myth about the Loch Ness monster. So many books and articles have been written, many expeditions and conferences have been held on this topic, many souvenirs sold and tourists attracted... But no one has actually ever seen this monster! If you believed the tour operators and souvenir stalls, the Loch Ness monster is real; but it is an undisputed fact, that it does not exist.

European consumers are first and foremost interested in their energy security, while Gazproms number one priority is ensuring undisrupted gas supplies to Europe and contributing to Europes energy stability. However, this is only possible in the absence of external factors that constitute force majeure for us and our European partners.

Europe is facing energy security risks of a different nature. EU countries appeal to global natural gas producers is fading. Asia and now even South America are offering a highly attractive business environment and investment climate for international energy companies. It is in such an environment that natural gas from Russia, a country with sufficient resources and connected to Europe by a highway of pipelines, is evidently the most effective and efficient way to ultimately meet Europes growing energy demand.

Since 2012, only Gazprom could increase gas supplies at a time when other producers were cutting their deliveries. Algeria, Norway, UK and now the Netherlands are experiencing production problems their deposits are gradually being exhausted. The alternative sources either cannot offer significant volumes or are located in less stable regions of the world. LNG is heading towards Asian markets, where prices are twice as high as in Europe.

North American LNG, which may be exported in the long-term, is most likely to be directed to Asia as it is simply not competitive in Europe compared to pipeline gas. Are Europeans really ready to pay twice their current purchase price to lure LNG from premium markets?

Unfortunately, it is in Europe that our company is facing a biased attitude from some politicians and political institutions. Without waiting for their benevolence and mindful of existing transit risks, Gazprom together with its European partners have been investing their own funds into new infrastructure projects to further enhance Europes energy security.

Gazprom is committed to fulfilling all its contractual obligations. However, Ukraines chronic unreliability displayed in its failure to pay for gas received and consumed and to act as a responsible transit country is causing serious concerns. In the spirit of the decades-long successful cooperation between Gazprom and its European partners one would hope the EU would use its influence to encourage the authorities in Kiev to ensure uninterrupted flow of the blue fuel from Russia to Europe.

Strengthening guarantees of European energy security should be done together with Gazprom and not against Gazprom. The construction of the South Stream gas pipeline through the Black Sea to Bulgaria will be another substantial contribution to the energy security of the Old Continent.

To our Readers: Myth Busting 101



For years the European gas market has been the major trade outlet for Russian natural gas. Unfortunately for us, demand for gas in Europe has decreased by about 30 bcm after the global crisis broke out in 2009. In contrast to Europe, the Asia-Pacific gas markets have shown a dramatic increase in demand for imported gas over the last five years. Our estimates indicate that the ten major Asian nations in 2012 increased demand by 170 bcm compared to 2008. Out of these 170 bcm, 86 bcm were additional imported volumes.

To attract ever growing volumes of LNG from all over the world, Asia pays a substantial premium for imported gas. We can endlessly debate over the question whether that premium is rational or not, and yet not come to a common conclusion. Our estimates show that, due to its price premium, Asia has pulled 35 bcm of LNG away from Europe over the last two years.

I suggest looking at the Asian premium from the point of view of other traded commodities price developments. Over the past ten years, the price of a range of exchange-traded commodities, including metals, agricultural and chemical products, has increased by about three times in U.S. dollar terms. This is within the same range 2.8

times as the oil-indexed gas price. But if you measure in calorific terms, oil-indexed gas prices in Continental Europe have grown at a lower rate than other energy commodities such as oil and electricity.

By contrast, the negative growth of the Henry Hub gas price has put long-term investments in dry gas production at risk in the U.S. Why? Producers have to buy the commodities necessary for their investments at a rising price. American gas prices are clearly a demonstration of an abnormality: the cost of production of shale gas is much higher compared to the cost of production of conventional gas. Such a price abnormality cannot last forever and banking on this abnormality is a risky strategy for gas buyers.

Let me share with you some of the lessons we have learnt on the European gas market:

Despite the enormous efforts by European reformists to change the pricing paradigm, oil-indexation remains the dominant pricing model;

Prices of long-term oil indexed contracts still set the baseline trend for hub prices;

Hub price volatility is exacerbated by supply and demand dynamics;

A hubs liquidity originates from resale of contracted volumes;

European hubs are an important instrument of balancing, arbitrage and portfolio optimization;

A developed pipeline system makes hub prices reasonably aligned as a result of arbitrage operations.

Hub prices are not independent: they are in fact derivatives of the contract prices that set a baseline trend for their behavior.

European politicians should take note of the statements coming out of Kiev that Ukraine cannot guarantee uninterrupted gas supplies to Europe. Even more worrisome have been calls by radicals in the western regions of Ukraine to take control of transit gas pipelines to Europe. Under these adverse circumstances, the South Stream pipeline network would become a vital artery to

meet energy needs of European countries. This project is not only backed by a solid Russian resource base, but also bolstered by strong demand and will undoubtedly play a crucial role in ensuring uninterrupted and reliable natural gas supplies to Europe.

Hub-based Pricing: European Lessons for AsiaBy: Alexander Medvedev - (Excerpts from speech at the GASTECH forum in Seoul, March 2014)

Continues on page 6

6Hub and contract prices move in tandem and do not differ much from each other.

This comes as no surprise as Europe is getting more and more import-dependent, while three out of four major suppliers to Europe support oil indexation in their contracts. The Association of European Regulators in its recent report confirmed the dominant role of oil in the price setting dynamics of the European gas market. This is exactly what we have been saying for several years - responding to our critics who claimed that the days of oil-indexation are over, once and for all.

What will happen to Asian gas prices if the region replicates the hybrid pricing system of Europe?

We can hardly expect any miracles in terms of price levels because gas markets in Asia will still be dominated by a portfolio

of long-term JCC-linked contracts. These contracts and not supply and demand will be setting the baseline trend for hub prices.

