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Gas balance

Renaissance Capital

20 June 2019

Russian oil & gas

Gas balance

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Renaissance Capital 20 June 2019

Gas balance						Russian oil & gas
Figure 103: Russia – gas balance, 2012-2018, bcm
	2012	2013	2014	2015	2016	2017	2018
Supply	746.0	745.2	714.2	694.5	718.2	770.3	810.4
Production	654.4	668.2	642.1	634.9	640.4	691.2	725.4
Third-party shipments	35.7	33.3	29.3	25.8	23.0	25.3	23.5
Withdrawals from storage	47.7	38.1	36.6	29.6	51.0	50.5	59.3
Decrease in UGSS reserves	8.1	5.7	6.2	4.1	3.9	3.3	2.4
Deliveries	746.0	745.2	714.2	694.5	718.2	770.3	810.4
Domestic gas consumption (incl. local)	424.5	420.7	425.2	406.1	424.4	430.2	452.6
Natural gas used for LNG production	14.6	14.5	14.5	14.5	14.7	15.5	20.9
Exports to non-FSU countries	140.1	167.0	151.6	163.0	181.7	197.4	200.3
Exports to FSU countries	64.7	52.4	41.8	37.6	32.1	32.9	36.7
Addition to storage	51.7	44.4	41.6	31.5	28.5	53.0	56.2
Increase in UGSS reserves	9.6	5.7	6.4	4.1	4.5	3.5	3.1
UGSS use and losses	40.9	40.6	33.2	37.6	32.3	37.8	40.6

Source: Gazprom

It is surprisingly more difficult to obtain Russia’s gas balance than its oil balance, despite the fact that one company – Gazprom – dominates the industry. The primary reason for this is a lack of accurate statistics on gas flaring, injection and local consumption (i.e. outside the UGSS, owned and controlled by Gazprom). We have also noticed that the start of LNG production by Yamal LNG in 2017 was not properly reflected in the official statistics provided by Gazprom. In addition, other – arguably much less significant – areas of inconsistency also exist when accounting for export/import flows, particularly with regard to Kazakhstan, as well as for the shipments of third-party gas. We therefore rely primarily on Gazprom statistics, if not for accuracy then for consistency. Even so, Gazprom’s own data are sometimes contradictory.

Gas production in Russia increased by 5.0% in 2018 as a result of both higher domestic demand and increased gas deliveries to Europe. Gazprom’s own production was up by 5.4%, while non-Gazprom producers delivered a growth of 4.7%.

In absolute terms, Gazprom’s production was up by 24bcm in 2018 with visibly increased sales. Around 76% of Gazprom’s 2018 output came from the Nadym-Pur-Taz region of West Siberia; this ratio having decreased significantly from 93% in 2012.

Over the years, Gazprom has undertaken significant efforts to minimise the effect of production declines at its core West Siberian fields (Medvezhye, Urengoiskoye, Yamburgskoye, Komsomolskoye and Zapolyarnoye) on the overall production levels of its three key subsidiaries – Gazprom dobycha Urengoi, Gazprom dobycha Yamburg, and Gazprom dobycha Nadym. Our analysis of Gazprom’s production profile is somewhat hampered by the company’s decision to stop reporting the split of its gas production by subsidiaries from 2015, but we estimate that Nadym-Pur-Taz production for Gazprom as a whole increased by 20bcm, or 6%, in 2018, which we attribute to higher production from its swing Zapolyarnoye field.

The remainder of the production growth was delivered by higher output in the Yamal Peninsula, with the Bovanenkovskoye field increasing its output by 4.7bcm to 87.5bcm in 2018, and we believe this will represent the fastest-growing part of Gazprom’s production portfolio for years to come. Bovanenkovskoye production started in 2012, with a planned production plateau of 115bcm expected to be reached in 2022, according to Gazprom. Over time, the Bovanenkovskoye field’s production will be complemented by development of the giant Kharasaveiskoye field (with a plateau target of 32bcm pa but a potential to increase this towards 50bcm pa), but Gazprom delayed its launch to 2023 (from an earlier target of 2018) due to its market share losses in Russia and an uncertain export outlook. The Tambei group of fields, also in the Yamal Peninsula, should be brought into production between 2027 and 2031, with planned production capacity of over 55bcm pa, possibly linked to an LNG development. Elsewhere for Gazprom, East Siberia and the

Total gas output was up by 5.0% in 2018

Gazprom’s production was up by 5.4% last year

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Renaissance Capital 20 June 2019

Russian oil & gas

Russian Far East (including the continental shelf), with estimated unexploited natural gas reserves of 7.9tcm, present substantial development opportunities in the medium term, associated with the planned start of gas exports to China in 2019. Gazprom has two main development properties in the region, the 1.2tcm Chayandinskoye field and the 2tcm Kovyktinskoye field. Both fields will have peak gas production capacity of 25bcm pa, with Chayandinskoye planned to be commissioned first, we forecast by the end of 2019, reaching 25bcm by 2023. These fields are substantially more challenging compared with

Gazprom’s traditional resources in West Siberia, as they are characterised by low gas density, low permeability and low initial pressure, as well as the presence of significant volumes of helium.

