March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 11

Achieving Access to Russian PipelinesAchieving Access to Russian Pipelines

Pipeline capacity and daily Pipeline capacity and daily flows – simple exercisesflows – simple exercises

Future bottlenecks in the Future bottlenecks in the pipeline systempipeline system

Third party accessThird party access

Signs of liberalization of the Signs of liberalization of the Russian gas market and Russian gas market and some other signssome other signs

Gazprom: Limits to growthGazprom: Limits to growth

Mikhail KorchemkinMikhail Korchemkin

korchemkin@eegas.comkorchemkin@eegas.com

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 22

Spare Capacity in 2002, bcm/yearSpare Capacity in 2002, bcm/year

~500-2

95

0-3

~20

0-2

5

~70

~70

~90~70

~5

~5

0-2

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 33

Exercise 1 - Upstream Capacity:Exercise 1 - Upstream Capacity:Gazprom’s Daily Production in W.Siberia, mmcmdGazprom’s Daily Production in W.Siberia, mmcmd

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

Jan-95

Jul-95

Jan-96

Jul-96

Jan-97

Jul-97

Jan-98

Jul-98

Jan-99

Jul-99

Jan-00

Jul-00

Jan-01

Jul-01

Jan-02

161 mmcmd

or

56 bcmy

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 44

Exercise 2 - Downstream Capacity:Exercise 2 - Downstream Capacity:Uzhgorod Export Flow, mmcmdUzhgorod Export Flow, mmcmd

150

200

250

300

350

Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03

27 mmcmd

or

10 bcmy

from the level of February 1999

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 55

Future Bottlenecks, 2003-2020Future Bottlenecks, 2003-2020Based on Maximum Daily Flows

Gazprom needs only additional export lines and Gazprom needs only additional export lines and pipelines linking new fields with the existing systempipelines linking new fields with the existing system

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 66

Upstream CapacityUpstream Capacity

• The existing pipeline capacity The existing pipeline capacity can accommodate the flow can accommodate the flow from Zapolyarnoe and then from Zapolyarnoe and then the Yamal gasthe Yamal gas

• The new production will The new production will replace the declining flow replace the declining flow from Urengoy, Yamburg and from Urengoy, Yamburg and other “Soviet” fieldsother “Soviet” fields

• Gazprom’s growth has a Gazprom’s growth has a “natural” limit - the West “natural” limit - the West Siberian pipeline capacitySiberian pipeline capacity

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 77

Third Party AccessThird Party AccessTPA to Gazprom pipelines is TPA to Gazprom pipelines is regulated by the stateregulated by the state

Transit tariffs are set by the RF Transit tariffs are set by the RF Federal Energy CommissionFederal Energy Commission– domestic: RUR16.56 / mcm per domestic: RUR16.56 / mcm per

100 km (~USD 0.52) - compare 100 km (~USD 0.52) - compare with the Russian price of about with the Russian price of about $20/mcm$20/mcm

– export: USD1.10/mcm / 100 kmexport: USD1.10/mcm / 100 km

Gas must meet the quality Gas must meet the quality standardstandard

Gazprom determines spare Gazprom determines spare capacity and sets up the transit capacity and sets up the transit route (may be longer than the route (may be longer than the shortcut)shortcut)

FEC may start monitoring spare FEC may start monitoring spare capacity of Gazpromcapacity of Gazprom

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 88

Transit Services: Costs & Benefits, $/mcmTransit Services: Costs & Benefits, $/mcm

$11.2

$21.0

$11.2

$3.9

0

5

10

15

20

25

30

35

Export Belarus

Cost Profit

Transit from Yamburg area Transit from Yamburg area to Belarus or Western to Belarus or Western Russia brings Gazprom a Russia brings Gazprom a profit of ~$3.9/mcm (a loss if profit of ~$3.9/mcm (a loss if Gazprom sells its own gas)Gazprom sells its own gas)Transit from Yamburg area Transit from Yamburg area to the Russian border to the Russian border generates a profit of generates a profit of ~$21/mcm~$21/mcmUnder current taxation, Under current taxation, Gazprom can hardly get a Gazprom can hardly get a profit of $21/mcm on the profit of $21/mcm on the export sales of Yamal gas export sales of Yamal gas (though it can on gas from (though it can on gas from Urengoy and Yamburg)Urengoy and Yamburg)Selling transit services to Selling transit services to gas exporters is a profitable gas exporters is a profitable businessbusiness

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 99

Liberalization or Tightening the Control?Liberalization or Tightening the Control?

GOOD SIGNSGOOD SIGNSOil companies selling more Oil companies selling more gas to Russian customers gas to Russian customers and having big plansand having big plansUkraine re-exports Russian Ukraine re-exports Russian and Turkmen gasand Turkmen gasRussian and Central Asian Russian and Central Asian companies about to start companies about to start exporting small volumes of exporting small volumes of gas to Europe soongas to Europe soonGazprom learns accounting Gazprom learns accounting trickstricksITERA is very much alive ITERA is very much alive and activeand active

BAD SIGNSBAD SIGNS““Return of stolen assets” Return of stolen assets” causes negative impacts on causes negative impacts on Gazprom performanceGazprom performance– Purgaz and BelarusPurgaz and Belarus– Payment rate in UkrainePayment rate in Ukraine

Gazprom is still production Gazprom is still production orientedoriented– Underestimating the role of Underestimating the role of

sales and overestimating sales and overestimating the role of productionthe role of production

– Cutting down transit Cutting down transit volumesvolumes

Internal power struggle in Internal power struggle in GazpromGazprom

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 1010

Pipeline & Production Investment, USD Bn/yearPipeline & Production Investment, USD Bn/year(shown at two previous Flame conferences)(shown at two previous Flame conferences)

0

1

2

3

4

5

6

7

8

2000 2005 2010 2015

Pipeline Production

These are new production These are new production and pipeline projects onlyand pipeline projects only

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 1111

What Gazprom Would Do If They Were What Gazprom Would Do If They Were Market-OrientedMarket-Oriented

Increase sales of transit Increase sales of transit services, including for exportservices, including for exportCreate a friendly environment Create a friendly environment for independent producers and for independent producers and oil companies to provide a oil companies to provide a steady and low-risk cash flow steady and low-risk cash flow from transit servicesfrom transit servicesAttract additional flows of Attract additional flows of Central Asian gasCentral Asian gasParticipate in the Yamal and Participate in the Yamal and other new fields’ development other new fields’ development as a minority shareholder as a minority shareholder (<20%)(<20%)Start cost-saving programStart cost-saving program

Alexey Miller

March 20, 2003March 20, 2003 East European Gas AnalysisEast European Gas Analysis 1212

WOULD GAZPROM DO IT?WOULD GAZPROM DO IT?

Yes, as soon Yes, as soon as they get a as they get a

word from word from the person the person in chargein charge