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Gas output

Renaissance Capital

20 June 2019

Russian oil & gas

In contrast with the oil segment, the gas industry in Russia remains dominated by Gazprom, which accounted for 65% of Russia’s gas output in 2018, unchanged YoY. Moreover, Gazprom holds an estimated 72% of Russian ABC1 gas reserves.

Total Russian gas production increased by 5.2% in 2018, led by Gazprom (+24.0bcm), NOVATEK (+11.5bcm) and Gazprom Neft (+3.1bcm). Russneft and Slavneft also increased their production by 0.2bcm in 2018. Other oil companies saw their production change marginally according to CDU TEK data.

Gazprom’s production has declined significantly since pre-2008-2009 crisis levels of c. 550bcm to 480bcm in 2018, according to CDU TEK, up 5.3% YoY.

Gazprom’s share of the domestic market has been consistently declining since 2005. It fell from 89% in 2005 to 60% in 2018, on our estimates, as independent producers have been ramping up production (8% CAGR in 2005-2018) amid stagnant domestic gas demand. In 2018, Gazprom delivered 365bcm of gas to domestic customers via its Unified Gas Supply System (UGSS) excluding own GTS consumption, of which only 196bcm was produced by Gazprom (down from 251bcm in 2005). Discriminatory regulation against Gazprom is the principal reason for the recent decline in its market share, in our view, as non-Gazprom producers are able to offer lower prices and have fewer regulatory obligations. We expect Gazprom’s market share in Russia to decline below 50% around 2022.

Gazprom produced 65% of Russia’s gas in 2018

Figure 17: Gas output* by company, mmcm

	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018	YoY
Russia	656,184	654,136	664,852	596,443	665,463	687,540	671,520	683,807	652,609	648,404	652,835	704,094	740,988	5.2%
Oil companies	61,540	60,327	59,705	69,354	73,067	79,827	83,983	91,532	93,359	97,157	101,053	109,288	111,896	2.4%
Rosneft	13,562	15,467	12,162	18,121	18,086	19,490	21,148	38,454	44,912	47,713	51,436	52,656	52,559	-0.2%
Gazprom Neft	2,056	1,759	3,026	5,024	5,701	9,836	11,890	13,743	14,336	15,214	16,657	19,491	22,549	15.7%
LUKOIL	14,110	13,725	14,234	14,787	17,361	17,929	18,107	19,473	19,815	19,700	17,591	21,641	21,341	-1.4%
SurgutNG	14,622	14,139	14,123	14,034	13,960	13,240	12,391	12,151	9,527	9,619	9,823	10,024	9,710	-3.1%
Russneft	1,570	1,555	1,343	1,779	1,862	2,136	2,120	1,956	2,011	2,052	2,479	2,447	2,620	7.0%
Slavneft	925	928	899	1,274	1,190	1,132	1,130	1,067	1,079	1,060	1,065	1,105	1,350	22.1%
Tatneft	739	738	762	838	836	862	915	945	941	969	1,026	1,008	1,010	0.1%
Bashneft	332	341	356	437	481	538	541	642	738	831	977	914	758	-17.2%
TNK-BP	11,731	10,156	12,800	13,061	13,592	14,664	15,740	3,101	0	0	0	0	0	n.a.
YUKOS	1,894	1,519	-	-	-	-	-							n.a.
NOVATEK	28,758	28,516	30,812	32,786	37,777	53,460	51,252	53,055	53,711	51,961	50,861	47,105	58,589	24.4%
Gazprom	550,345	550,143	554,813	462,300	508,999	515,452	489,443	476,346	432,145	408,579	405,731	455,623	479,799	5.3%
Independent and PSA operators	15,542	15,150	19,522	32,003	45,619	38,801	46,842	62,873	73,394	90,707	95,190	92,078	90,704	-1.5%

Note: Consolidated output, not including share of production from JVs. Figures for Rosneft and Gazprom Neft include their share of production from Tomskneft and Messoyakha.