NOVATEK’s production (excluding Yamal LNG) declined by 2.0bcm last year, while a

12.4bcm increase in Yamal LNG output was the single most significant contributor to the overall production increase in Russia, as the company’s LNG output ramped up to full capacity. Oil companies saw no major changes in their overall gas output in 2018, with a 3.4bcm decline of Rosneft (led by lower output in West Siberia) offset by a 3.7bcm increase at Gazprom Neft, driven by associated gas production at Novoportovskoye field. Most of this gas is reinjected due to lack of infrastructure. Gazprom Neft’s Yamal gas project is supposed to start in 2019, aiming to monetise gas reserves at Novoportovskoye and neighbouring fields.

On the demand side of the gas balance, Gazprom reported that overall Russian consumption – including UGSS shipments, gas consumed locally, gas reaching consumers directly and an unquantifiable amount of gas flared or reinjected – increased by 5.2% in 2018 to 452.6bcm (vs a 1.4% growth in 2017). Pipeline deliveries to Russian consumers increased more modestly, by 3.0%, to 365bcm in 2018. Gazprom reported a small 3.2bcm reduction in storage, while fuel and losses of 40.6bcm were 7% above the level in the previous year.

Russian gas exports (including LNG) were reportedly up by 5.0% last year, with non-FSU shipments growing by 2.9bcm (+1.5% YoY) and FSU deliveries by 3.8bcm (+11.6%), reflecting reduced delivery volumes to Ukraine. Gazprom reported Ukraine exports of 2.7bcm last year, which we attribute to its deliveries to the separatist regions of Donetsk and Luhansk, as Ukraine itself reported it had no Russian gas imports since 2016. NonFSU exports saw increased deliveries to Europe as a result of rebounding demand and declining indigenous production; we expect these will also include deliveries to China from 2020.

Finally, LNG represents a growing share of Russia’s gas balance with the recent launch of NOVATEK’s Yamal LNG project at the end of 2017, complementing previously the only other Russian LNG producer, Sakhalin Energy. Gazprom reported that Russia exported 20.9bcm of natural gas in the form of LNG in 2018, a 35% increase YoY, although we believe the more accurate estimate is 31.9bcm. We forecast that the share of Russian natural gas, used for the production of LNG, will increase to 6.3% of aggregate production in 2020, vs 2.3% in 2018.

