Gazprom bluefuel vol 8: issue 5 oct 15

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BLUE FUEL October 2015/ Vol. 8/ Issue 5

BLUE FUEL

Gazprom Export Global Newsletter October 2015/ Vol. 8/ Issue 5

Elena Burmistrova: A Good Partnership Has Added Value Page 5

First Ever Gas Auction on Gazprom Export Platform Page 6

Nord Stream 2: The Next Stage of a Success Story Page 10

Gazprom and Wintershall Complete Asset Swap Page 12

Mario Mehren: “Always take Russia into consideration!” Page 13

Gas Hubs in Asia Will Hardly be Unambiguous and Predictable Page 22 www.gazpromexport.com | newsletter@gazpromexport.com +7 (812) 646-14-14 | comm@gazpromexport.com © Gazprom Export

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BLUE FUEL Gazprom Export Global Newsletter

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In this issue October 2015/ Vol. 8/ Issue 5 To Our Readers..........................................................................................................4 Elena Burmistrova: A Good Partnership Has Added Value – Celebrating Srbijagas’ 10th Anniversary................................................................5 First Ever Gas Auction on Gazprom Export Platform............................................... 6 Nord Stream 2: The Next Stage of a Success Story...............................................10 Gazprom and Wintershall Complete Asset Swap....................................................12 Mario Mehren: “Always take Russia into consideration!”.......................................13 New Home for WINGAS............................................................................................16 Constantinos Filis: Europe and Russia at a Critical Energy Juncture.....................17 CNG and LNG in Germany: A Market Ready for the Next Big Move.......................18 IAA Frankfurt 2015: Green Light for the Blue Fuel................................................. 19 East Asian Gas Trading Hubs Could Be a Win-Win Game for Importers and Exporters....................................................................................21 Stairway to Heaven? Gas Hubs in Asia Will Hardly be Unambiguous and Predictable................................................................................22 GM&T Sponsors Sophisticated Laboratory at SUMIS...........................................24 A Weekend at Europa-Park with Gazprom Germania............................................25 Gazprom Export Brings “Victory! 1945-2015” Exhibition to China.......................27 Gazprom Export Sponsors St. Petersburg Open 2015...........................................29

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To Our Readers Over the past 12 months the global LNG industry has seen a gradual shift and rebalancing of market fundamentals. After an extended period of tight supply and demand dynamics, the recent strong supply growth and subdued demand in traditional markets has eased pressure on Asian LNG spot prices. The industry is becoming more competitive in its nature. After some delays, Australia has kicked off a sequence of new liquefaction projects that are scheduled to start operations in the coming year or two across the globe. Estimates indicate that new LNG supplies, including from projects currently under construction or those with final investment decisions in place, will increase by 125 mtpa (or 50% of current supply) within the next six years. New projects in Australia will increase the country’s supply from 30 to 80 mtpa, followed closely by projects from the USA with 65 mtpa of liquefaction capacity already under construction. Aside from large on-shore projects, there has been a surge in the development of floating liquefaction (FLNG) projects. This allows producers to monetise stranded

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gas fields quicker and more effectively than traditional on-shore facilities. Conversely, while demand has been subdued amongst the traditional power buyers in Asia, it continues to evolve elsewhere, with new demand centres developing in the Middle East and South East Asia including Egypt, Jordan, Pakistan and the Philippines. In the near future, demand growth is likely to be at a slower pace and over a shorter horizon, as buyers turn away from longer term contracts and look for more flexible pricing. This will result in LNG producers seeking new markets to supply Floating Storage and Regasification Facilities (FSRUs) and this will shorten the time required for buyers to be able to import LNG, and in turn further increase competition between global regions for access to supply. Away from term-based demand and supply, the spot market continues to grow and develop. Compared to 2004, LNG spot volumes form an ever increasing portion of global trade, rising from 12% to 29% in 2015, with indications that this trend will continue.


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October 2015/ Vol. 8/ Issue 5

Whilst the fundamental demand centres of Asia remain ever present, traditional buyers are becoming ever more empowered by increasing competition, contractual flexibility and diversity of supply. Gazprom, through its dedicated subsidiaries Gazprom Marketing & Trading Singapore and Gazprom Global LNG, is well positioned to take advantage of this new market environment. Over the last five years, GM&T has significantly increased its trading activity across the world, delivering circa 50 cargoes of LNG per year in 2014-15. GM&T continues to grow its portfolio to support the development of equity projects in the Baltic and the Far East. Last year was marked by the signing of a 2.9 mtpa long-term flexible off-take from Yamal LNG starting in 2018. Outside

of Russia, Gazprom has become a pioneer and leader in supporting the development of state-of-the-art FLNG projects. Winning supply tenders in South America and Africa has initiated valuable new business relationships, and emphasised the incredible trust our partners have in Gazprom’s operational excellence and technical expertise gathered from operating the world’s largest, most sophisticated ice-class LNG shipping fleet. Not stopping there, GM&T has been quick to expand its market footprint with new term deals in the Middle East, the Far East and South East Asia, as well as investing in an FSRU in Kaliningrad. By optimising its diversified portfolio and participating in tenders on spot and term basis, Gazprom has firmly established itself as a recognised and respected international LNG player.

Elena Burmistrova: A Good Partnership Has Added Value – Celebrating Srbijagas’ 10th Anniversary Speech by Elena Burmistrova, CEO, Gazprom Export, at the celebration of the 10th anniversary of Srbijagas, 1 October 2015 I am delighted to speak in Belgrade on the 10th anniversary of Srbijagas, our long-term good partner. The history of RussianSerbian cooperation in the energy sphere spans several decades. Supplies of natural gas to the Yugoslavian market via pipeline started in 1978. Many things have changed since then. Neither the Soviet Union nor the Socialist Federal Republic of Yugoslavia do exist anymore, but gas from the Siberian fields and wells continues to flow uninterruptedly to the Balkans, bringing heat and light to Serbian households. Since January 2007, Russian gas has been supplied to Serbia by Jugorusgas, a joint venture of PAO Gazprom and Srbijagas. This is a modern and efficient gas trader. This year we expect to supply 1.5 bcm of natural gas to Serbia which will break the record supply volume reached in 2010.

