How LNG Supply Additions Could Affect Gas Prices in

Europe?

C5, Gas and LNG Supply Contracts Forum Berlin, June 20, 2018

Sergei Komlev Head of Contract Structuring and Price

Formation Directorate Gazprom Export*

*Views expressed in this presentation are the author’s sole responsibility and do not necessarily represent that

of Gazprom Export

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According to Conventional Wisdom, Doubling of Global

LNG Capacity Should Bring European Gas Prices Down,

but…

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Historic Precedent of the Opposite Outcome: Ignoring Dependence of Hub Prices on Oil

Indexes and Overestimation of LNG Glut Impact Have Let to Hefty Losses for

Traders/Midstreamers in 2010

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Unique Nature of Natural Gas as Commodity Needs to be

Taken into Consideration in Assessing LNG Glut Effects on

Hub Prices

There are three main features of natural gas as a commodity which make it one of the kind:

1. Market prices of natural gas are set up by two forms of competition – gas-on-substitute (inter-fuel) and gas-on-gas competition. No other global commodity is characterized by this duality.

2. LTCs play a leading role in the global natural gas supply and here to stay for years ahead, while a move to exchange-based pricing in other commodities is associated with elimination of the long-term contact arrangements or their radical transformation.

3. Simultaneously functioning different pricing mechanisms in natural gas have direct effect on hub price, making it a hybrid product both on macro and micro level.

Assessment of these specific characters of natural gas as a commodity represents not only an academic interest but has sensible practical business-related implications.

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Competition with Other Carbons

Locks Natural Gas in Price Envelope

Source: Shell

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Global natural gas prices irrespective of their inter-regional differences firmly sit within a price envelop set up

by oil (ceiling) and coal (floor), see grey area in the Charts.

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Inter-Fuel Competition Sets up

Corridor for Natural Gas Prices

Ceiling

Floor

Oil/Oil products parity

Coal parity

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Inter-fuel Competition Makes Hub Prices

Rangebound

Source: Gazprom Export

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Inter-fuel Competition at Work: Oil Price Sets

Resistance Level for Natural Gas Prices

Source: BP, Gazprom Export

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Inter-fuel Competition at Work: Coal Price Sets

Support Level for Natural Gas Prices in Europe and US

Source: BP, Gazprom Export

7

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… and Asia

Source: BP, Gazprom Export

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Special Arrangements are Required for Gas

to Outcompete Coal

What Should One Know about Natural Gas Pricing Fundamentals?

NBP* compared to UK coal-to-gas switching price

NCG** compared to German coal-to-gas switching price

Sources: Argus, Platts, IEA *NBP day-ahead **NCG day-ahead

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0

100

200

300

400

500

600

US

D /

mcm

NBP actual price Switching price

0

100

200

300

400

500

600

US

D /

mcm

NCG actual price Switching price

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Inter-fuel Competition at Work: Gas Price

Corridor Width

Gas Price Corridor Width is Determined Mainly by Oil Price Volatility

and Stretched from Nearly Zero in 1988, 1995 and 1998 to 13 USD/MMBTU in 2013

Source: BP, Gazprom Export

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European Gas Has not Lost it Dependence on Oil,

Although Indirect Dependence via LTC is Now Less Pronounced

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Source: Gazprom Export

Brent - TTF* 84,3% 82,9% 80,7% 84,4%

Brent - TTF 3M 81,8% 77,5% 80,6% 74,0%

Brent - TTF 6M 76,3% 63,5% 83,0% 35,7%

Brent - TTF 9M 70,7% 48,7% 85,4% -5,0%

Brent 3M - TTF 86,2% 84,8% 83,6% 84,0%

Brent 6M - TTF 88,7% 89,8% 85,9% 77,0%

Brent 9M - TTF 88,7% 91,1% 86,1% 72,2%

Brent +3M - TTF 86,9% 86,7% 84,3% -

Brent +6M - TTF 81,2% 77,8% 82,0% -

Brent +9M - TTF 65,0% 50,4% 75,2% -

CIF ARA - TTF 63,2% 42,6% 67,9% 87,4%

CIF ARA - TTF 3M 58,8% 38,5% 58,5% 78,3%

CIF ARA - TTF 6M 51,5% 27,4% 48,6% 48,3%

CIF ARA - TTF 9M 44,4% 12,8% 44,5% 10,2%

Correlation ratio 2009-2017 2009-2013 2014-2017 2016-2017

* Hereinafter TTF Month Ahead

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Oil Indexes Retain Their Dominant Position in

European Pricing

What Should One Know about Natural Gas Pricing Fundamentals?

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When Quasi-Oil Indexed Contracts are Taken into Consideration, Oil Indexes

Retain Their Dominant Position in European Prices*

68,4% 59,4% 57,8%

26,0% 31,7% 33,1%

5,6% 8,9% 9,1%

0%

20%

40%

60%

80%

100%

1Q 2016 1Q 2017 1Q 2018

Oil- and quasi-oil-indexed Hub-indexed Fixed price

* Norway is considered as an internal supplier Source: IEA, «Gazprom export» LLC assessment

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ACER Report: Correlation between Oil and

Gas Still High due to Existence of LTCs

Long-term contracts… provide as well orientation for hub price formation, so there is a close interdependence between sources (ACER 2017 Report, P. 34)

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Do All Exchange Traded Goods Correlate

with Commodity Super Cycle?

