Sanc%ons  and  the  Future  of  Russian  Oil  and  Gas  

James  Henderson  December  2014  

•  US  and  EU  sanc%ons  ban  transfer  of  technology  for  use  in  Arc%c,  deep  water  offshore  (>500  feet)  and  for  shale  oil  development  

•  Financial  restric%ons  on  access  to  capital  markets  –  90  day  debt  maturity  in  US,  30  days  in  EU  

•  RosneQ  and  GazpromNeQ  the  main  overlap.  No  financial  restric%ons  on  Gazprom,  Novatek  hit  hard  by  inclusion  on  US  list  

•  Russian  banks  also  targeted  with  30  day  debt  maturity  rule  in  both  areas  

•  Importantly  Australia,  Canada,  Japan  and  Norway  have  also  introduced  sanc%ons  

Sanc%ons  on  Russian  oil  and  gas  companies  US  Treasury  EO  13662  Directive  2  

(Financing)

US  Treasury  EO  13662  Directive  4  (Technology)

US  Commerce  Dept.  Export  Controls

EU  Finance  Restrictions

EU  Technology  Restirctions

Transneft Yes Yes YesGazprom Yes YesGazpromNeft Yes Yes Yes Yes YesLUKOIL Yes YesNovatek YesRosneft   Yes Yes Yes Yes YesSurgutneftegaz Yes Yes

•  Maintaining  oil  produc%on  above  10mmbpd  is  becoming  a  key  challenge  

•  Slow  growth  from  current  levels  (10.6mmbpd)  had  been  expected  

•  This  now  seems  unlikely  as  new  fields  are  postponed  

•  Long-­‐term  challenge  to  enhance  exis%ng  fields  and  develop  new  regions  using  advanced  technology  and  interna%onal  experience  

Future  of  Russian  oil  produc%on  –  key  drivers  

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2010 2013 2015 2020 2025 2030

Prod

ction  (m

mbp

d)

General  Scheme  (High) General  Scheme  (Low) EIA

Source: Ministry of Energy, General Scheme of Development of Oil industry to 2020, EIA International Energy Outlook 2013

Enhanced recovery at

existing fields

Arctic offshore

Tight Oil

East Siberia

Black Sea and Barents Sea

Tight  correla%on  between  oil  price,  

economic  growth  and  oil  produc%on  

   

Russian  GDP,  oil  produc%on  and  the  oil  price  

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140

0

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14

1965

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2013

US$/bbl

mmbp

d

kbpd Oil  Price  (US$2013)

Oil price and Russian oil output Oil price and Russian Real GDP

•  Arc%c  development  a  pres%ge  poli%cal  project  for  Russia  as  well  as  a  long-­‐term  produc%on  solu%on  

•  Opportunity  to  develop  world-­‐leading  technology  in  partnership  with  IOCs  and  establish  important  presence  in  emerging  new  region  

•  RosneQ  will  not  be  able  to  move  forward  with  plans  without  IOC  support,  both  financial  and  technical  

Development  of  Russian  Arc%c  now  in  serious  doubt  

West  Siberia,  147.9

Other  Russia,  120.6

Alaska,  77.9

Greenland,  51.7

Other  ,  53.2

Russia has largest share of Arctic resources Partnership with Exxon has been key focus

•  Russia  has  the  largest  shale  oil  resources  in  the  world  •  Bazhenov  shale  has  been  know  about  for  years,  but  foreign  partnership  

needed  to  exploit  it  successfully  •  Shell,  Exxon,  Statoil,  Total  and  BP  have  all  formed  JVs,  now  on  hold  •  Russian  service  companies  cannot  offer  adequate  equipment  

Tight  oil  in  Russia  will  be  delayed  despite  con%nued  enthusiasm  

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2015 2020 2025 2030

kbpd

Rosnedra RF  MoE

Source: Rosnedra, RF MoE

Bazhenov shale extensive in West Siberia Production potential up to 1.5mmbpd

Brownfield  recovery  through  EOR  is  s%ll  possible,  but  western  service  companies  are  needed  