Establishing our joint venture, UGS Banatski Dvor, became a true jewel of our cooperation with Srbijagas. This underground storage with an active capacity of 450 mcm guarantees reliable gas supplies to the Balkan region and the ability to swiftly respond to peak demand of the “blue fuel” during winter snaps and summer heat. Specialists of our two companies carried out studies that showed that UGS Banatski Dvor can be expanded to up to 1 bcm of active capacity. This will allow us to cover all Serbian demand in terms of underground gas storage capacity. Now together with our Serbian partners we are analyzing the technical specifications of this project. I would like to assure you that Gazprom Export will always remain a reliable and predictable supplier of natural gas to the Balkans. Despite all the political turmoil and turbulences, Russian gas will always be supplied in time to the Serbian market. And our long-term and superb cooperation with Srbijagas is the best proof of that. On the 10th anniversary of Srbijagas let me wish all the professionals that were the pioneers who established the company and who are still contributing to its functioning all success for the future. You have all the prerequisites to be on the winning side. “Kakvo gnezdo takva ptitsa,” as the Serbian proverb says, which can be translated as “an aerie makes the falcon.” We at Gazprom Export highly value the partnership established between our companies and look forward to its further progress and development.

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First Ever Gas Auction on Gazprom Export Platform Excerpts from the press conference by Alexander Medvedev, Gazprom Management Committee Deputy Chairman, and Dmitry Averkin, Gazprom Export Department Head for Gas Exports to North and South-West Europe, 14 September 2015

Alexander Medvedev, Gazprom’s Deputy Chairman of Management Committee (right) and Dmitry Averkin, Head of Department of Gas Export to North and Southwest Europe, Gazprom Export Alexander Medvedev: First of all, let’s look at the qualitative rather than quantitative results of Gazprom Export’s gas auction: we have created, practically from scratch, a system for trading natural gas on an auction platform that comprises the following basic elements: • • • • 6

A legal infrastructure, including a package of documents setting out the rules and terms for holding auctions, and – most importantly – standardized contracts; Standardized products, or lots, which have been put up for auction; A functioning IT infrastructure to support auction trading, based on an electronic data exchange system, including receiving and processing bids for gas; A simple and comprehensible qualification mechanism for participating companies, as well as requirements for the financial situation

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of bidders to ensure guaranteed payment for supplied gas and economic security, with the aim of ruling out any and all falsifications or reputational risks; An evaluation and selection process for companies applying to bid, based on the abovementioned requirements; and A continuously developing set of potential participants in future auctions, if it is decided that they should be held on a regular basis.

The abovementioned platform could later be used to hold gas trading auctions for other delivery points as well. Work is already under way on improving the developed mechanism, with the aim of making it fully electronic, partly in cooperation with the St. Petersburg International Mercantile Exchange (SPIMEX).


October 2015/ Vol. 8/ Issue 5 Although the auction’s timing was less than ideal, given the market situation, the auction succeeded in selling an additional 1.23 bcm of gas for a sum in excess of €250 million. The auction resulted in 48 lots being sold to 16 companies, including both established gas purchasers and new counterparties. The greatest bidder interest – 37 lots – focused on Product A, with gas supplied to the Greifswald delivery point. Ten lots were sold for Product B, with Olbernhau as the delivery point. Product C, supply to the Greifswald delivery point for subsequent transmission to customers via the OPAL pipeline, drew the least interest, with one lot sold. This brings us back to the matter of the OPAL gas pipeline. Although there was every opportunity to book OPAL’s capacity and transport gas onward, as you can see, there was only one buyer for one lot. This is further evidence that problems with access to OPAL’s capacity are entirely contrived, being political rather than economic. The weighted average price for gas sold at the auction did not exceed weighted average prices at the Gaspool trading point. So our price results are higher than our weighted average portfolio for gas exports, gas supply terms in the region, and supply to Germany, the destination of the auctioned gas. The prices were also higher than spot prices. I mean prices for one day ahead, and one month ahead, and for the gas year, and for 2016, and for the winter period. So, whichever way you look at it, our pricing terms ended up higher than what we set. Thus, I’d like to repeat that we are completely satisfied with the auction’s qualitative and quantitative outcomes alike. It has confirmed that we are right to choose a policy of using both established and new methods of operating in the market.

Question: The auction drew some new gas customers. Are you able to name them? Answer: We are bound by confidentiality agreements, so I don’t have the right to tell you who the newcomers were, but we did indeed have some. There were 15 companies with winning bids. Some of them have long-standing relationships with us, some are among the market’s leading traders, and some we have never seen in the market before – complete newcomers.

Q: How many were established partners? A: There were roughly equal proportions of established and new customers. After all, we haven’t dealt with traders as exporters before. The companies dealing with traders were our subsidiaries and affiliates, including Gazprom Marketing & Trading and Wingas. But now we have started dealing with them directly for the first time.

BLUE FUEL Q: You said the prices were higher than your contracts for the coming winter period. Could you be any more specific about prices for October 2015 to March 2016? A: To give you some basis for comparison, I’ll just say that our average export price for all contracts, including oil-indexed contracts and spot-indexed contracts, for the coming winter period – a forecast price, naturally, liable to change – is €195.90/1,000 bcm. I’ll emphasize that this is the forecast price across our whole contract portfolio, oil-indexed and spotindexed, as it stands today, the day of the auction results.