Russian deliveries were up by 5.2% last year…

…while exports increased by 6.6%

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Non-FSU exports

Renaissance Capital

20 June 2019

Russian oil & gas

Figure 104: Non-FSU exports, 2002-2018, bcm

	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Total exports	128.6	139.1	149.1	154.6	161.5	151.0	159.1	149.4	152.9	165.0	155.0	177.8	164.5	175.2	194.5	212.7	231.5
Pipeline exports to Europe	128.6	139.1	149.1	154.6	161.5	150.5	158.7	140.9	138.6	150.0	138.8	161.5	146.6	158.6	178.3	194.4	200.9
Austria	5.2	6.0	6.0	6.8	6.6	5.4	5.8	5.4	5.6	5.4	5.2	5.2	3.9	4.4	6.1	9.1	12.3
Belgium	0.0	0.0	0.0	0.0	3.2	0.1	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	1.8
Bulgaria	2.8	2.9	3.0	3.1	2.7	3.4	3.5	2.6	2.7	2.8	2.5	2.8	2.8	3.1	3.2	3.3	3.3
Czech Republic	7.4	7.4	6.8	7.4	7.4	7.0	7.6	6.4	8.6	7.6	7.3	7.3	4.8	4.2	4.5	5.8	6.5
Denmark	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.1	0.3	0.3	0.4	0.7	1.7	1.8	1.7
Finland	4.6	5.1	5.0	4.5	4.9	4.7	4.8	4.4	4.8	4.2	3.8	3.5	3.1	2.8	2.5	2.4	2.6
France	11.4	11.2	14.0	13.2	10.0	9.8	10.4	10.1	9.8	9.5	8.0	8.2	7.1	9.7	11.5	12.3	12.9
Germany	31.5	35.0	40.9	39.9	34.4	39.0	34.7	31.4	34.0	34.0	33.2	40.2	38.7	45.3	49.8	53.4	58.5
Hungary	9.1	10.4	9.3	9.0	8.8	6.4	8.9	7.6	6.9	6.3	5.3	6.0	5.3	5.9	5.5	7.0	7.4
Italy	19.3	19.8	21.6	21.9	22.1	21.0	22.3	19.0	13.1	17.1	15.1	25.3	21.7	24.4	24.7	23.8	22.8
Netherlands	1.4	2.3	2.7	4.0	4.7	4.4	4.4	4.3	4.3	4.4	2.3	2.1	3.5	2.4	4.2	4.7	7.9
Poland	7.2	7.4	6.3	7.0	7.7	7.0	7.9	9.0	9.9	10.3	9.9	9.8	9.1	8.9	11.1	10.5	9.9
Romania	3.5	5.1	4.1	4.5	5.5	3.9	3.6	2.0	2.3	2.8	2.2	1.2	0.3	0.2	1.5	1.2	1.3
Slovak Republic	7.7	7.3	7.8	7.5	7.0	6.3	6.2	5.4	5.8	5.9	4.2	5.4	4.4	3.8	3.7	4.6	5.1
Turkey	11.7	12.9	14.5	18.0	19.9	23.4	23.8	20.0	18.0	26.0	27.0	26.7	27.3	27.0	24.8	29.0	24.0
UK	0.0	0.1	0.0	0.0	8.7	0.5	7.5	7.3	6.8	8.2	8.1	12.5	10.1	11.1	17.9	16.3	14.3
Greece	1.6	1.9	2.2	2.4	2.7	3.2	2.8	2.1	2.1	2.9	2.5	2.6	1.7	2.0	2.7	2.9	3.3
Switzerland	0.3	0.3	0.3	0.4	0.4	0.3	0.3	0.3	0.3	0.3	0.3	0.4	0.3	0.3	0.3	0.3	0.4
Former Yugoslavia	3.8	4.1	4.4	4.7	4.4	3.9	4.2	3.6	3.8	2.3	1.6	1.9	2.0	2.4	2.6	6.0	5.1
Other	0.0	0.1	0.2	0.3	0.4	0.8	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0
LNG exports	0.0	0.0	0.0	0.0	0.0	0.5	0.4	8.5	14.3	15.1	16.2	16.3	17.8	16.6	16.2	18.3	30.6
Sakhalin Energy	0.0	0.0	0.0	0.0	0.0	0.5	0.4	8.5	14.3	15.1	16.2	16.3	17.8	16.6	16.2	17.0	16.9
Yamal LNG	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	0.0	1.3	13.7

Source: Gazprom, Company data, Interfax

Overall, Russian gas exports to non-FSU destinations in 2018 were up by 8.8% YoY to 231.5bcm, based on data provided by Gazprom and including all gas produced at Sakhalin Energy and Yamal LNG for LNG exports.

In 2018, Germany remained Russia’s largest export customer, with delivery volumes up by 10% to 58.5bcm. We understand that, before 2006, and in 2007, the German figure also included most of the UK’s shipments, which were reported separately in 2006 and 20082018. Turkey has maintained its position as the second-largest export destination for Gazprom, with volumes down by 17% to 24.0bcm last year. Italy ranks a close third, with 4% lower offtake in 2018, of 22.8bcm. All three of these key markets exhibit significant volatility of supplies YoY, affected by economic and weather conditions, as well as differences in price levels between Gazprom and other suppliers. The UK stayed in fourth place with an offtake of 14.3bcm (down 12% YoY), followed by France with 5% higher offtake of 12.9bcm. Deliveries to Austria were up by 35% to 12.3bcm in 2018.

Among smaller Western European customers, deliveries were mostly up. Exports to Greece increased by 13% last year to 3.3bcm, while shipments to the Netherlands were up by 67% to 7.9bcm as its domestic production continued to decline. Exports to Finland and Hungary were both up, by 9% and 6%, to 2.6bcm and 7.4bcm, respectively, while Denmark reduced its deliveries by 4% to 1.7bcm. Elsewhere in Central and Eastern Europe, deliveries to Bulgaria were flat while Czech Republic saw growth of 12% YoY. There were also higher exports to Romania and Slovakia (up by 10% and 11%, respectively), while deliveries to former Yugoslavia were down 16%.