The only party that will definitely benefit from the growing role of gas hubs in Asia will be financial institutions. They would create a new market for gas price derivative instruments.

There are no hubs in Asia at the moment. But there is a proxy to hub-pricing Platts index for spot trades, JKM. But JKM is even more dependent on JCC than the European hub indexes on crude oil. This relationship will not change dramatically with hub gas markets developing. Arbitrage opportunities on these hubs will be limited due to the absence of pipeline connections between the markets and high prices for LNG tanker shipments.

Hub-based Pricing: European Lessons for AsiaContinued from page 5

The European Commission is preparing a plan to reduce the EUs dependence on Russian gas over the next three month. Finding alternatives to Gazprom is possible, many American and British observers claim. Over the last few years, the EU has left no stone untouched in its efforts to cut its energy dependence on Russia. Yet, it should be noted that the actual relationship between Gazprom and its European customers is that of interdependence. Just as our European customers rely on Gazproms gas supplies, we rely on two thirds of our revenues being generated on the traditional markets of the Old Continent. However, there is more than one side to this medal.

Market data clearly demonstrates that the share of Russian gas in EU-28 gas imports declined to 34% in 2010 from 53% in 2000 largely due to global LNG flows being redirected from the US to Europe. But Gazproms share of natural gas supplies to Europe rebounded in 2013 as these flows were rerouted from Europe to the premium Asian markets.

EU-Russian Gas Trade: Too Deep and Comprehensive to FailBy: Sergei Komlev, Head of Price Formation and Contract Structuring, Gazprom Export;

Arseny Kirichenko, Contract Economics Division, Gazprom Export



Dependence on Russia as measured by its share in EU gas consumption was stable for the whole period and actually rose to 28.3% in 2013 compared to 25.3% in 2000. There is no indication that the EU today is less reliant on Russian gas than before. A number of EU Member States depend 100% on Russian gas, some between 10% to more than 50%. Two major customers in the EU Germany (43%) and Italy (35%) are heavily dependent on Gazproms gas and alternative suppliers are hard to find.

EU leaders plead for US gas exports to counter the perceived dependence on Russia. The discussions about the abundance of shale gas and its benefits to spill over

across the Atlantic take place before any American LNG cargo has actually reached the shores of Europe. Exports of US LNG are scheduled to begin only next year.

This is the general idea. Yet, it is worth noting that Asian gas prices are around 50 percent higher than in Europe. Exports to EU countries at current US market prices are not attractive unless these prices reach at least parity with premium Asian ones. Europes option of increasing imports of LNG at the expense of Russian pipeline gas is a long-term, costly solution that may never materialize.

Continues on page 8

8EU-Russian Gas Trade: Too Deep and Comprehensive to FailContinued from page 7

Internal US developments have to be taken into account too. The current American domestic price (Henry Hub, HH) does not cover shale dry gas production costs estimated to be USD 6 / MMBTU on average for more than five years. Production of dry gas at depressed prices is only possible as a by-product of gas liquids of shale oil. The number of rigs drilling for dry gas contracted from nearly 1000 in 2010 to less than 400 in 2013. There has been no major increase in shale gas output since September 2011. Dry gas output may fall unless prices are adjusted to cover production costs.

The current US gas price anomaly is not sustainable and will eventually lead to the HH price rising above the USD 6 / MMBTU level. HH-linked tolling contracts are structured in a way that the risk of such price adjustments fully stays with the buyer.

Meanwhile, the EU policy of diversifying energy sources has not come to fruition

as its dependence on a few traditional suppliers is evidently still strong. The Herfindahl-Hirschman index of supply concentration increased from 3536 to 4471 over the last year indicating no progress in the EUs diversification policy.

In 2013, Gazprom proved to be the only reliable supplier from outside the EU. Its deliveries to Europe topped 163 bcm of gas - 16% (23 bcm) higher than in 2012. Furthermore, Gazprom demonstrated that it is a major provider of daily flexibility of supply to the European market.

In fact, Gazprom delivers more than just a commodity; it delivers a related service of adjusting supply volumes to daily demand fluctuations. Seasonal swings in daily Russias deliveries have doubled from 90 mcm/d in 2000 to 185 mcm/d in 2013. One can hardly imagine, let alone find another supplier with the capability of substituting Gazprom and being the master dispatcher for most of Europe.



We live in a world of constant discovery and innovation. New disruptive technologies emerge that change the way we live, think and solve the worlds biggest problems. Contrary to popular belief, the gas industry is no different. Innovative technologies are used to find, extract and deliver the blue fuel from some of the most challenging environments to the doorstep of end customers around the world.

With 250-500 years worth of reserves in the ground, gas is the affordable, clean and reliable fuel for the 21st century. Demand for gas is motivated by pure economics, as its cheaper than nuclear or renewable energy. It is also driven by rising concerns for the environment, as using more gas is a perfect substitute for dirty coal, which is still widely used. New uses for gas as a transportation fuel also come into play.

However, the nature of gas as a commodity as well as the lack of storage facilities make the security and flexibility of gas supplies a top priority. The demand-supply dynamics of gas also determine the pricing and availability of gas around the world, which can make it challenging to bring the required liquidity online should demand suddenly increase. Thats why we believe that cooperative competition is of paramount importance to both open up more opportunities and overcome the existing challenges, with decisions made with the benefit of the end consumer in mind.

Gazprom has been working in partnership with its biggest customers not only to deliver secure supplies to Europe for over 40 years, but also to build truly unique energy projects, such as the first and only LNG production plant in Russia, Sakhalin-II. The company is already managing the security of supply risk via Ukraine by building Nord Stream a unique undersea pipeline. South Stream, planned to become operational in 2015, will fully eliminate the security of supply risk for Europe. No other energy company is able or willing to invest as much as Gazprom does in European gas infrastructure. No other gas producer offers the same flexibility of supply via its long-term contracts. No other company is as committed to partnerships and commercially viable solutions for the most challenging projects. Gazprom is investing in exploration, ensuring it discovers more gas than it produces. It is constantly pushing boundaries and innovating, be it building new LNG production facilities, or funding the necessary infrastructure to deliver gas to China.