Q: Are you already planning your next auctions, and what kind of new directions might there be? And what about potential cooperation with SPIMEX? A: Regarding future trading, our foreign trade bloc and Gazprom Export will propose to continue holding these auctions – perhaps not in exactly the same form, but modified. This could be done at other delivery points as well. We can already offer new instruments. Regarding cooperation with the exchange, well, an exchange and an auction are separate things. At our auctions, we don’t need anyone else. But we would be delighted to discuss drawing on the exchange’s experience in using modern electronic platform technologies. Because we are open to adopting everything positive, from anywhere in the world, and especially from Russia.

Q: When is the next gas auction likely to be? How much gas are you likely to put up for auction in future? A: There are no templates for this. The market is changing, just as it changed during the rounds of this auction. So those of us who handled this auction – including myself and Gazprom Export Director General Elena Burmistrova – we and our colleagues spent a great deal of time before, during, and after the rounds on planning our auction behavior. There may be different volumes and different delivery points, as I said. We are already preparing for more auctions. You’ll find out the volume and the instruments on offer just like you found out about this auction. We no longer have any need to hold an auction for the coming winter period. Our main task – an economically successful test of the mechanism – has already been achieved. The €250 million in revenue is a bonus. Not just in comparison to the price of our portfolio, which would have to be counted according to price differences. If we had taken this gas out of the portfolio and auctioned it, the economic impact would be simply a matter of price differences. In this case, however, it’s just extra volume. Continues on page 8

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Q: What kind of volume might these gas auctions contribute to your exports in future? A: I think we could easily reach 10% of export volumes. It’s an entirely realistic figure.

Q: And what would be the timeframe for that? A: When we get started – next year, in 2016 – and if the market develops the way we see it going today, even with a conservative supply-demand ratio forecast. After all, we have held an auction at a time when everyone is writing about oversupply and a saturated market. In these difficult conditions, we have sold our gas and sold it well.

So if this situation continues, and if we go by our current export forecast, I wouldn’t rule out being able to sell up to 10% of our gas through the auction system in 2016-2017. Or being able to offer it, at least. Because selling a certain amount at auction is not a goal in itself for us. The price results have given us some food for thought: given the gas oversupply situation, how is it that we have managed to sell gas at a price higher than our contracts and higher than forward or spot prices. So there is something to this. Why is gas selling this way? Because there are supply guarantees and supply reliability. And some interesting instruments on offer.

Energy Experts on Gazprom’s First Gas Auction “The move represents a fairly historic shift in Gazprom’s marketing of gas to Europe (…) It is one of the most high profile interactions Gazprom has had with the concept of putting spare gas into the spot market. There are some good reasons why Gazprom is making this change now.” “Using a market-based trade instrument “will certainly be seen as moving in the right direction.” (Bloomberg) TREVOR SIKORSKI, Head of Gas, Coal and Carbon at Energy Aspects Ltd., a London-based consultancy

“Gazprom clearly sought a higher price (…) They wanted to study the market, to see how the oil-linked price correlates with market rates -- there was no point to sell at a lower cost as Gazprom has sufficient demand in Europe.” (Bloomberg) MAXIM MOSHKOV, Maxim Moshkov, Oil and Gas Analyst at UBS Group AG in Moscow

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“The auction will bring additional volumes to northwest Europe, and as the market is already well supplied and most market participants should have hedged most parts of their physical short position for the winter, it does have a negative effect on the market price (…) Timing of the auction is likely not the best to receive high revenues, auctioning volumes in the second quarter would have been more successful.” (Bloomberg) ANDREAS HOLZER, Senior Portfolio Manager at Montana Energie-Handel GmbH, a German energy trader

“Even Gazprom, the fierce defender of old oil-indexation, has adapted and sold gas at auction. The poorly competitive European gas market is now mostly spot driven.” (Platts) THIERRY BROS, Senior Analyst, European Gas and LNG Markets at Societe Generale


October 2015/ Vol. 8/ Issue 5

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About Gazprom Export’s Gas Auction

Products offered on the gas auction:

The auction for 3.2 bcm supplied during the period Winter 2015/2016 was announced by Gazprom Export on 31 July 2015. On 14 August 2015, the prequalification application process was completed and 39 companies successfully qualified to participate in the auction. On 7, 8, 9 and 10 September 2015, three rounds of bidding were held each day.

Auction A: 48 lots 60 MWh/h each at the Delivery Point

In each round, the bidders received information on the number of lots available in the current round, and the minimal price. During 30 minutes the bidders were expected to provide their offers that include price, desired volume (number of lots) and the chosen product (A, B or C). As a result of the auction, over forty deals with 15 clients were concluded, with a total volume of 1.23 bcm being sold which corresponds to over one-third of the volumes initially offered.

Greifswald NEL with optional for the buyers Delivery Point VP Gaspool for delivery period from 1 October 2015 to 31 March 2016;

Auction B: 57 lots 60 MWh/h each at the Delivery Point Olbernhau II with the option for the buyers to purchase entry capacity to the CZ gas transport network from Gazprom Export for delivery period from 1 October 2015 to 31 March 2016;

Auction C: 22 lots 60 MWh/h each at Delivery Point Greifswald OPAL exempted. Adjacent OPAL capacity with the exit point Brandov can be purchased from the Network Operator for delivery period from 1 October 2015 to 31 March 2016.

The next gas auction will be held at the end of 2015, Alexey Miller, Chairman of the Gazprom Management Committee, announced recently.