LNG exports were up a significant 67% YoY to 30.6bcm, driven by the ramp-up of Yamal LNG production and exports.

Non-FSU exports in 2018 were up by 8.8% YoY to 231.5bcm

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FSU exports

Renaissance Capital

20 June 2019

Russian oil & gas

Figure 105: Gazprom’s 2002-2018 FSU exports, bcm

	2002	2003	2004	2005	2006	2007	2008	2009	2010	2011	2012	2013	2014	2015	2016	2017	2018
Armenia	-	0.3	1.3	1.7	1.7	2.0	2.3	1.6	1.4	1.6	1.9	1.7	1.8	1.8	1.8	2.0	1.9
Azerbaijan	-	-	4.9	3.8	4.0	-	-	-	-	-	-	-	-	0.1	-	0.3	1.0
Belarus	10.2	10.2	13.5	19.8	20.5	20.7	21.1	17.6	21.6	23.3	20.3	19.8	19.6	18.4	18.3	19.0	20.3
Estonia	0.7	0.9	0.9	1.3	0.7	0.9	0.6	0.8	0.4	0.7	0.6	0.7	0.4	0.5	0.4	0.5	0.4
Georgia	-	0.3	1.2	1.4	1.9	0.7	0.5	0.2	0.2	0.2	0.3	0.3	0.3	0.2	0.1	0.1	0.0
Kazakhstan	-	-	0.8	4.0	6.5	0.9	0.8	0.8	0.9	0.9	0.9	4.7	5.1	4.7	4.7	3.0	3.2
Kirgyzia	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0.2	0.3
Latvia	1.1	1.2	1.2	1.4	1.4	1.1	0.7	1.1	0.7	1.2	1.1	1.1	1.0	1.3	1.3	1.8	1.3
Lithuania	2.4	2.9	2.9	2.8	2.8	3.7	3.1	2.7	3.1	3.4	3.3	2.7	2.5	2.2	0.9	1.4	1.4
Moldova	2.1	2.4	2.7	2.8	2.5	2.7	2.7	3.0	3.2	3.1	3.1	2.4	2.8	2.9	3.0	2.7	2.9
South Ossetia	-	-	-	-	-	-	-	-	-	-	-	-	-	-	-	0.0	0.0
Ukraine	26.0	26.0	34.3	15.5	9.1	6.8	-	23.0	36.5	40.0	32.9	25.8	14.5	7.8	2.4	2.4	2.7
Total	42.6	44.1	63.7	54.5	51.1	39.5	31.8	50.8	68.0	74.4	64.4	59.2	48.0	39.9	32.9	33.6	35.7

Source: Gazprom, Gazexport, RPI’s FSU Oil and Gas Statistics Yearbook

Historical data for gas exports to FSU markets are particularly unreliable. There are plenty around, but more often than not they are contradictory. This applies principally to gas exports to Ukraine and Kazakhstan, which are affected by Gazprom’s re-export of Central Asian gas, as well as sales made to and from Ukraine, including its underground storage facilities and deliveries to the separatist regions of Donetsk and Luhansk from 2015.

We estimate that Gazprom’s FSU exports in 2018 increased by 6% to 35.7bcm (from 33.6bcm in 2017). This was driven principally by higher reported shipments to Belarus and the full-year effect from the resumption of gas exports to Azerbaijan in November 2017.

Gazprom reported Ukrainian exports of 2.7bcm last year, which we attribute to its deliveries to the separatist regions of Donetsk and Luhansk, as Ukraine itself reported it had no Russian gas imports since 2016. Starting from 2015, Ukraine has substituted its Russian gas purchases via reverse flows from Slovakia, Hungary and Poland, following a multi-year deterioration in Russia-Ukraine relationships. In 2018, Ukraine imported 10.6bcm of gas from these three countries, down 14.8% from 14.1bcm in 2017.

The recent loss of Russia’s shipments to Ukraine is reminiscent of the years 2005-2009, which saw increasing gas deliveries to Ukraine from the Central Asian countries, notably Turkmenistan, Uzbekistan, Kazakhstan and Azerbaijan, culminating in Russia making no direct deliveries to Ukraine during 2008. Gazprom did play a role in these sales, acquiring Central Asian volumes at the Kazakhstan-Russia border and immediately reselling them to RosUkrEnergo, which was one of the causes of the historical data discrepancies.

FSU exports in 2018 increased by 6% to 35.7bcm

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