Gas is not oil. One cannot monetise a field after simply drilling three wells. Gas takes time, significant investment and, most importantly, it needs a physical linkage through infrastructure to the market. We are, therefore, symbiotically linked to our downstream clients as we need a secure market to justify the enormous expense of development. Our customers need a secure supply of gas, as in a low liquidity market like gas supply constraints can mean massive price spikes that can ruin businesses. It is this symbiotic relationship with our European clients that has driven 40 years of seamless co-operation and technical development.

The seamless sophistication, driven by the symbiotic nature of the gas industry sometimes makes consumers and regulators forget that it takes many years and billions in investment from the point of gas discovery through to the point of delivery to a home in Germany or France. We all know that beef does not come from a supermarket shelf. The same applies to gas. Secure supplies are only made possible via innovation and significant financial risk-taking, as gas is brought to the market from remote and often physically and geologically challenging sources.

Rightly so, all gas producers, including Gazprom, are subject to regulatory scrutiny in each country of operation to ensure consumers are protected. At the same time, all gas producers need to demonstrate profitability of all projects over a period often counted in decades, so that the cost of capital is acceptable to investors and funding is made available.

Our partners downstream in the utilities industry face very similar challenges. Building infrastructure such as distribution systems, pipelines and power generation capacity takes time and capital. We both have to work together to make sure that we do not waste valuable time or our shareholders capital, as it will generally be the consumer that will bear the costs.

The gas business therefore requires long-term planning and zero margin for error. All of the above challenges need to be recognised and considered by stakeholders making regulatory or policy decisions. Especially, given that all parties are working towards the same goal: ensuring the stability and affordability of gas supplies to end users.

Cooperative Competition is at the Heart of What We Do

Continues on page 10

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Cooperative Competition is at the Heart of What We DoContinued from page 9

Despite significant efforts, Gazprom sometimes encounters severe misconceptions this is of course far from unique. Our friends across the upstream industry have had to manage ongoing campaigns, including protestors questioning their permission to operate. Some voices call for the reduction of Russian gas in the European energy mix. Others provide generous subsidies to nuclear and renewable sources of energy, which would have otherwise been uneconomic. However, it is important to remember that gas is a long-term business. If we look beyond the short-lived and often populist statements and focus on pure economics, all it would take to wean Europe off of Gazprom gas, is $215bn of up-front capital expenditure, according to a recent report by Stanford Bernstein (2 April 2014). It would also result in around $40bn of additional annual energy costs, 5-years of effort, 10,000+ jobs lost, mandatory monthly cold showers for everyone in the EU, 300MT of additional annual CO2 emissions, $12bn of Norwegian tax-breaks and the closure of most of Europes gas-intensive industry, according to the report.

While colorful political rhetoric often makes an attractive media story, the more objective capital markets views tend to be under-reported. Investors and financial analysts remain convinced that fears over the Ukraine transit risks to Europe are overblown. J.P. Morgan Cazenove (11 April 2014) opines that talk of disruptions make for worrying headlines, but the Ukraine transit risk should not be overestimated, adding

that Gazproms export outlook looks strong in the medium term given the EUs inability to diversify to other suppliers.

Citibank (28 March 2014) rightly points out that even if a reverse flow from Slovakia to Ukraine is set up, it will only be possible to arrange a virtual reverse flow, whereby Ukraine doesnt deliver gas intended for Slovakia from Gazproms pipelines. No new sources of gas are being brought to the European market, it concludes, and therefore a shutdown of Russian transit to Europe via Ukraine is extremely unlikely. The icing on the cake is that out of 28 international banks and brokerages covering the Gazprom shares at the moment, 18 recommend investors BUY the Gazprom stock, 8 recommend a HOLD and only a single analyst indorses a SELL. This is an objective view reflecting that fact that Gazproms business fundamentals remain sound.

Given all of the above, a call for the reduction of Russian gas in the European energy mix strikes one as throwing out the baby with the bath water.

Its worth remembering that we are successful when our partners are successful. It is with the help of competitive partnerships that both our business and the international gas industry continue to grow from strength to strength, providing the consumer with plentiful, clean natural gas.



The Dark Side of Renewable EnergyIn the search for alternative energy sources, the EU countries, Germany in particular, attach exceptional importance to renewables. What achievements can the Germans boast of, so far?

Germany, being the engine of the European economy, is consistently showing striking results, increasing the share of renewable energy sources (RES) in its energy mix. Data from the German Association of Energy and Water Industries (BDEW) is impressive the RES share in the countrys power generation reached 23.4% in 2013. By way of comparison, two other major EU economies, Britain and France, have not yet brought the share of green energy in their respective electricity production up to even 20%.

Hiding behind these remarkable results related to the share of RES in Germanys energy mix is a systematic market excess that will require considerable time to be corrected. In Germany, the systematic subsidizing of expensive renewable energy, in conjunction with its priority access to the grid, has forced energy companies to switch to the environmentally hazardous coal for the sake of optimizing costs. What is more, the compromised carbon dioxide quota trading mechanism with ultralow prices per unit of emissions has exacerbated the situation. As a result, output of electricity produced at coal-fired power stations in Germany has reached its highest level since 1990, while gas-fired power stations have largely been moth-balled.

It must be noted that natural gas combustion emits 50-60% less CO2 than coal combustion. According to forecasts by the European Gas Forum, a balanced mix of renewable energy and natural gas would enable us to achieve a 95% reduction in CO2 emissions from power generation in Europe by 2050.

The success in reducing environmental damage thanks to the growth of wind turbines, solar panels, water and biological resources has been wiped out by the renaissance of coal-fired power stations. Germany has become one of the leading offenders in the surge in carbon dioxide emissions. Based on a study carried out by the Global Carbon Project, there was a 4.2% growth in CO2 emissions from coal combustion in Germany in 2012, while in Europe as a whole, the figure was 3%.