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Nord Stream 2: The Next Stage of a Success Story By Ulrich Lissek, Head of Communications, Nord Stream 2 The Nord Stream Pipeline has set benchmarks for large-scale infrastructure projects and the construction of offshore pipelines. Nord Stream 2 will build on this success story by extending the existing pipeline system with two additional lines. This will allow the EU to secure direct access to the world’s largest natural gas resources in Russia – in a safe, environmentally sound way and under sensible economic conditions. As of the beginning of October 2015, the heating period in Europe has started. For Europe’s energy providers this is the most critical time of the year – they have to guarantee a reliable energy supply to the European Union’s market. For this reason, a new group of shareholders lead by Gazprom decided to join forces on the Nord Stream 2 project in September 2015, building on the positive results of the feasibility study which was previously conducted by Nord Stream AG. Under the umbrella of a new project company, the shareholders PJSC Gazprom, E.ON, OMV, Royal Dutch Shell, Wintershall and Engie will implement this project in order to enhance the supply of natural gas to the European market. The feasibility study conducted in 2012 confirmed that extending Nord Stream with one or two additional pipelines was possible from a technical and permit perspective. The Nord Stream 2 twin pipelines will stretch for some 1,200 kilometers across the Baltic Sea, connecting the Russian coast with Germany’s coast near Greifswald. They will have the capacity to deliver 55 bcm of natural gas per year directly to the EU – for more than 50 years. The consortium envisages completion of the two new pipelines by the end of 2019.

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The European Union has committed to limiting CO2 emissions. Due to the CO2-efficient qualities of natural gas, the demand for this versatile fuel within the European Union is projected to grow over the coming years. At the moment, natural gas makes up one quarter of the EU’s primary energy consumption. With the EU looking to cut its CO2 emissions by 40% compared to 1990 emission levels, the only cost-effective and sustainable way to achieve this goal will be to increase the share of natural gas in the EU energy mix, which will lead to a higher demand for gas. However, indigenous gas production in Europe is in an accelerated decline, most dominantly in the North Sea. The United Kingdom, Germany and the Netherlands are all looking at decreasing production. Therefore, the overall gas demand in the EU over the coming decades can only be met by increasing imports. The EU is in reach of numerous suppliers which can help fill the import gap. However, the need for commercially sensible supply options calls for additional gas supplies from Russia, as other existing European gas supply sources will not be sufficient to fill the gap. The experience of the Nord Stream Pipeline has shown that additional reliable long-term supply options by way of pipelines have many advantages. Nord Stream 2 will offer a competitive additional supply option by providing a direct connection between the largest natural gas reserves in the world in Russia’s North and European markets. The Nord Stream 2 pipeline will complement the existing infrastructure, strengthen the EU gas hubs and contribute to the region’s security of energy supply.


October 2015/ Vol. 8/ Issue 5

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Ulrich Lissek, Head of Communications, Nord Stream 2 From April 2009 through August 2015, Ulrich Lissek served as Communications Director at Nord Stream AG. Since September 2015, he leads the communication for Nord Stream 2, overseeing the external and internal communications activities of the company including Public Affairs, Events and Sponsoring. Ulrich Lissek is a journalist by profession (he worked at the newspapers “Kölnische Rundschau” and «Die Welt”). From 1993 to 2006 he worked for the communications department of German telecommunications company “Deutsche Telekom”, which he was leading from 2003 to 2006. Afterwards, he worked for the retail- and tourism company “Rewe Group”.

The project company for Nord Stream 2 is in charge of the future project development and will continue the permit and survey work which Nord Stream AG initiated. At the moment we are further developing the project on a number of levels: planning offshore survey work for route optimization, working on a detailed engineering design and a detailed budget and financing concept as well as preparing the environmental impact assessment (EIA) programs. In addition, the project company is preparing to approach the market to procure key services and materials. As with the first Nord Stream Pipeline, the project will be carried out transparently and in accordance with the most stringent environmental protection criteria. This entails researching and assessing the potential environmental impact of the construction to the Baltic Sea and taking account of the findings when planning the optimal pipeline route. The existing knowledge gained from the construction of the first Nord Stream pipeline system will be beneficial in the technical planning as well as the approval processes ahead. The planning and construction of this ambitious project will be a massive team effort, from receiving the relevant permits and survey work to detailed project planning, to logistics, materials procurement and pipe-laying, and finally commissioning. As a dedicated project company we can build on the experience of Nord Stream AG, accumulate relevant knowledge under one roof, and manage the project’s many facets on its road to completion. The first Nord Stream pipeline was hailed as a milestone in the long-standing energy partnership between Russia and the EU, contributing to the achievement of a common goal – a safe, reliable and sustainable reinforcement of Europe’s energy security. It was completed on schedule and on budget, and received many accolades for high environmental and HSE standards, green logistics, open dialogue and public consultation. Nord Stream 2 will build on this success story and continue this spirit of cooperation and mutual interest between the European Union and Russia.

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Several options for the route and the landfall points were developed within the scope of the feasibility study.

The technical design for Nord Stream 2 foresees the same specifications for the pipes as the existing pipeline system: 48-inch, 12-metre, concrete weightcoated steel-pipes.

The successful construction of the first two Nord Stream Pipelines has shown that from an environmental, technical and economic point of view, natural gas transportation through the Baltic Sea is a sustainable solution to meet the demand for natural gas in the EU.

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Gazprom and Wintershall Complete Asset Swap In return, Wintershall obtained 25.01% in the project developing Blocks 4A and 5A in the Achimov deposits of the Urengoy oil, gas and condensate field. “For over 40 years Gazprom has been a reliable supplier to Europe. Strengthening the company’s position in the European gas storage and sales segment guarantees uninterrupted gas supplies to consumers,” Alexey Miller, Chairman of the Gazprom Management Committee, pointed out. On 1 October 2015 Gazprom and Wintershall completed their asset swap. As a result of the deal, Gazprom increased its share in European gas trading and storage companies WINGAS, WIEH and WIEE to 100%. Gazprom also received a 50% stake in WINZ, a company involved in hydrocarbon exploration and production in the North Sea.

“Following our long-term partnership in the gas trading and storage business, we have transferred it to our partner and are convinced that Gazprom will continue to successfully develop the business. We look forward to further expanding the joint production of natural gas and condensate with Gazprom in Western Siberia,” said Kurt Bock, Chairman of the BASF Board of Executive Directors.

Alexey Miller, Chairman of the Gazprom Management Committee and Kurt Bock, Chairman of BASF Board of Executive Directors at the ceremony dedicated to the 25th anniversary of the cooperation between Gazprom and BASF/Wintershall in the Chinese Palace at the town of Lomonosov (Leningrad Region, Russia).

