The Russian Gas Deficit

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The Russian Gas Deficit

Geopolitical Implications for Bulgaria and for Europe

Professor Alan Riley.

Sofia

Friday 16th November


A Russian Gas Deficit?

• 47 Trillion Cubic Metres

in the ground

• Surely they cannot be

running short of gas?


Gas Deficit: A Serious Supply Issue

• Declining Production in ‘legacy’ Gas Fields

• Lack of Investment in New Fields

• Low Domestic Prices

• Diverted Investment

• Capital Costs


Source: Gazprom, Institute of Energy Policy

546523

505477

461442

428

37 6488

100

16 16 20

78

350

400

450

500

550

600

1999 2000 2001 2002 2003 2004 2005

Independent gas producer takeover additions

Zapolyarnoye gas field

Gazprom production net of Zapolyarnoye and Purgaz

Matured fields: over 20% decline in 6 years!

Gas sector: on the forefront of supply crisis


Gas production on Gazprom’s mature gas fields would continue to rapidly decline

0

100

200

300

400

500

600

2004 2010 2015 2020

bcm

pa

OtherOrenburgAstrakhanUrengoy (achimov)Yeti-PurovskoyeSouth RusskoyeVyngayakhinskoyePestsovoyeYubilyeynoeWest TarkosalinskoyeKomsomolskoyeZapolyarnoyeMedvezheAneryakhinskoyeKharvutinskoyeYamburgYen-YakhinskoyeUrengoy

Source: Jonathan Stern, Oxford Institute for Energy Studies, ‘The future of Russian gas and Gazprom’, 2005

Urengoy and Yamburg will decline by 30% by 2010 as compared to 2004!


Where Gazprom had been investing in the previous years?

Source: Institute of Energy Policy, Gazprom data. * - Gazprom estimate

Cumulative capital investment by Gazprom in 2000-2006, USD bn (money of the day)

70

30,6

12,5

0 20 40 60 80

Investments required to developgas fields of Yamal Peninsula*

Capital investments in areasother than gas production

Acquisitions outside gas sectorin 2003-2005

Actual investments in upstreamgas production

SibneftSibur (petrochemical company)Pow erOther

17,9


IEA Concerns I• We are afraid that

Gazprom will not have

enough gas to supply

even their existing

customers and existing

contracts. This is our

data,” Claude Mandil, IEA

executive director.


IEA Concerns II• Inefficiency & Lack of Competition

• Increasing Gasification

• Ability of Central Asia to Deliver

• Incentives for Gas Independents


Stern: Future of Russian Gas?

• OUP Book, The Future of

Russian Gas & Gazprom

• Extent of Depletion of NPT

Fields

• Lack of Investment in New

Fields

• Domestic Price Increases Vital

• Raises Issue of Accelerated

Depletion


Gazprom in Crisis• UK Defence Academy

Paper, Michael Fredholm

• Gas Supply Shortage

investment-depletion

problem

• Details of 05/06 Deficit

• Looks at Potential Deficit

Solutions


Russia Short of Gas?• Milov former energy

minister www.energypolicy.ru

• Series of Papers and

Speeches on Subject

• Believes Potential

Problem as early as 2010

http://www.energypolicy.ru/


President Putin• Chaired a Meeting on the

Deficit in the Kremlin

• Looking for Solutions

• Reportedly Unhappy with

Gazprom

• Influence on Price

Increase Announcement

in November 2006


How Big and When?• Milov: 126bcm by 2010.

• Central Asia and Domestic Gasification could make it worse

• 155bcm current EU Imports

• Accelerated Depletion…2008?


Deficit Solutions I• Kremlin Meeting September 2006

• Short Term Supply Problems

Nuclear, Hydro-Timing

• Coal-Near Term Possibilities-But Rail Capacity

• Energy Efficiency-Difficult to Put in Place Incentives


Deficit Solutions II• Higher Domestic Prices?

-Time Delay

-Political Trouble

-Economic Trouble

• Energy Saving in Industry?

-Kremlin Needs Effective Tax Regime


Russian Deficit Analysis• Unclear how great

• Significant

• Very Little to be a lot worse-eg accelerated depletion or increase in domestic demand


Deficit Consequences• Much More Serious than a Cut Off

• Pressure to Switch to Alternatives

• Pipeline Questions

• Impact on Energy Liberalisation

• Bulgarian Gas Market Development

• Geopolitical Consequences


Much More Serious than a Cut Off

• Cut off-a day or two.

• Fundamental Financial Incentive to sell to EU

• No Pipelines to China

• Chinese cannot pay EU rates with EU scale

• Deficit-’we want to but we cannot’

• Much More Serious Supply Security Issue.


Switch to Alternatives• LNG Gasification Plants

• LNG Hubs?

• Alternative Pipelines-

Nabucco

• Switch to Domestic Coal

• Issue of Speed

• Delay Closure of Nuclear

Power Stations


Pipeline Questions• If Gas Deficit how

valuable Russian

Pipeline plans?

• Southstream a pipeline-

but what about the gas?

• Reliance on Nabucco

and LNG Instead?


Impact on Energy Market Liberalisation

• Liberalisation: A EU Solution to Gas Supply Shortages

• Physical Interconnection and Legal Right to Trade Bring Enhances Gas Security

• Advantage of Increased LNG Facilities Across EU can be maximised

• Liberalisation will bring more investment into energy market.


Impact on German Liberalisation Debate

• Leaves Ms Merkel

Worried

• Germany Heavily

Dependent on Russian

Gas

• Particularly Vulnerable

largest Western

Customer


Impact Bulgarian Energy Development

• Importance of Nabucco

for Bulgarian Gas Market

• Vital Importance of

interconnection other gas

markets

• Role of Coal

• Role of Nuclear


Geopolitical Consequences• Weaken Russian ‘Energy Power’

• Energy Superpower ‘out of gas’

• Encourage alternatives which will stimulate competition to Russian Gas

• Encourage liberalisation across EU

• Increase incentive for Bulgaria and rest of SEE to build themselves into EU energy markets

• Make Central Asia & LNG Sources Vital.


Market Lessons for EU & Russia

• EU Big Energy Players E.ON & GDF

• Favour-Vertical Closed Energy Market with-LTSC

• Seen to Fail to Deliver

• Failure of Gazprom- Force Re-assessment

• Time to Liberalise the Russian Gas Market?


You Cannot Buck the Market!

The Russian Gas Deficit

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