Renewable energy subsidies significantly changed the cost structure for producers and jeopardized investments in gas infrastructure. Skyrocketing electricity prices, both for households and industrial enterprises, became one of the consequences of government support for renewable energy. According to preliminary estimates, every German citizen in 2013 paid 240 euros for subsidies of renewable energy in addition to the natural indexation of tariffs.

The existing mechanisms of government support, which work against market forces, reduce the commercial appeal of green projects and, as a result endanger them. Recent data from Bloomberg New Energy Finance identified a curious trend investment in alternative energy in Europe decreased by 39% in 2013 compared with the year earlier. Among the leaders who have reduced investments in renewable energy are powerful economies such as Italy (-73%), France (-34%) and Germany (-46%).

Political emphasis on energy reset, or, as they say in Germany, Energiewende, inspired citizens and increased confidence in the success of companies working with renewables. However, as of late, reports about companies associated with wind energy or solar energy going bankrupt have become a regular occurrence. In particular, expectations of significant progress in the solar energy sector in Germany fell flat. According to the Federal Statistical Office of Germany, 10,200 people were employed in the German solar industry at the beginning of 2012. One third of these workers lost their job within a year; the number of employees fell to 4,800 in November 2013. The situation is intensified by the weak position of German companies in a price battle against cheap Chinese-produced solar panels. Protectionist tariffs imposed by the EU in December 2013 to shield local producers did not reverse this trend.

Sigmar Gabriel, German Federal Vice-Chancellor and Minister for Economic Affairs and Energy, believes that todays electricity market model cannot accommodate renewable sources. If energy reform is not carried out professionally, the country will face the biggest de-industrialization in its history, says Gabriel.

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At a ceremony held in Yuzhno-Sakhalinsk, Gazprom Marketing & Trading (GM&T) and Sakhalin Energy Investment Company Ltd (Sakhalin Energy) signed a time charter agreement for the provision of an LNG vessel. The duration of the contract is 13 years.

This modern LNG carrier with a cargo capacity of 149,700 cubic meters is chartered by GM&T from Dynagas (Greece) and is currently operating under the name of Clean Force. The vessel will be renamed Amur River prior to the start of her charter to Sakhalin Energy in July 2015. She is fully winterised and has a 1A FS ice class notation, allowing her to operate in ice conditions for year-round LNG shipments from the Sakhalin Energy terminal at Prigorodnoye.

The crew of the Amur River includes a significant number of Russian seafarers, as well as cadets from the Admiral Makarov State University of Maritime and Inland Shipping (SUMIS) in St. Petersburg, Russia, with which GM&T and Dynagas maintain a strong partnership.

Mr. Nikolai Grigoriev, Managing Director, Shipping & Logistics, GM&T said, GM&T has a long history of collaboration with Sakhalin Energy through the LNG supply agreement between the companies and several LNG vessels chartered by GM&T to Sakhalin Energy since 2010. We are honoured to have been awarded this long-term contract that furthers this well-established relationship between the two companies. GM&T currently controls the largest ice class LNG fleet in the world and we are confident we can be a valued partner of Sakhalin Energy in delivering LNG securely to customers.

We are also very pleased to note that, in line with the Gazprom Groups LNG Strategy, the growth in our LNG fleet provides additional opportunities for the training and employment of Russian seafarers on these highly specialised vessels, he added.

GM&T Signs Long-Term Charter Agreement with Sakhalin Energy



GM&T Singapore and Petro Vietnam Gas Sign Vietnams First LNG MSPA Gazprom Marketing & Trading Singapore (GM&T Singapore), a wholly owned subsidiary of Gazprom Export, has signed a Master Sales and Purchase Agreement (MSPA) with Petro Vietnam Gas (PV Gas).

The ceremony, held in Ho Chi Minh, was attended by senior representatives from both companies, including Mr Medan Abdullah, Managing Director of GM&T Singapore and Mr Do Khang Ning, Chief Executive Officer of PV Gas.

This agreement is the first MSPA for Liquefied Natural Gas (LNG) to be signed in Vietnam and is intended to secure supplies for PV Gas Thi Vai import terminal.

Gazprom and Petro Vietnam National oil and Gas Group (PVN), parent of PV Gas, have a long history of strategic cooperation, with joint ventures in the area of gas exploration and production. In 2012, this relationship was extended to LNG with the signing of an agreement to co-operate on development opportunities in the LNG supply sector.

Medan Abdullah said, We are delighted to have signed this MSPA with PV Gas, one of Gazproms most valued partners. This is a natural extension of the well-established relationship between our parent companies. We recognise

PV Gas as one of Southeast Asias major players in the energy market and we are honoured they have chosen to sign their first LNG MSPA with us.

We look forward to partnering with them as they build and maintain a secure supply of energy, to meet the growing demand for energy, and specifically LNG, in the country, he added.

Frederic Barnaud, Executive Director of Global LNG and Shipping & Logistics, Gazprom Marketing & Trading, said, This agreement provides a good basis for further expansion of our commercial portfolio in Southeast Asia and progresses our ambition to be the leading LNG marketer in Asia Pacific. We look forward to a long and mutually beneficial relationship with PV Gas.

Since its establishment in December 2009, GM&T Singapore has grown to become one of the most active LNG players in Asia Pacific. It will continue to expand its trading, marketing and shipping activity in the region ahead of equity supplies expected in the latter part of this decade.

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German car manufacturer Volkswagen has announced the latest edition of the Scirocco R-Cup series of car races for natural gas powered autos. Gazprom Germania has been selected as exclusive fuel supplier for the racing series which will take place on racing circuits in Germany, Austria and Russia.

The competition sees drivers racing in Volkswagen Scirocco 285 horsepower racing cars, with engines running on Russian gas.