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BLUE FUEL

October 2015/ Vol. 8/ Issue 5

Mario Mehren: “Always take Russia into consideration!” In early June 2015, Mario Mehren (44) became Chairman of Wintershall, Germany’s largest international oil and gas producer. In an interview with Blue Fuel, Mehren talks about the strategy and goals of the company, and about his plans for the Russian market. BF: Mr Mehren, as CEO you’ve been at the helm of Wintershall since June. How do you feel after the first few months in your new position? MM: I feel very good, thank you! Of course, I’m still getting used to the new tasks that such a position of responsibility entails. There are considerable challenges, especially in such troubled times when old market certainties no longer apply and the whole industry needs to undergo a rethink. Nevertheless, I’ve worked in different positions at BASF and Wintershall for more than 15 years, and I’m therefore very familiar with the business. That’s why I’m also fully convinced that Wintershall has already optimally adjusted to the changed market conditions. We are fit for the future. What’s more, I have already worked trustingly together with many colleagues over the years. That’s made my move to the helm considerably easier.

BF: A particular challenge for the energy industry is the current oil price which has halved within the last year. What should we expect in the coming years?

MM: The massive drop in oil prices has taken the whole industry by surprise. The market is facing fundamental changes. We should certainly not expect oil prices beyond the $100 dollar mark in the short term. And we also do not expect any significant increases in the oil price in the medium term.The general view at the moment is that it will remain lower for longer.

BF: What does the low oil price mean for Wintershall’s company’s strategy? MM: The massive price fluctuations have unsettled many market participants, particularly given that analysts obviously got it wrong in the past with forecasts that were far too high. The future has therefore become somewhat more uncertain. We thus need to adapt to the new realities in order to operate efficiently and profitably even at low prices.

BF: What does that mean in concrete terms? MM: As a producer, we must focus more on the cost side. We need to critically examine the scope and timing of exploration, technology and investment projects. Despite the turbulent market environment, we are nevertheless very well positioned. We have continued our successful course in 2014. For example, we managed to expand our production by 3% to nearly 136 million barrels of oil equivalent and last year we made a profit of over one billion euros for the fourth time in a row.

About Mario Mehren Mario Mehren was named CEO of Wintershall in June 2015. Born in Koblenz, the business graduate is currently interim head of all activities concerning the company’s activities in Exploration and Production in Russia, North Africa and South America. After completing a course in business administration at Saarland University in Saarbrücken, he began his professional career in 1998 as a specialist adviser in BASF’s Group Accounting section in the Corporate Finance Department. In 2001, Mehren became Head of Finance & Accounting at BASF Schwarzheide before moving to BASF in Chile in 2003 to become Managing Director of Finance & Administration. Mehren joined Wintershall in 2006 as Vice President Finance & Information Management in the former “Finance & Russia” department headed by CFO Ties Tiessen.

Mehren is a member of the Supervisory Boards of Wintershall’s Russian joint ventures and was decisively involved in the recent expansion of the cooperation with Gazprom.

Continues on page 14

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We are one of the most cost-efficient producers and will continue to increase our production. Even if we cannot completely compensate for the low oil price, we will maintain our course, remain profitable and continue to make an excellent contribution to the BASF results.

BF: Will oil and gas production remain the core business of Wintershall? MM: Yes, oil and gas production has always been our core business. Nothing will change that. The world will need oil and gas for a long time to come as well as technologically strong companies such as Wintershall, who explore and produce worldwide. Fossil fuels will continue to account for a large part of the global energy mix. We will therefore continue our strategy of growing right next to the source with verve. By 2018, we want to increase our production to 190 million barrels of oil equivalent and invest around 4 billion euros in our oil and gas activities.

BF: Which developments will shape the natural gas market in the long term? That is difficult to predict. Two things have considerably changed the global gas market in recent years and will also necessitate a rethink in the medium term: the increased production of unconventional natural gas and LNG. The increase in unconventional oil and gas production, especially in the USA, has changed the markets profoundly. Within the next 25 years, unconventional natural gas production will increase from the current 17% to over 30% of global production. And this trend will continue to dominate the markets. The importance of LNG will also increase. The IEA, for example, forecasts that liquid gas will make up around 50% of the global gas trade by 2040. LNG will mainly play a role, however, in Asia, where the Asian markets will demand around 70% of the global offer. The greater role of LNG will also have an impact on the European market, but not to the extent and not as rapidly as is sometimes forecasted. This

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is because it is expensive to ship gas, and you have to invest a lot before you do it.

BF: Before you became Chairman, you spent more than four years on Wintershall’s Executive Board as the member responsible for the company’s Russian activities. You are therefore familiar with the country and the business there. How important is Russia for Wintershall? MM: Russia is and will continue to be the most important core region in Wintershall’s portfolio. Our participation in Nord Stream 2 and the just recently concluded asset swap with Gazprom send a very clear signal here: Wintershall will continue to grow at the source. We are jointly implementing this goal with our increased participation in Blocks 4 and 5 in the Achimov formation. Moreover, one must not forget that we have several very successful joint ventures in Russia: at Achimgaz in Siberia we managed to increase the natural gas production in 2014 by 40%! Through the asset swap alone we hope to produce a further 8 bcm of natural gas each year during the plateau production. We are already producing 25 bcm each year in Yuzhno-Russkoye. We will therefore realise our investments in the Achimgaz and Yuzhno-Russkoye projects as planned. That will amount to several hundred million euros by 2018.

BF: Impressive figures! MM: Yes, but it must also be said that we’ve always been convinced that Europe’s supply security is not possible without Russia – this is a geological fact, because this is where there are large mineral deposits in pipeline distance to Europe.

BF: Talking of Europe: Not just the European Commission but also the leaders of various EU Member States have voiced strong criticism about Nord Stream 2. Do you think that the expansion of the Nord Stream pipeline will nevertheless be built with two further strands?


