Security of supply and gas market competition

1
Security of supply and gas market competition

• Vladimir Milov
• President, Institute of Energy Policy (Moscow)
• http//www.energypolicy.ru
• Brussels, October 10th, 2006

2
What are the risks of supply monopoly?

• Underinvestment in production and infrastructure
  development
• Politically motivated supply interruptions
• Growing asymmetry between stronger
  monopolization, statecontrol and closing doors
  to foreign capital in the upstream, andtrends of
  more liberalization in the European downstream,
  presentsa threat to competition in downstream
  European markets
• arbitrary selection of partners for upstream
  projects(Shtokman, South Russkoye, Zapolyarnoye
  fields)
• shaping the configuration of downstream players
  viamonopolization and arbitrary provision of
  access toupstream
• downstream takeovers by upstream
  monopoliescreate retail competitive inequalities

3
The new Russian law on gas exports

• Nothing new, but
• Gazprom had been enjoying a de-juro export
  monopoly for14 years. Why now?
• Apparently the law was targeted to block LNG
  exports fromSouth Tambey field, a private
  project. The draft law was introducedon the same
  day as Gazprom had publicly announced
  thatTambeyneftegaz is a problem asset
• It appears that Gazproms lobbyist capabilities
  are now farstronger than those of Yukos years
  ago
• The law actually puts Gazprom in a legally
  vulnerable position,as competition regulators
  may now consider legal claims againstmonopolized
  gas supplies from Russia

4
Can asset swap scheme work?(Cases of
development of South Russkoye and Zapolyarnoye
(neokom) gas fields

• The swap scheme just doesnt work out
• Key problem issues
• Fair access to governance of Western Siberian
  JVsfor IOCs (operational, investment, marketing
  solutions). As its clear after Rosnefts IPO,
  Russian Governmentand state corporations do not
  really wish to give awaycontrol with equity
• Sustainability of wellhead purchase prices by
  Gazprom
• Access to pipeline
• Blocked access to exports

5
Is Europe that dependent on Russian gas?
Share of gas imports from Russia in primary
energy consumption, 2005
Source BP Statistical Review of World Energy
2006 (primary energy consumption), Gazprom (gas
imports by relevant countries)
6
The EU competition regulators should strictly
link Gazproms further downstream asset
acquisitions in Europe to

• Open and competitive (as opposed to arbitrary)
  access to Russian upstream
• Lifting the gas export monopoly
• Opening the pipelines to transit

7
Can Russia meet its supply commitments?
8
Gas Gazproms stagnation continues
Source Riatec, PrimeTASS
9
Gas sector on the forefront of supply crisis
Matured fields over 20 decline in 6 years!
Source Gazprom, Institute of Energy Policy
10
Gas production on Gazproms mature gas fields
would continue to rapidly decline
Urengoy and Yamburg will decline by 30 by 2010
as compared to 2004!
Source Jonathan Stern, Oxford Institute for
Energy Studies, The future of Russian gas and
Gazprom, 2005
11
Russian projected gas balance in 2010
Source Institute of Energy Policy, except where
indicated
12
Where Gazprom had been investing in the previous
years?
Cumulative capital investment by Gazprom in
2000-2006, USD bn (money of the day)
Source Institute of Energy Policy, Gazprom data.
- Gazprom estimate
13
New planned non-gas acquisitions...

• 50 equity share in TNK-BP (USD 20-25bn)
• Acquisition of a control equity share in
  Mosenergo (USD 2.1bn)
• What else?...

14
Can Gazprom convert extra revenues into
investments?
Gazproms revenues, expenses and profits,
31.12.2005 to 31.12.2000
In 2001-2005, Gazproms inefficiency and growth
of expenses had largely eroded the investment
opportunities provided by strong growth of
revenues
Source Gazprom data IFRS financial reports
15
In the monopoly environment and under strong
state protection, Gazprom will not invest in
production development, even if domestic gas
prices in Russia will rise substantially.
16
The EU gas importers should address the
conditions of gas supply contracts with Gazprom
in order to meet the undersuply risks

• Reconsider the take or pay option
• Adjust price formulas
• Introduce sanctions for the inavailability of gas
  deliveries

17
Some conclusions

• Russian and European consumers are suffering from
  the monopoly environment in the Russian gas
  production and transportation upstream
• This environment threatens competition on
  downstream European markets as well
• Europe needs to pursue effective competition
  policies to meet that challenge
• Choice of foreign partners to develop Russian gas
  fields should also be based on competitive
  principles
• European dependence on gas imports from Russia is
  not too strong to be afraid of firm competitive
  policies