Natural gas has enormous potential as a means of fueling motor vehicles in an energy-efficient, cost-efficient, and environmentally friendly manner. The Scirocco R-Cup shows that high performance, eco-friendliness, and high emotions are not mutually exclusive. We look forward to an exciting racing series and very much value our partnership with Volkswagen, said Vyacheslav Krupenkov, Senior Managing Director of Gazprom Germania GmbH.

The Scirocco R-Cup racing series has been held since 2010 and enjoys popularity not only with professional racers but also with the fans of motorsport in general.

Volkswagen and Gazprom Germania are cooperating on the Scirocco R-Cup project for the second consecutive year. In 2013, more than 200,000 motorsport fans attended the races.

Interest in natural gas as a motor fuel is rapidly growing worldwide. The Scirocco R-Cup proves that natural gas powered cars can not only be environmentally friendly and efficient, but also good-looking and really fast.

New Motor Racing Series Scirocco R-Cup Launched in Partnership with Gazprom Germania

Table 1. The schedule of 2014 racing series

Date Race Track Sat/Sun Remarks03./04.05.2014 Hockenheim (D) XX Opening Ceremony

17./18.05.2014 Oschersleben (D) XX29.06.2014 Norisring (D) X

13.07.2014 Moscow (RU) X Show Race

02./03.08.2014 Spielberg (AT) XX16./17.08.2014 Nrburgring (D) XX23./24.09.2014 Oschersleben (D) XX Test Days19.10.2014 Hockenheim (D) X Final



The pioneer of Russian continental shelf development, Sakhalin Energy, celebrated its 20th anniversary in April 2014. The path the Company has travelled is marked with great successes. However, Sakhalin Energy refuses to be complacent. It embraces every challenge as an opportunity to meet greater challenges in the future.

2013 proved to be a very successful year for Sakhalin Energy as the companys plans for oil and LNG production were exceeded 60 oil consignments (against the planned 55) and 166 LNG consignments (against the planned 162) were

shipped. These included the jubilee 300th oil consignment since the start of year-round production in December 2008 and the 700th liquefied natural gas consignment since the commissioning of the LNG plant in February 2009. A total of 42.35 million barrels of oil and 10.84 million tons of LNG were shipped in 2013. In addition, 1.444 billion cubic meters of natural gas were delivered.

In 2013, Sakhalin Energy completed the drilling programme on its second pre-planned oil rim well at the Lunskoye-A platform (Lun-A). With a depth of 5,315 m, the well is the deepest of its kind ever to be drilled from the platform. Sakhalin Energys very first platform Molikpaq (PA-A), now in its 15th year of operation at the Sakhalin shelf, set several records, excelling in its production results and being named Drilling Rig of the Year in an international contest run by global drilling services provider KCA Deutag.

The Sakhalin-2 project is one of the worlds largest integrated oil and gas projects. Unlike many Russian oil and gas companies that have been built on the foundations of the Soviet oil and gas industry, Sakhalin Energy was literally established from scratch. At that time Russia did not have the right experience to create large technological complexes at offshore fields with LNG production and shipment facilities.

The first oil and gas deposits in the Sea of Okhotsk were discovered in the 1980s on the northeast shelf of the Sakhalin Island. However, these deposits remained unclaimed. The costs required developing the deposits, the lack of tested and proven technologies, and the difficult financial situation in Russia at the time were formidable obstacles. This is why,

Sakhalin Energy: 20 Years and Going Strong


Sakhalin Energy Investment Company Ltd. (Sakhalin Energy) was founded in April 1994 to develop the Piltun-Astokhskoye and Lunskoye oil and gas deposits off the north-eastern coast of Sakhalin Island. This development is known as the Sakhalin-2 Project.

The Company operates under a Production Shar-ing Agreement (PSA) signed between Sakhalin Energy and the Russian Federation in June 1994. This Agreement was the first PSA in Russia.

Sakhalin Energy shareholders include OAO Gazprom (50% plus one share), Royal Dutch Shell plc (27.5% minus one share), Mitsui & Co (12.5%), and Mitsubishi Corporation (10%).

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in 1991, the Government of the Russian Federation decided to attract foreign companies to develop the hydrocarbon deposits on the adjoining shelf of the Sakhalin Island. In 1994, Sakhalin Energy was created to develop the Piltun-Astokhskoye and the Lunskoye license areas.

The Sakhalin-2 project was unprecedented in its complexity, but it was successfully implemented thanks to the professional work of its employees and partners as well as the direct participation of all Sakhalin Energy shareholders.

At the very beginning, Sakhalin Island almost completely lacked major industrial infrastructure, while its general-purpose infrastructure was not developed enough to implement such a large-scale project. For these reasons the Sakhalin Energy shareholders invested over $600 million alone in the construction and upgrading of roads, bridges, airports, seaports and other facilities.

number of innovative solutions were found and applied for the first time both in Russia and in the global oil and gas industry. For example, in the construction of its offshore production platforms, Sakhalin Energy was the worlds first company to apply seismoisolation sliding pendulum bearings designed to suppress fluctuations in the earths crust during earthquakes and to help cope with wave and ice loads in stable conditions.

Also, advanced technologies are applied for drilling and the operation of borehole stock. One of the examples is the smart well technology at the Piltun sector of the Piltun-Astokhskoye oil field which uses automated downhole equipment that facilitates continuous real-time data collection and transmission of production and fluid injection data to the surface. Each zone is equipped with downhole valves controlled from the surface. The smart completion of producers and re-injectors is one of the most effective technologies to increase the oil recovery ratio by producing from different intervals in parallel.

Another example is the LNG plant itself. The innovative double mixed refrigerant (DMR) technology was purpose built for the cold climate conditions of Sakhalin Island and used for the first time there. To cool the natural gas, two circuits with mixed refrigerant, derived from the same produced gas with the use of a lighter mixed refrigerant, were used: the pre-cooling circuit and the main liquefaction circuit. This technology facilitates flexibility of the production process and enables to take advantage of the Sakhalin cool climate and cold winters, thus improving production efficiency.