October 2015/ Vol. 8/ Issue 5 MM: As a company, first of all we look at the economic viability of a project and, in this regard, the Nord Stream extension makes perfect sense. This is because Europe needs the gas due to the decline in its own production and the rising proportion of natural gas in the European energy mix. In order to meet the increasing import requirements, we are supplementing the existing infrastructure. We managed to realise the first two Nord Stream strands in record time. Now, we want to repeat this success. I do not believe that the expansion of Nord Stream contradicts European policy. After all, the Baltic Sea is one of the safest transit routes in existence – European consumers can only benefit from that. In addition, the Nord Stream pipeline with its decidedly European shareholder structure is central to ensuring the continent’s supply security, and this also applies to the expansion. The additional capacity will enable us to secure the energy for 50 million European households – for the next 50 years! As I already said: domestic production is decreasing continuously and at the same time the demand is increasing. It therefore makes sense to ensure that the supply is safe, flexible and above all reliable. The arguments speak for themselves, and I am convinced that this view will also prevail in Brussels.

BF: The EU evidently sees that differently at the moment: Europe’s politicians want to reduce Europe’s dependence on Russian energy supplies with the European Energy Union. MM: It is in principle right and proper that the EU is seeking to diversify its transport routes and energy sources. We are therefore taking a close look at Brussels’ plans for the Energy

BLUE FUEL Union. However, until now there have been few concrete ideas as to how the Energy Union should be organised, which measures should be taken and who is ultimately responsible. Here we need to wait and see. In addition, the problem lies in a one-sided debate in which supply security is always equated with less Russia. However, the opposite is the case. Russia has been reliably supplying natural gas to Europe for several decades. The transport infrastructure is very well developed. It would therefore be unwise to move away from Russia as an energy supplier for political reasons. Russia must always be taken into consideration when securing energy supplies for Europe.

BF: Aside from the politics in Brussels, does the strained political situation have a direct impact on your business? MM: When viewed objectively, the end of South Stream, in which we were involved, but also the delayed asset swap between Gazprom and Wintershall were first and foremost due to the political climate. The decisions were understandable give the current overall context. The fact that we have nevertheless completed the asset swap is, of course, a great success under the given circumstances, and provides a clear signal that we are continuing the cooperation. Especially in politically difficult times we need to build bridges, because functioning economic cooperation enables barriers to be overcome. I believe that the renewed joint commitment to the partnership between Gazprom and Wintershall, in particular as far as mutual trust is concerned, can have a positive effect.

Wintershall in Russia Wintershall and Gazprom Dobycha Urengoy each have a 50% holding in the Achimgaz joint venture. Achimgaz produces natural gas and condensate from the Achimov Formation in the challenging Urengoy field, which is located near Novy Urengoy in Western Siberia, about 3,500 kilometres Northeast of Moscow. Initial drilling took place in 2008 and production has been underway since 2011. In 2014, Achimgaz produced 3.4 bcm of natural gas and 1.5 million tonnes of condensate. During the next 30 years, it plans to produce up to 200 bcm and 40 million tonnes of condensate.

The Yuzhno-Russkoye natural gas field is the second major natural gas production project between Gazprom and Wintershall in Siberia. The natural gas deposit was commissioned in 2007. Wintershall has a 35% share in the commercial success of the field via OAO Severneftegazprom. The field already reached a plateau production of 25 bcm of natural gas per year in the middle of 2009. More than 140 production wells are in operation. Around 70 mcm of natural gas are produced there every day.

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New Home for WINGAS of our company,” WINGAS Chairman Gerhard König said following the completion of the move. “Over 400 WINGAS employees, now all united under one roof, can dedicate their efforts to ensuring a secure and reliable supply of natural gas for Germany and its European neighbors.”

The German natural gas supplier and Gazprom’s 100% subsidiary WINGAS has moved into its new company headquarters in Kassel’s city center at Königstor. “The new building will be the foundation for the continued successful development

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The staff had previously worked at various different locations in Kassel. The modern office building has four floors and around 12,000 square meters of space. “We are pleased that we have found such an attractive location here at Königstor,” König explained. “This location in the city center of Kassel is an expression of our deep ties with the city, which has been home to WINGAS for more than 20 years. It is here that our company was founded, it is here that our company achieved strong growth in recent years.”


October 2015/ Vol. 8/ Issue 5

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Europe and Russia at a Critical Energy Juncture By Dr. Constantinos Filis, Research Director at the Institute of International Relations, Athens The recent agreements signed between Gazprom and its European partners on Nord Stream’s extension as well as the recent asset swaps with BASF show that the market needs may transcend political interests. They also highlight that Russia will remain a key energy partner for Europe in the foreseeable future. It is therefore essential to rebuild confidence between the two partners and de-politicise energy relations as Europe’s and Russia’s mutual energy dependence is here to stay. The European energy market is bound to change in the coming years. The EU’s dependence on natural gas imports will increase as North Sea resources deplete and prospects for tapping Eastern Mediterranean gas resources appear more distant. At the same time, new supplies may reach European markets: LNG, for example, is likely to play an increasing role. Shale gas could also cover some needs. Iranian gas is another potential option. However, these supplies could only help bridge the import gap. The largest share of Europe’s gas import needs will continue to be met by Russia, who will remain Europe’s most reliable partner. The Nord Stream extension will soon bring the necessary additional quantities to meet Europe’s gas needs. Coming on top of existing routes such as the Yamal pipeline (delivering 33bcm via Belarus and Poland), Nord Stream 2 will help ensure Europe’s energy security. One of the advantages of the Nord Stream 2 project is the participation of leading and influential European energy companies. The size and maturity of Central European gas markets should allow a large number of countries in the region to benefit from these additional volumes. In contrast, South-Eastern Europe and Greece will remain exposed to the risks associated with gas transit via Ukraine due to the lack of interconnectors.

