Nabucco, European Energy Supply Diversification, and Russia

1
Nabucco, European Energy Supply Diversification,
and Russia

• Vladimir MilovInstitute of Energy Policy, Russia
• FT Gas for Europe ConferenceBudapest, September
  14th, 2007

2
South Eastern and Central Europe the region of
Europe most dependent on Russian gas supplies
Share of gas imports from Russia in primary
energy consumption, 2006,
Source BP Statistical Review of World Energy
2006 (primary energy consumption), Gazprom (gas
imports by relevant countries)
3
Why doubts on Russian gas supply reliability?

• High possibility of gas supply deficit due to
  underinvestment in upstream gas production sector
• Ageing gas pipeline system and increasing risk of
  pipeline accidents (several recorded this year)
• Permanent difficulties with transit countries
  (Belarus, Poland, Ukraine, Turkey)

4
Gazproms aggressive asset acquisition policy
leaves little room for upstream investments
Gazproms investments during the recent years
(billion USD)
Source calculations based on Gazprom data
5
Will Gazprom invest enough in new gas field
development to address the supply challenge?
Structure of Gazproms investment program for
2007 (billion USD)
Source Gazproms board of directors decisions of
January, May, August 2007
6
Projects delayed in 2007, sacrificed for more
asset acquisitions

• Investments in development of Shtokman field in
  2007 cut from USD 670 million to USD 335 million
• Peak production at Kharvutinskaya area of Yamburg
  field (30 bcm/year) postponed from 2008 to 2010
• Production at Neocomian strata of Zapolyarnoye
  field (15 bcm/year) postponed to 2011
• Expenditures on modernization of the trunk
  pipeline system cut by USD 950 million
• This is the price paid so far for the
  acquisitions of Sakhalin Energy, Beltransgaz
  (Belarus gas pipeline operator), Mosenergo
  power company

7
Rapidly ageing gas pipelines
Gazproms pipelines structured by age,
Source Gazprom, Gazprom Databook 2006
8
Can the current area of production deliver
substantial new volumes of gas?
Potential of new gas output in the current gas
production area, bcm/year
Source presentation by Gazproms deputy CEO
A.Ananenkov, Moscow, June 14th, 2007
These volumes are only sufficient to offset the
expected cumulative 85-90 bcm decline of gas
production at Urengoy and Yamburg fields in the
coming 4-5 years.
9
How much money is required to develop new gas
production areas?
Gazproms estimates of Yamal Peninsula gas field
development costs(billion USD in current US
dollars)
Source Gazproms Complex program of Yamal
Peninsula gas fields industrial development, 2002
10
Central Asia the great uncertainty

• No guarantees of gas supplies from Turkmenistan
  to Russia beyond 2009 exist
• Despite announcements made in May 2007, no
  specific agreements on gas supplies through
  Caspian gas pipeline were reached by September
  1st, 2007
• Turkmenistan pursues alternative gas pipeline
  projects (with pipeline to China being the most
  potentially realistic option)

11
Can the growing gas demand be satisfied with this
type of investment strategy?
Gazproms gas demand projection to 2030 (bcmpa
best case scenario)
Source Vedomosti (www.vedomosti.ru), April 16th,
2007
12
Additional gas for Nord Stream,South Stream,
Altai pipeline to China where is it going to
come from?

• Gazprom will be able to meet its supply
  commitments only if the domestic demand will grow
  below 1 a year to 2010 and below 0,5 a year in
  2011-2030
• If the domestic gas demand in Russia will grow
  faster, even if independent gas producers
  increase production to 140-150 bcm by 2010, the
  deficit of gas will occur
• The average growth of gas demand in Russia in
  2002-2006 had been 3 a year (6,7 only in 2006)

13
Why Nabucco is sometimes viewed with skepticism?

• Unclear resource base
• The perspectives for a Trans-Caspian pipeline,
  putting aside the U.S. optimism, appear bleak due
  to unresolved Caspian seabed division dispute
• Without this, the supply capabilities of
  Shah-Deniz gas field in Azerbaijan will be only
  partially sufficient for Nabucco
• The Trans-Iranian pipeline (the most potentially
  realistic and viable option for transportation of
  Turkmen and Iranian gas to Europe) will be most
  likely blocked by the U.S.

14
Russian gas in Nabucco?

• Probably this will be a soft solution in the
  end
• However, Russia will most likely reject supplies
  to an unfriendly pipeline on political grounds
• In the same manner, participation in
  Baku-Tbilisi-Ceyhan oil pipeline was rejected by
  Russia back in 2002
• Putins Kremlin takes no prisoners when it
  comes down to gas transit geopolitics
• Also, the dependence on Russian supplies increases

15
South Stream viable?

• Cost of construction? (Involvement of Gazprom and
  ENI suggests that the costs would be excessive)
• Wheres the gas?

Map source ENI Gazprom
16
South Stream potential rationale

• Bypassing the problem transit countries
  Ukraine, Turkey
• Potential target markets Italy and Baumgarten
  gas hub in Austria
• If both Nabucco and the South Stream will be
  build, this will create excessive pipeline
  capacities in the South Eastern Europe region
• Which is probably not bad for the European
  energy security

17
Conclusions

• Successful implementation of the Nabucco project
  may help mitigate the risks of dependence on
  Russian gas supplies for the countries of South
  Eastern and Central Europe
• The risks of Russian gas supplies in the
  forthcoming future severely increase due to
• (a) abandoning the Gazprom restructuring plans,
  and
• (b) the strategy of building up a global energy
  company which diverts financial resources away
  from investments in core business development
• Nabucco may be a good risk mitigation option, but
  its viability remains uncertain
• Competition with the South Stream South Eastern
  Europe doesnt need two new gas pipelines