Environmental issues have also been carefully addressed. In summer, gray whales come to the coastal waters of the Sakhalin Island, their main feeding habitat. To protect these whales, Sakhalin Energy took an unprecedented step by creating an international advisory panel, and in 2005 redirected the offshore pipeline route away from the originally planned route to protect the habitat of the gray whales.

A successful and safe production naturally secures excellent financial returns, benefitting to all stakeholders the company, its shareholders, its employees and the country as a whole. In 2013 alone, Russia received more than $2.6 billion in taxes and other revenues from the project. Since the inception of the project, the company has contributed a total of over $7 billion to the Russian budget, of which $1.7 billion went directly to the budget of the Sakhalin Oblast.

The so-called multiplier effect of the project has also resulted in further indirect benefits to the region. The emergence and development of new manufacturing and service companies on Sakhalin Island created new jobs and significantly reduced unemployment, and helped improve overall living standards.

The geographical location of Sakhalin helped to open Russias gates to the Asia-Pacific region, whose energy companies are the main customers of the Companys production. Sakhalin Energy delivers LNG mainly to Japan, South Korea and China. Japan is the

Sakhalin Energy: 20 Years and Going StrongContinued from page 15



main LNG buyer: about 9.8 % of Japans LNG imports come from the Sakhalin-2 production plant. The implementation of the Sakhalin-2 project has enabled Russia to join the 15-member community of LNG exporting countries, and provide over 4% of the world supplies of liquefied natural gas.

Sakhalin Energy continues to lead the charge toward its primary goal to be the premier energy source for the Asia-Pacific region. Presently, the Company started the preparation of the FEED (Front-End Engineering and Design) documentation for a third LNG Train, opening up a new stage in the development of the company.

VEMEX s.r.o. has opened a new compressed natural gas (CNG) station in the Czech Town of Pilsen on Chebsk street, at the Czech Post campus. This station will be open 24 hours a day, 7 days a week. It offers the same quality standard for customers as any station for refueling with petrol or diesel. The station can serve approximately 10 cars per hour.

This is good news for motorists in the Pilsen region. In comparison with other regions, such as Central Bohemia, Moravia and Prague, where 6-7 stations are already in operation, there are currently just two CNG stations in the Pilsen region.

VEMEX is one of the leaders in the construction of public CNG filling stations in the Czech Republic, said its marketing director Hugo Kysilka. This year the company plans to open at least another 10 to 20 stations. The current supply of conventional fuels is expanded by an alternative which is environmentally friendly and significantly reduces operating

costs in transport. There are 20-25 CNG million vehicles worldwide, Mr. Kysilka added.

There are now more than 6.700 CNG vehicles, which is about two thousand more than last year and by the end of 2014 there could be almost 90 public CNG stations in the Czech Republic. The most common rationale for buying a CNG vehicle is a significant reduction in operational costs. CNG is about half the price of gasoline or diesel fuel, said Jan Ruml, executive director of the Czech Gas Association.

Currently, the Czech Republic has 53 public CNG filling stations. Within five years, the number of stations is expected to be tripled. Moreover, motorists use at least 110 home filling stations. New CNG options are not only created in a stand alone format, but also directly at petrol stations such as those run by Benzina, with the company expecting to increase its network to about 40 CNG filling stations. CNG consumption in the Czech Republic in 2013 has increased by 44 percent.

VEMEX Opens New CNG Station in Pilsen

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Britains energy market doesnt usually elicit a great deal of interest but lately its been the subject of intense debate.

From accusations of profiteering and cartelisation to over-hyping of the benefits of shale gas and fracking the media, politicians, and the public are focused on Britains energy future, and the nature of its market. Our inclement times have forced consumers to examine their spending and the reports of companies making huge profits, as the public faces an austerity diet, dont go down well.

Like the rest of the world, the UK faces a conundrum. The Government must deliver secure, clean and affordable energy, while at the same time limit environmental impact from climate change and encourage homes and businesses to become energy efficient.

If you believe some commentators, the era of peak oil is upon us, and the 50- year grace period that global oil and gas reserves were supposed to give us at current rates of consumption has lapsed. Britain has moved from being a net exporter of energy to being dependent on imports, and it must find a secure and clean supply of energy to guarantee the future.

The Government and UK energy industry are grappling with these issues. The ambitious target of reducing emissions by 80 per cent by 2050 means that the country must curtail its use of fossil fuels and clean them up as well as develop renewable alternatives, which will require considerable investment.

Energy policy, investment decisions, and markets all stem from this challenging context of a finite resource in a changing world. The UKs energy market has come under increasing scrutiny with the prevailing view that it is anti-competitive, run by six companies profiting from cash strapped consumers. The Big Six, as they are known, are struggling to dispel this view by improving transparency, and are courting the spectre of price control in the not so distant future.

In the years following privatisation in the 1990s, pricing in the UK energy market remained largely benign. But as the world changed, prices began to climb. Wholesale energy prices across the board oil, gas, and coal increased along with energy demand, and Chinas surge as an economic powerhouse applied further pressure. As the industry matured, costs associated with maintaining investment and transitioning to cleaner energy began to rise. Network charges, support for renewable energy and the costs of various fuel poverty and energy efficiency schemes added to the average consumers energy bill.

Investing in the future is critical for the UK and its energy market. Recently, the Energy Institute (EI) responded to the Governments consultation around reforming the electricity market. The idea is to strike a balance between giving consumers the best deal possible and encouraging the investment needed to create cleaner energy through low carbon technologies.

To replace and upgrade existing electricity infrastructure alone, the Government estimates that 110 billion is required over the next decade. But when capital is scarce, companies remain reticent about making investment decisions meticulously weighing up rates of return and payback periods. Even so, energy companies are investing, as the EIs own President, Ian Marchant [a former CEO of electricity firm SSE] can confirm. When he became CEO of SSE in 2002, the company had no wind capacity. Eleven years later, it was generating 1700MW, with plans for more under way.