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Beef Meat, sheep

Meat, chicken

Swine (pork)

Banana, Europe

Orange Juice

Natural gas, Europe

1990-2016 75% 88% 72% 38% 76% 76% 92%

1995-2016 77% 86% 66% 53% 75% 71% 90%

2000-2016 67% 81% 51% 68% 67% 58% 86%

2005-2016 38% 68% 3% 62% 28% 30% 70%

2010-2016 7% 78% -54% 67% -6% 19% 91%

All Exchange Traded Goods Have Strong Correlation with Oil due to Commodity Super Cycle:

Not a Sound Explanation

Despite commonalities in price behavior over the last 25 years, commodities by few exceptions had a strong momentum of their own after the 2008 crisis

Source: based on IMF and WB data (monthly)

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Although Correlation of Gas Prices with Coal Price

Increased Positive Price Spreads Between DA

and MA Prices Point to Emerging Gas Deficit

* At the basis of daily quotes ** Quotes with delivery in the same month are used

Source: Gazprom Export

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LNG Deliveries to the European Market in Q1 2018 were Down

Q1 2017 Q1 2018 change (bcm)

change (%)

Qatar 5.1 4.9 -0.2 -3.9%

Nigeria 3.5 3.7 0.2 5.7%

Algeria 4.0 3.7 -0.3 -7.5%

Russia (Novatek) 0.0 0.8 0.8

Norway 1.3 0.8 -0.5 -38.5%

Trinidad and Tobago 0.2 0.7 0.5 250.0%

Peru 1.0 0.4 -0.6 -60.0%

USA 0.8 0.4 -0.4 -50.0%

Angola 0.3 0.1 -0.2 -66.7%

Equatorial Guinea

0.2 0.1 -0.1 -50.0%

Dominican Republic

0.1 0.0 -0.1 -100.0%

Lithuania (re-export) 0.0 0.0 0.0 -100.0%

TOTAL 16.4 15.7 -0.7 -4.3%

Despite growing gas

demand in 1Q 2018

(+0.9 bcm or +0.5%)

LNG deliveries to the

European market fell

in 1Q 2018, being

attracted by other

markets with higher

margins

Source: IEA, ENTSOG

LNG Ignores European Gas Market Even Though Deliveries are

Breakeven at Current Prices on Full Cost Basis

0,00

1,00

2,00

3,00

4,00

5,00

6,00

7,00

8,00

9,00

0

50

100

150

200

250

300

350

USD

/mm

btu

USD

/mcm

US LNG breakevenprices (full cyclecosts)US LNG short-run

marginal costs(excl. tolling fees)TTF Month Aheadand Futures

Germany border

price (BAFA)

Prices of US LNGdeliveries to Spain(Cedigaz)Prices of US LNG

deliveries to Italy(Cedigaz)Prices of US LNGdeliveries to UK(Cedigaz)

10.0

8.5

7.1

5.7

4.3

2.8

1.4

0

Source: Bloomberg, Cedigaz, IHS Calculated on the basis of Henry Hub Futures prices, P = HH * 115% + X where X – costs of liquefaction, shipping to Europe, regasification

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As Contract Obligations are not Fully Met,

Costs for Spot LNG Volumes Could be Subsidized

Source: IHS, Gazprom Export

23% 20%

38%

66%

63%

0

2 000

4 000

6 000

8 000

10 000

12 000

H1 2016 H2 2016 H1 2017 H2 2017 H1 2018

Liq

uefa

cti

on

Vo

lum

e,

MM

cm

LNG trains cap, MMcm Contracted cap, MMcm

Supplies to Middle East, MMcm Supplies to Latin America, MMcm

Supplies to Europe, MMcm Supplies to Asia Pacific, MMcm

% of Contracts Used and Real Volume, MMcm

Sabine Pass T1

+Sabine Pass T2

+Sabine Pass T3

+Sabine Pass T4

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LNG Ignored Demand Hikes in Europe in January-April 2018

Despite Associated Price Hikes

5,1 5,6 5,7

5,2 5,8

4,6 5,3

4,3

0

2

4

6

8

January February March April

bcm

19,1 16,3 15,6 15,8 17,3 17,4

19,7 17,2

0

5

10

15

20

25

January February March April

2017 2018

bcm

LNG Deliveries to Europe, bcm

Gazprom Export Deliveries to Europe, bcm

Source: IEA, ENTSOG

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Incremental Demand For LNG in

January-April 2018 Came From Asia

Net LNG Demand Increase in Jan-Apr 2018 vs. Jan-Apr 2017

Source: IHS Markit

* Excluding Mexico

12,9

0,2 -0,5 -0,4 -2,2 -2,2

-4

-2

0

2

4

6

8

10

12

14

Asia North America Middle East Latin America* Africa Europe

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Year-by-Year North-West Europe Receives Less

LNG for Same Size of Asian Premium

*Monthly averages Asian premium is JKM-NBP spread Source: Bloomberg, IHS Markit, Interfax-GGA, Platts

0

20

40

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100M

Mcm

/day

2014

2015

2016

2017

2018

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