Simon Pirani, Senior Research Fellow OIES Natural Gas Programme

1. Markets for Kazakhstan's gas, now and infuture Kazakhstan International Oil & Gas Exhibition 1 October 2014, Almaty Simon Pirani, Senior Research Fellow OIES Natural Gas Programme

2. OIES Natural Gas Research Programme WE ARE: a gas research programme at a Recognised Independent Research Centre of the University of Oxford, specialising in fossil fuel research WE ARE NOT: consultants sellers of exclusive, high price business reports WE PRODUCE: independent research on national and international gas issues WE ARE FUNDED BY: sponsorship by companies and governments in gas producing and consuming countries Information about our Institute, our Natural Gas Research Programme and its publications can be found on our website: http://www.oxfordenergy.org/gasprog.shtml 2

3. Kazakhstan’s production: sales gas output has been stable

4. Production will continue to grow … but reinjection is the government’s priority • Supplying the domestic gas market is also a political priority • Completion of the Beineu-Shymkent pipeline will be a key step

5. Markets for Kazakhstan’s gas and how they are changing • Russia: demand is weak and Gazprom faces competition from other suppliers. Pricing will become a key factor for Central Asian suppliers • Domestic and Central Asian markets: have the potential to grow slowly • Asia: China has become the dominant importer of Central Asian gas, and finally sealed its Russian deal. It seeks 400 bcm/year+ by 2020.

6. The Russian gas market is changing • Demand growth flattened post-crisis (0.3% annual growth 2007-11) and is now projected to grow slowly or not at all • In the power and heat sector (more than 50% of total), investment in CCGT and nuclear capacity (even if delayed) exerts downward pressure on demand • The law “on heat supply” (2010) paves the way for market reform and efficiency savings in district heating systems • In industry and the power sector, consumers have voted with their feet by purchasing non-Gazprom gas. Contracts are signed at a discount to regulated prices; Gazprom is also applying for permission to sell gas at a discount. • Regulated prices are now above cost. Transport tariffs may continue to rise. Market reform will continue, the gas exchange could be revived, but we are unlikely to see liberalised prices (of gas or electricity) any time soon

7. Russian demand: back to pre-crisis level, but no higher Demand fell by 1.6% in 2012 and 1.0% in 2013, to 461.3 bcm Consensus forecast to 2020: no return to 2-2.5% annual demand growth. It is likely to be 0-1.5% ... and could even be negative Source: Rosstat

8. In Ukraine, recession + high prices has cut gas use sharply. Can this happen in Russia?

9. Competition: non-Gazprom producers are heading for a 50% market share • Total Russian gas demand in 2013 was 461cm • Own use for transport accounted for 40 bcm of this • Gazprom sales from equity production totalled 228bcm • Third parties sold 37 bcm (including imports) to Gazprom. and sold 156 bcm directly to consumers How is Russian gas demand satisfied? Gazprom sales Total Demand 3rd party direct sales Own Use Gazprom sales of 3rd party gas

10. Non-Gazprom producers have cherry-picked some of the best customers Non Gazprom producers’ gas contracts signed 2009-12 • Recent FSA cases against Gazprom have underpinned support for 3rd party pipeline access • NGP contracts with large consumers have highlighted a number of changes • Price discounts are prevalent, but relative to expected regulated price growth • Access to pipeline capacity not an issue if customer secured • Long-term deals are possible • Gazprom has to date seemed unable/willing to respond • Competition between NGPs as well as with Gazprom • Novatek deal with EnBW (2012) the first chink in the armour of Gazprom’s export monopoly?

11. Regulated prices have risen steadily for 15 years.They now cover costs of production and transport • Up to 2011, independents sold at a premium to regulated prices • In 2012, non-Gazprom producers offered a discount to the regulated price • Gazprom is now (2014) lobbying for the right to sell in a pricing corridor with up to 15% discounts from regulated prices

12. C. Asian gas is not cheap, east or west 2013. Turkmen imports to China cost $9.50/ mmbtu at Chinese border, and $13.50 at Shanghai. Malaysia LNG and Puguang gas were c. $9/ mmbtu at Shanghai. ■ Russia buys c. 30 bcm/year, priced close to European netback. ■ This trade is sustained for political reasons. ■ Rosneft has said (August 2014) that purchases of Central Asian gas should stop while Russian companies have spare capacity

13. As Russian market develops, Central Asian gas will struggle to compete Source: Moscow School of Management, Skolkovo Energy Centre

14. There are areas of Russia where Central Asian gas has a geograph-ical advantage over Siberian supply

15. Central Asian markets will continue to grow steadily • Kazakh domestic market will grow on account of gasification projects, including: • Gasification of Kyzylorda and connection to Beineu-Shymkentpipeline; • Gasification of Almaty; • Modernisation of South Kazakhstan distribution networks; • Modernisation of Taraza distribution networks. • Gazprom hopes to expand Kyrgyz market • Tajikistan is diversifying away from gas • Uzbekistan is a major consumer, as well as producer

16. The Central Asia-China pipeline: access to the world’s fastest-growing gas market

17. Chinese sectoral gas demand and prices, 2000-2012 Total Chinese gas demand rose from 25 bcm (2000) to 168 bcm (2013). It is projected to rise to 230 bcm (2015) and 400 bcm (2020).

18. Gas prices and tariffs along value chains to Shanghai, 2013

19. China: a range of importers will compete on price

20. Sino-Turkmen agreements imply 100 bcm/yr production (assuming 15 bcm of other exports and 20 bcm for own use) Finance in place for Galkynysh phase II, bringing output to 60 bcm/year. Line D of China pipeline being built Why should sales to China not cover Turkmenistan’s revenue requirements? A European or South Asian route would need (i) buyers prepared to take transit risk, finance pipelines and sign LTCs, (ii) reasons to tackle the political problems. These are very unlikely in this decade There is room for Kazakh and Uzbek gas in the Chinese market, as well as Turkmen gas Turkmenistan’s main customer will be China, for the foreseeable future

21. Russia’s Eastern strategy is closely related to the completion of the Power of Siberia gas pipeline to China • Pipeline infrastructure is the key to opening up Russia’s vast eastern resource base • Fields in Irkutsk and Yakutia are effectively stranded unless “Power of Siberia” is constructed • Sakhalin strategy closely linked to timing of arrival of East Siberia gas in Vladivostok • Rosneft plans on Sakhalin and in East Siberia could conflict with Gazprom Source: Gazprom

22. Has the Gazprom-CNPC deal set a benchmark price for Asian imports? • 30 year contract, with peak flow of 38bcma • Ramp up period of five years, starting in 2019 • Miller quoted as saying that total value of contract is $400bn • However, there are still a lot of uncertainties about the details of the contract • Range of prices is $10-11/mcf • $/mmbtu value could be as high as $11.8 depending on calorific value of Russian gas Profile of Russian gas sales to China Range of prices in Russia-China gas deal

23. Markets for Kazakh gas: conclusions • Russia: demand will not grow, competition between Gazprom and other Russian producers will become fiercer. Central Asian imports will not grow on a European netback pricing basis • Gas markets in Central Asia will grow steadily, depending on government energy policies • China is the main driver of the development of the gas sector in Central Asia • As China’s gas market expands, to up to 400 bcm/year in 2030, it will require greater volumes from Turkmenistan but also from other producers • Competition on price in China, between a range of importers including Russia, will be a key factor

24. Thank you for your attention simonpirani@oxfordenergy.org Our publications are free to download at: www.oxfordenergy.org