that Moscow, Kiev, and Brussels ultimately reach a compromise that would minimise the need for this project. Another potential obstacle is that the European Commission tends to be opposed in principle to any project seen as strengthening Moscow’s position, even if it ultimately undermines European interests. Indeed, for Europe, security of supply is as much about diversification of sources as about diversification of routes given that the Ukrainian gas transmission system has proven unreliable on several occasions in the past decade and would require sizeable investment for maintenance and modernisation works. The pipeline’s implementation will require political support and close cooperation between the supporters of the project. While Nord Stream 2 certainly has that, European stakeholders involved in the South European Pipeline do not have Germany’s political clout to rally partners around the project. If these conditions are met, the most realistic route for a European offshoot of TurkStream would be the revival of the Interconnector Greece-Italy, due to the maturity of the permitissuance process, the pipeline’s technical features (short length, low construction costs), and the involvement of fewer and more stable partner countries. France’s indirect involvement, through EDF-owned Edison which has already expressed interest in the project, could help ensure the project materialises and that sufficient gas volumes reach South-Eastern Europe via a safe route. Energy will remain a cornerstone of EU-Russia relations in the coming years. For this partnership to function, both sides will have to demonstrate flexibility and adaptability to new market realities and define a mutually acceptable framework of rules. Most importantly, enhancing Europe’s energy security will require letting market needs prevail over political considerations.

Gazprom’s plan to build TurkStream – a 63 bcm pipeline running via Turkey and reaching Greece – may solve this problem, but some questions remain open regarding the project’s implementation. 16 bcm will be devoted to the Turkish market only, but the volumes reaching Europe may be lower than the remaining 47 bcm if demand continues declining and if Nord Stream 2 is meanwhile implemented. It may also be the case www.gazpromexport.com | newsletter@gazpromexport.com | +7 (812) 646-14-14 | comm@gazpromexport.com

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CNG and LNG in Germany: A Market Ready for the Next Big Move By Dr. Timm Kehler, Director of erdgas mobil GmbH and head of Zukunft ERDGAS e.V.

On 1 July 2015, 140 participants representing economy, politics and society met in Berlin for the annual conference of the Initiative for Natural Gas-Based Mobility in Germany. For the third time, the initiative presented a progress report on natural gas and biomethane as transport fuels, highlighting significant efforts made to promote their use. With over 920 CNG gas stations, infrastructure in Germany has reached a good level of development and is in a process of consolidation. The number of CNG vehicles has grown by about 50 percent within the last four years. In addition, political support has recently been strengthened – the German Bundestag decided to extend the tax benefit for natural gas as a transport fuel. The development of the German market for CNG as a transport fuel and the efforts of erdgas mobil are closely interlinked. The initiative had been formed by the German gas industry to enable joint action and ambitious market development. erdgas mobil has built more than 500 of the 920 CNG gas stations in Germany and is an established player in the market as well as in politics. It enjoys ties with the automotive industry, gas station operators from the oil industry, NGOs and political actors. Both large CNG fueling station operators, such as E.ON, EWE and Gazprom Germania, and

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many local energy providers serving one or two gas stations are members of erdgas mobil. Thanks to the commitment of the erdgas mobil member companies like Gazprom Germania, the efforts are already bearing fruit in a dynamic market. The German CNG infrastructure is the second best in Europe. After Italy with 974 CNG fueling stations, Germany has the next best availability of CNG throughout Europe. Since 2011, the number of CNG stations has not grown much, but their quality has improved: gas stations at the depots of logistical companies or municipal utilities have been replaced by gas stations of large operators like Aral or Shell. This has increased availability and brought a significant improvement of service, including 24/7 opening hours at twothirds of all CNG stations, acceptance of credit cards and additional services like cafes, shops etc. A smartphone app designed by erdgas mobil also navigates drivers to the next CNG station. In total, about 2.3 million MWh of natural gas and biomethane were sold at gas stations in Germany in 2014. The variety of CNG vehicles has reached a new high. In 2011, 8.5 % of the registered new cars were available as a CNG model. In 2014, the CNG offer reached 25 % of the market. Fiat, Opel and Daimler, as well as the brands of the Volkswagen Group, offer CNG engines. Currently there are 100,000 CNG vehicles on German roads. Sustainable mobility is not a vision of the future anymore: compared to conventional vehicles, natural gas vehicles emit about 25% less CO2 and show even larger advantages with regard to NOx, SOx and noise emissions. Nevertheless, as the progress report on natural gas mobility points out, the market for CNG stagnated in the last year.


October 2015/ Vol. 8/ Issue 5 While in 2012 and 2013 the market growth was above 10%, in 2014 the CNG market grew by only 2.3%. This pattern can be explained by three main factors. Firstly, low gasoline and diesel prices reduced the pressure to look for low-cost alternatives. This effect is enforced, secondly, by insufficient price transparency at gas stations: at German gas stations the price per kilogram of natural gas is compared to the price per liter of gasoline, not taking into account the higher energy content of a kilogram of CNG. The third reason is politics: electric vehicles are considered a zero-emission option by EU law, not accounting for the large amount of electricity generated in coal-fired power plants. On the contrary, natural gas in transport is considered a fossil fuel by EU law, not accounting for the large share of bio-methane (about 20% in Germany). Furthermore, it took until June 2015 for the German Bundestag to decide on the extension of tax benefits for natural gas as a transport fuel. Customers may have felt insecure because of a missing reliable basis for planning the purchase of a new natural gas car. Luckily this burden no longer restrains the market. The infrastructure is promising and vehicle availability has never been better. The market is ready for the next big move.