•  Difficult  to  recover  reserves  account  for  62%  of  Russian  total  

•  IEA  es%mates  that  EOR  could  account  for  500kbpd  of  output  by  2030  

•  Ter%ary  methods  gradually  being  introduced  as  tax  incen%ves  increase  

•  Interna%onal  techniques  brought  by  IOCs  and  service  companies  

–  95%  of  horizontal  wells  drilled  by  interna%onal  service  companies  

•  Confusion  over  exact  impact  of  sanc%ons  here  

–  Clarity  s%ll  being  sought  concerning  equipment  with  dual  uses  

7  

Russia’s oil is getting more difficult

Reserves Production

Source: E&Y

•  RosneQ  has  $66  billion  of  outstanding  debt,  of  which  half  needs  to  be  repaid  inside  two  years  

•  Ministry  of  Economic  Development  believes  that  access  to  capital  markets  could  occur  in  2016/17  at  the  earliest  

•  RosneQ  has  applied  to  Na%onal  Wealth  Fund  for  more  than  2  trillion  RUR  (c.$44bn)    

•  Company  is  already  being  forced  to  re-­‐priori%se  projects  and  seek  new  partners  

RosneQ  faces  tes%ng  financial  issues  Rosneft Debt Profile… …and Repayment Schedule

•  Gazprom  has  struggled  over  the  past  decade,  with  output  hiing  a  post-­‐Soviet  low  in  2014  

•  Increasing  compe%%on  in  all  the  company’s  core  markets  has  combined  with  the  economic  crisis,  US  shale  gas,  low  coal  prices  and  increased  support  for  renewables  to  undermine  sales  

•  Independent  producers  in  Russia  have  also  been  producing  more,  leaving  Gazprom  with  a  significant  supply  bubble  

•  Outlook  in  Europe  and  FSU  markets  related  to  poli%cs  as  well  as  economics  

Previous  gas  market  developments  –  rise  of  Novatek  and  RosneQ  

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E

bcm

Gazprom output in long term decline…

0.0%

5.0%

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25.0%

30.0%

20002001200220032004200520062007200820092010201120122013

Non

-­‐Gazprom

 Sha

re  of  O

utpu

t

…due in part to increasing domestic competition

•  Ukraine  situa%on  creates  a  clear  security  of  supply  risk  for  Europe  this  winter  

•  In  the  long-­‐term,  does  the  risk  concern  Russian  supply  or  Ukraine  transit?  •  The  EU  appears  split  over  the  desirable  place  for  Russian  gas  as  a  source  of  

imports  –  the  South  Stream  debate  has  highlighted  the  dilemma  •  Russia’s  compe%%ve  commercial  posi%on  is  very  strong  –  it  has  excess  gas  

at  a  low  cost  of  supply  

Gazprom  faces  an  uncertain  future  in  Europe  –  but  con%nued  significant  gas  sales  seem  inevitable  

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Yamal  Full  Cost MarginalGazprom  Supply

2013  RussiaExport  Price

NBP  2014 US  LNG  (HH  at$5)

US$/m

mbtu

Capex Lifting  Cost MET Domestic  Transport Export  Transport Export  Tax Total

Energy Security

Environment

Energy Cost

What is Russia’s

role?

Europe’s Trilemma

Russia offers the cheapest gas supply

11

•  South  Stream  project  cancelled  as  EU  not  suppor4ve  •  Alterna4ve  pipeline  to  Turkey  proposed  •  Ukraine  transit  risk  le;  with  EU;  Russia  targets  Europe’s  only  

growing  gas  market,  but  is  this  the  op4mal  route?  

Russia  has  called  Europe’s  bluff  and  re-­‐focussed  on  Turkey  

?

?