Alternative types of energy generation are gathering pace and attention. Coal fired power stations are moving to run partially or wholly from biomass biological material derived from living, or recently living organisms. Drax the UKs largest coal power plant is moving towards biomass conversion with a projected emissions reduction of 80 per cent.

The UKs Energy Market ConundrumBy: Louise Kingham, Chief Executive of the Energy Institute (EI)



Biomass isnt the only cleaner energy option the Government is keen on. Shale gas and fracking have also been the focus of fierce debate with emotions often running high. The Prime Ministers unequivocal support for shale has led to accusations of over hype and fantasy fairytales about the benefits of this energy source.

Shale gas is derived from natural gas trapped within shale formations, which were previously inaccessible or uneconomical to drill. No longer the case, techniques such as horizontal drilling and hydraulic fracturing, have made large volumes of shale gas accessible. Shale has revitalised the natural gas industry in the US, allowing the country to develop a secure and affordable source of energy. And now countries around the world hope that it can do the same for them.

Its clear to see that shale gas has potential in the UK. The British Geological Survey (BGS) estimates that as much as 1,300 trillion cubic feet (tcf) may lie beneath the North of England. Supporters argue shale could be the answer to our energy needs, providing the UK with cheap, local and sustainable energy. Meanwhile, detractors point out that the UKs geology isnt proven as being suitable; environmental impacts like waste water and local disturbances will be damaging; and given our infrastructure interconnectedness to Europe, it would be highly unlikely that prices would be cheap for UK consumers.

Shale gas is in its infancy in Britain and, like all infants, it will require nurturing if it is to grow. The case for shale as the

great hope for Britains energy future isnt without merit but as the BGS points out, it will require engineering and geological expertise, along with environmental safeguards. But shale alone cant solve the UKs energy conundrum. Forward planning, investment and the ability for Government and industry to work together will go a long way to providing that particular answer.

Louise Kingham OBE FEI is Chief Executive of the Energy Institute (EI), the leading professional body for energy, which promotes excellence by developing knowledge, skills and good practice in the global energy sector.

Recent years have seen the over-hyping of the so-called U.S. shale gas revolution. The success of increasing U.S. shale gas production volumes in the past few years from 12-15

billion cubic meters in 2003 to 260-270 billion cubic meters in 2012 has reduced the need to import large LNG volumes. Meanwhile, plans to build gas liquefaction and export facilities are now used to achieve the tactical and strategic goals of some U.S. stakeholders in reducing the influence of Russias gas industry. This campaign seems to be conducted without a proper analysis of the shale phenomenon, the real situation on the gas market in the United States and North America in general, the impact of these developments on the global gas market and Russias position in this market.

In the U.S., the economics of the shale industry make little sense, it even has the feel of a dangerous, speculative bubble development costs are not recouped, while uncontrolled production growth has led to a collapse in market prices and worsening of liquidity problems for manufacturers, which existed even when there was a favorable price environment.


The Secrets Behind the Shale HypeBy: Aleksei Grivach, Deputy Director, National Energy Security Fund (NESF)

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The Secrets Behind the Shale HypeContinued from page 19

For example, lets look at the oldest and most studied oil shale deposit, the Barnett Shale in Texas, which has been under development since the start of horizontal drilling and hydraulic fracturing technologies.

The first shale gas well on the Barnett Shale was drilled in 1981, while the first horizontal shale gas well was drilled in 2003. By the end of 2012, there were about 18,000 shale gas wells operating at the Barnett Shale.

There is scarce information about the economic efficiency of gas production from this field. The authorities and companies themselves do not disclose the size of investment or the production cost for individual shale fields. Nevertheless, for the Barnett Shale deposit there is publicly available data on the annual cost of investment in exploration and production up to the end of 2010 compiled by consulting company Perryman Group, whose task was to show the benefits of developing Barnett Shale for the State of Texas and its inhabitants.

As can be seen from the table below, direct investments in the Barnett Shale in 2005-2010 exceeded $70 billion; a further $17.6 billion more was paid by operators as royalties for the use of subsoil and rents. During this period, 12,000 wells were drilled, i.e., the cost per well was $5.8 million, excluding royalties, or $7.3 million in general. It is unknown whether or not infrastructure investments (gas pipelines linking the wells to the gas transmission system as well as costs of plants used to prepare gas for transportation) were included in these estimates by Perryman Group. However, even if they were included, the estimated revenue for the six years in question was still 2.8 times lower than the capital costs and cumulative payments to the land owners. It should be noted that producers have been selling gas with a discount of between 22% and 35% to the Henry Hub price.

Even during highest gas prices in the U.S. 2005 and 2008 investments in the Barnett Shale exceeded revenues significantly. Debt financing, portfolio and strategic investors,

and operations on hedging risks associated with conditions in the gas market enabled to finance capital expenditures. Besides, oil, condensate and other valuable natural gas liquids produced at the shale field had some positive impact on the economics of projects.

In the process of studying shale deposits, estimates of the resource base were revised considerably, which puts into question one of the tenets of the shale campaign; that the United States has more than 100 years worth of natural gas supply. Moreover, the shale boom could end as quickly as it began, leaving behind new idle LNG production capacities, as earlier inaccurate forecasts of gas production falling in the U.S. led to now idle regasification terminals being built on Americas shores with a capacity of more than 140 million tons per year.

The latest official data from the EIA dates back to the end of 2010, where it was proven that the United States have estimated shale reserves of 2.7 trillion cubic meters, which includes 2.3 trillion at four main shale fields. Technically recoverable resources were estimated at 21.2 trillion cubic meters, which includes about 15 trillion at the Barnett, Marcellus, Haynesville and Fayetteville shale fields. However, in early 2012, the EIA reduced its estimates for the Marcellus by almost two-thirds to 4 trillion cubic meters. The other shale fields were previously subjected to the same sequestration. For example, the Haynesville reserves were officially reduced from the initial 7 to 2.1 trillion cubic meters.