Source: Ministry of Energy, InfoTEK, Company data

Figure 18: 2018 and 5M19 gas production growth by company, %

2018 5M19

70%

60%

50%

40%

30%

20%

10%

0% -10% -20%

-30%

Bashneft SurgutNG LUKOIL Rosneft Tatneft Gazprom Russneft Gazprom Slavneft NOVATEK Neft

Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

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vk.com/id446425943

Renaissance Capital

20 June 2019

Russian oil & gas

Russia’s independent natural gas producers have made significant inroads in recent years due to favourable regulation, including the ability to cherry-pick Gazprom’s customers by offering them price discounts (which Gazprom is not allowed to offer), low MET rates and low gas transportation tariffs. We believe the Russian VICs (chiefly Rosneft) will continue to increase their gas output in the medium term. Rosneft plans to increase gas production to 100bcm by 2022 (vs 68.4bcm in 2018, including its share of production in JVs), a two-year delay to the previous target of 2020 (mainly due to delays in the commissioning of the Rospan project). We expect Rosneft’s average 2022 production to be 95bcm, which means to us that Gazprom’s market share on the domestic may approach 50% by that year, assuming flat gas consumption in Russia.

NOVATEK reclaimed its position as second-largest gas producer in Russia in 2018 with its production up 8.5% YoY to 68.8bcm (including production share in SeverEnergia, Nortgaz, Terneftegaz and Yamal LNG). The company’s performance in 2018 (+8.5%) was driven by the ramp-up of its export-oriented Yamal LNG project (+7.5bcm), offset by a continued decline in production from core fields (-9.2% for Yurkharovskoye, -10.2% for EastTarkosalinskoye, -13.4% for Khancheyskoye), as well as the decline at other JVs, including Arcticgas (-1.9%) and Nortgaz (-11.7%).

Figure 19: Oil companies’ gas output, 2014-2018, bcm
			2014			2015		2016		2017		2018
60
50
40
30
20
10
0
	Rosneft Gazprom Neft LUKOIL			SurgutNG			Russneft			Slavneft		Tatneft	Bashneft

Source: Ministry of Energy, Interfax, InfoTEK, Renaissance Capital

Oil companies have become very important players in the Russian gas market, with their production rising by 2.4% in 2018. Combined, oil companies account for 43% of nonGazprom gas output (111.9bcm in 2018) – with Rosneft, Gazprom Neft and LUKOIL delivering the bulk of that production.

Rosneft was the largest gas producer among the oil majors in 2018, posting a marginal decline in output of 0.2% to 52.6bcm (68 bcm if JVs are included), with the decline at the core output (-0.6%) offset by the higher output of associated gas at the East Messoyakhinskoye field.

Gazprom Neft took the second place in the list of largest gas producers among the oil companies from LUKOIL in 2018, increasing its gas production by 15.7% YoY, which we associate with the growing share of associated gas production.

LUKOIL lost its leading position among the oil companies in 2011. Its production declined in 2018 by 1.4% YoY, following a substantial increase of 23.4% in 2017 that mostly related to a launch of the gas production at its Pyakyakhinskoye filed. This field alone contributed 3.86bcm in 2018 (2.79bcm in 2017) to the company’s output. LUKOIL’s gas production started to grow in 2006, after the Nakhodkinskoye field (in the

Rosneft has ambitious gas growth plans

NOVATEK reclaimed its position as

Russia’s second-largest gas producer in 2018

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vk.com/id446425943

Renaissance Capital

20 June 2019

Russian oil & gas

Bolshekhetskaya Depression, Yamalo-Nenetsk Autonomous District) was commissioned in October 2005.

Surgutneftegas has traditionally stood out in terms of its relative focus on gas output, although the company’s ranking slid to fourth position among the Russian oil majors in 2011. Surgutneftegas has stepped up its efforts in the gas arena since acquiring the Surgut Gas Processing Plant (SGPP) in December 2001, enabling associated gas output to climb. In 2006, the company put on stream a new gas-processing unit and expanded the capacity of the SGPP to 7.2bcm pa. However, the company’s gas production has been down substantially in the past five years (CAGR of -4.4%), driven by the reduction of associated gas output at its mature West Siberian fields. This trend continued in 2018 with production down 3.1% YoY.

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