•  Expansion  into  Asia  has  always  been  a  sensible  strategy  for  Russia,  with  ac%on  catalysed  by  the  current  poli%cal  situa%on  

•  China  offers  a  huge  growth  market,  but  also  a  dependency  risk  •  China  has  been  ambiguous  in  its  support  of  Russia  in  2014,  and  its  gas  

consump%on  plans  remain  unclear  •  Despite  the  bold  talk,  the  Russian  shiQ  East  offers  lille  real  threat  to  Europe,  

as  all  par%es  need  a  balanced  supply  and  demand  picture    

Russia  wants  to  balance  exports  between  Europe  and  Asia  

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Europe  80%  ToP Power  of  Siberia Altai

Crude oil export strategy Possible outlook for gas exports

The  switch  to  Asia  triggered  a  move  to  LNG,  but  this  has  now  reverted  to  a  pipeline  export  strategy  

•  LNG  expansion  posed  a  threat  to  Gazprom  via  Novatek  and  RosneQ  •  Projects  now  delayed  or  postponed  due  to  lack  of  finance,  customer  

commitment  and  certainty  over  technology  •  Pipeline  strategy  suits  Gazprom  and  Russian  budget  •  Possibility  of  new  lines  to  Korea  and  Japan  could  extend  poli%cal  reach  

Yamal LNG – 16.5mmt CNPC - 3mmtpa Negotiations with European and Asian traders

Sakhalin 1 – 5mmt SODECO – 1mmtpa Marubeni – 1.25mmtpa Vitol – 2.75mmtpa

Sakhalin 2 – 10mmt Various Asian buyers Potential for 5mmt expansion

Vladivostok LNG – 10-15mmt

Chayanda

Kovykta

38bcma to China

Pechora LNG – 2.6mmtpa ?

Leningrad LNG – 10mmtpa ?

Gazprom

Novatek

Rosneft

S-K

-V

Shtokman - 15mmtpa in Phase 1?

Altai Pipeline

30bcma to China?

20-30bcma to China

•  Yamal  LNG  is  likely  to  proceed,  but  behind  schedule,  with  expansion  of  Sakhalin  2  another  possibility  

•  Three  pipelines  to  China  are  feasible  over  %me,  with  two  already  under  discussion  /  agreement  

•  Russian  gas  can  be  compe%%ve  in  China  /  NE  Asia,  albeit  at  very  modest  returns  for  Gazprom  

Russian  gas  is  compe%%ve  in  Asia,  and  volumes  could  grow  rapidly  by  2030  

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2010 2015 2020 2025 2030

Sakhalin  2 Power  of  Siberia Altai  Pipe

SKV  to  China Sakhalin  2  Expansion Yamal  LNG

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Possible scenario for Russian gas in Asia Cost of supply of alternative gas to Shanghai

•  RosneQ  and  Igor  Sechin  remain  very  influen%al,  especially  in  the  oil  sector  

•  BashneQ  example  demonstrates  that  loyalty  to  the  current  administra%on  is  paramount  

•  Compe%%on  between  domes%c  companies  is  being  discouraged;  reform  is  not  on  the  agenda  

•  RosneQ  and  Gazprom  remain  at  war,  but  have  bee  constrained  by  sanc%ons  and  Russian  “fortress”  mentality  

•  Budget  revenues  under  threat  from  lower  oil  price,  meaning  that  pipeline  gas  exports  need  to  become  more  important  over  %me  

Consolida%on  of  state  control  in  the  oil  and  gas  sector  is  an  ever  increasing  theme  

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Oil  Prod

uctio

n  (kbp

d)

Private

State-­‐Influenced

State-­‐Owned

State control of Russian oil production

W. Canada shale

US shale

Argentina shale

Brazil pre-salt

E. Siberia

Sakhalin

Queensland CBM

N. / N.W. Australia

E. Africa Offshore

W. Africa

N. Africa

E. Med.

Middle East

N. Sea

Barents Sea

Yamal

W. Siberia

SE Asia

Caspian Europe

Asia

Russia  sits  at  the  heart  of  the  global  energy  economy  –  there  is  growing  compe%%on  but  it  has  plen%ful  rela%vely  low  cost  resources  

Legend Established gas export province / flows

Emerging gas export province / flows N. Sea Gas export / import province name

Gas import province

China Shale Gas

Russia’s potential eastern gas exports

Impact of North American markets on price formation

•  Will politics undermine commercial advantages? •  Will lack of finance cause a lack of investment? •  Can Russia move forward without IOC support?