This means that shale reserves under the 2012 level of production (270 billion cubic meters) and under favorable circumstances are estimated to last for only 28 years. Of course, this is a provisional time period because it is obvious that it is hardly possible to maintain production at this level.

The boom in shale gas production in the United States and its gradual overflow into a fever of extraction of liquid hydrocarbons from shale deposits carries a significant number of problems and uncertainties in the future, some (the economics of production and



revaluation of reserves) of which were exposed recently, and others (large-scale environmental consequences of production) will only emerge in the future. Nevertheless, what you cannot take away from this shale history is the large-scale campaign to promote shale in the global media and political consciousness, as well as in the government both in the United States and in other countries political circles.

The idea of new giant hydrocarbon reserves in the backyard of current energy importers on the one hand, and the ability to exert pressure on oil and gas exporters on the other were the basis for promoting the idea of the shale revolution, an idea that would change the entire structure of the global energy industry.

This campaign, just like when advertising a product, has beneficiaries, those who are championing it and a very specific target audience. Apart from those who managed to get out of this business at the peak, the main beneficiaries are service companies, as well as investment banks who earn from financing shale oil and gas production companies as well as mergers and acquisitions. Partner companies and regional administrations who receive investments in their regions, together with new jobs and tax payments also have certain interests. In addition, landowners and speculators are also interested parties.

Shale oil and gas producers themselves are in a difficult situation and are now hostages to investments previously made in a poor pricing environment. Even shale oil developers have a relatively modest rate of return on invested capital (within 15%) under the current very high prices for liquid hydrocarbons. Nevertheless, they have to whether they like it or not maintain a high degree of commitment to the shale industry to prevent the bubble from bursting and hope that gas prices return to pre-crisis levels, while maintaining high oil prices.

Owners of regasification terminals, who hope to partially use the capacity for LNG liquefaction and export to world markets, are another group that is interested in promoting the shale story as they are the most affected.

Finally, the shale industrys high profile perfectly fits into U.S. foreign policy doctrine and strengthens the image of the United States as the leading energy power, an innovation leader and a role model for large consumers. This campaign can also have a greater impact on the relationship between suppliers and buyers in third countries and thus increase Washingtons weight in geopolitical alignments.

Table 1. Barnett Shale Economic Impact Study (2005-2010)

2005 2006 2007 2008 2009 2010 TOTALTotal production, billion cubic meters 10.8 20.3 31.3 45.6 50.2 52.4 210.6

Production*, billion cubic meters 9.1 18.1 25.7 38.4 42.4 43.8 177.5Number of wells drilled, pcs 1,200 1,600 1,500 2,700 3,800 1,200 12,00Capital expenditures on exploration and production, billion dollars

3.9 7.7 12.5 17.7 13.4 14.9 70.1

Royalties and other compensations to land owners, billion dollars

1.5 1.9 2.9 5.4 2.7 3.2 17.6

Total costs, billion dollars 5.4 9.6 15.4 23.1 16.1 18.1 87.7Costs per well, million dollars 4.5 6 10.3 8.5 4.2 15 7.3**Henry Hub natural gas spot price, dollars per thousand cubic meters

313 242 251 319 142 157 237**

Sales price for Devon Energys gas*** 250 213 207 268 106 116 177Estimated sales revenue, billion dollars 2.3 3.9 5.3 10.3 4.5 5.1 31.4

*Net marketable gas production about 15% less than the recoverable gas volume** Average*** Largest gas producer at BarnettSource: Texas Railroad Commission, EIA, Perryman Group, NESF assessment

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Since 2012, Gazprom Export, together with the cultural centre Russ Press Photo, has been implementing the Photo Wheel charity educational program for pupils from sponsored childcare centres.

Photo Wheel aims at developing childrens creativity and creative thinking, and broadening their horizons and worldview by acquainting them with outstanding fine art photographers and their best work, and teaching them photographic skills.

The Photo Wheel program features creative workshops and master classes held by prominent masters of Russian photography. Those sharing their professional secrets and experiences with aspiring photographers are Vladimir Vyatkin, leading press photographer at RIA Novosti news agency, Sergei Shakhidjanyan, press photographer with daily Russian newspaper Komsomolskaya Pravda, and renowned photojournalist Vasily Prudnikov. Vyatkin and Shakhidjanyan are lecturers at the photojournalism department of the Faculty of Journalism, Moscow State University.

The master classes are organized in such a way that children learn the art of photography in the form of a lively and accessible game. These classes now fully feature fascinating stories about the history of photography and amazing facts from this venerable profession. Each participant can try their hand in a photo contest held once a year. The best works from this contest become part of a special exhibition.

Last year, the final master class, which includes the judging of the entries, the final exhibition of works by winners and best photos from the contest, were held in Moscow. This year, the final events took place in St. Petersburg where children were also treated to an extensive cultural and entertainment program, including visits to major attractions in this historic city.

Photo Wheel Inspires Creativity



The University of Cambridge, in cooperation with Gazprom Export, is launching an educational program to support Russian language learning. This is in response to demand from talented young people, who feel the Russian language and Russian studies will benefit their future life and career as Russias role in world politics and the global economy continues to grow. To become a Russian expert, students need to have perfect language skills, profound knowledge of culture and history in order to position themselves comfortably as professionals in the field.

The University of Cambridge is keen to set up a special sponsorship programme to support students learning Russian, regardless of their background. Firstly, the program will grant scholarships for an exchange program that will enable

students to undertake studies in Russia. This will allow them to experience the atmosphere of Russian society and engage in productive interaction.

Secondly, the sponsorship will encourage professors who tutor students specializing in Slavonic Studies, to put together intensive academic courses to deepen knowledge of contemporary Russia in commercial, political and economic dimensions, as well as in a cultural and historical context.

The program will create a unique and valuable experience enabling students to develop a special attitude towards modern Russia which will be a driver for their future careers.

University of Cambridge Welcomes Gazprom Exports Sponsorship

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Blue Fuel Newsletter | May 2014 | Vol. 7 | Issue 2

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