BLUE FUEL New horizons for natural gas mobility have arisen, especially due to the strict limits of the EURO VI emission standard: buses and trucks must decrease their emissions significantly to match the requirements. Natural gas – CNG or LNG – happens to be the sole alternative fuel for this market segment. The key to unlocking this part of the market is the fact that LNG needs significantly less space. With the same tank volume, LNG trucks can travel longer distances than CNG trucks. This is why LNG will have a significant impact on the market, especially when it comes to long-distance freight transport. Currently there are no LNG gas stations in Germany. However, the European Union sees the advantages of LNG for trucks. erdgas mobil is a partner of the project “LNG Blue Corridors” which aims at building 14 LNG gas stations alongside important European transport routes. Moreover, erdgas mobil and the Initiative for Natural-Gas-Based Mobility operate an LNG dialog platform on behalf of the German Federal Ministry of Transport, which aims at developing the market and formulating policy recommendations. Natural gas as a transport fuel stands for environment-friendly mobility. The market is prepared. As soon as transparent pricing shows the advantages of gas mobility to the broader public and LNG for trucks hits the market, natural gas will have a great future in the German and European markets.

IAA Frankfurt 2015: Green Light for the Blue Fuel The 66th International Motor Show IAA took place in the German city of Frankfurt in September 2015, bringing together car lovers, experts and media – and the latest vehicles of today and tomorrow. “Mobility connects” was the motto of this year’s exhibition, perfectly bringing together the issues of clean mobility, lower fuel costs and growing interconnectivity which all applies to natural gas as a transport fuel. Indeed, new vehicles running on natural gas attracted the most attention together with electric cars.

Among others, Audi presented its newly announced A4 Avant in its NGV version, to be available in late 2016. The vehicle, equipped with a 2.0 liter engine and 19kg gas tank, can boast 170hp. It will be the “efficiency leader in the medium class,” as the company’s board member Luca de Meo proclaimed. The A4 g-tron will follow the A3 Sportback g-tron which is already in the market, and join the family of altogether 22 serial NGVfueled models of a number of brands that are already available for purchase.

Continues on page 20

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Another premiere of the IAA 2015 was the Volkswagen Caddy Altrack, powered by CNG as well. It will come to market already this year, and can serve as a family car, a commercial vehicle or a compact MPV. Every fourth car sold in Germany could be an NGV, said Dr. Timm Kehler, Head of German NGV initiative Zukunft ERDGAS e.V. The environment is developed and conducive enough, offering the variety of vehicles and well developed fueling infrastructure. What is still needed is

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political support, including the extension of tax benefits; and the clarity in the pricing units for fueling stations which are set in a regulated way which leads to difficult inter-fuel comparison. As the IAA 2015 highlighted, the natural gas vehicles of today combine environmentally friendly fuel technology with the highest power efficiency. What is more, producers are ready to invest further in natural gas transportation technologies.


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October 2015/ Vol. 8/ Issue 5

East Asian Gas Trading Hubs Could Be a Win-Win Game for Importers and Exporters By Xunpeng Shi, Senior Fellow, Energy Studies Institute, National University of Singapore While gas prices in the US and some Europe markets prices are set by hubs based on gas-on-gas competition, pipeline gas and most LNG imports into East Asia are priced against oil prices. Most of LNG into East Asia, including those small percentages of LNG spot trade, is traded under oil indexed contracts. This oil indexation pricing mechanism encounters controversies, such as failure to reflect the markets’ fundamentals of gas, which are different from those of oil products. The observed significant gap between Asia gas prices and those in the US or Europe also raises the question of an Asian premium. While the US and UK established hub pricing more than a decade ago, continental Europe is slowly transitioning from oil indexation to hub pricing in the gas trade. By the end of 2014, about half of the traded volume of European gas was no longer oil indexed. While the UK’s National Balancing Point (NBP) is a pioneer, the Dutch Title Transfer Facilities (TTF) have recently surpassed NBP as the most liquid spot-trade market in Europe due to the rapid transition of the gas pricing mechanism in continental Europe. Motivated by these controversies and the development in the European continental gas markets, East Asia has started to work on creating its own regional gas pricing through the establishment of gas trading hubs that can generate competitive prices reflecting the region’s own supply and demand fundamentals. Singapore, Japan and China are leading the way. The Asian premium, probably the most important motivation behind East Asian efforts to seek hub prices could be misunderstood. The differential between Asian LNG prices and European Hub Prices only became significant after 2009. While in the US, the Henry Hub (HH) spot price was frequently above oil indexed prices before the emergence of shale gas in 2008. The divergence between Asian gas prices and US and European prices could be due to different reasons such as the shale gas revolution, weak gas demand in Europe and high demand in East Asia partly due to the Fukushima nuclear accident and strong economic growth in China.

Without East Asian indigenous prices, it is hard to deny the argument that the prices difference, if any, is due to different fundamentals between East Asia and Europe or the US. Even if an Asia premium does exist, hub pricing may not be able to reduce the “premium.” Hub pricing will let the market set gas prices. Hub prices are not necessary lower than oil indexed prices, as it has been shown in the case of Europe before 2009, the history of US gas prices in the past 30 years, and the recent prices of gas in East Asia (figure below). If the price of crude oil stays below $70/barrel, spot prices in European market could be above oil indexed prices in Europe over the next few months. Monthly Oil and Gas Prices, 1984-2015

Source: World Bank

Using the Asian premium as a reason to justify hub-building is not only a mistake, but also creates unnecessary barriers. Exporters may worry that the hub pricing mechanism will lead to systematically lower gas prices and thus damage their interests. In this context, it is hardly likely to get the collaboration of exporters. However, a change of pricing mechanisms needs collaborative efforts of both exporters and importers. For importers, the rationale to build gas trading hubs should be properly interpreted. A more reasonable justification for building gas trading hub in East Asia is that hubs can reveal the region’s own gas prices that reflect market fundamentals. Such prices would bring economic benefits by reducing inefficiency, increasing transparency, attracting investments and avoiding geographical and exchange risks from gas markets elsewhere. This motivation is also neutral to both exporters and importers and will be resilient to different levels of oil prices. Such a rationality would also be beneficial for exporters as a correct market price can make the East Asian market sustainable in the long run. Continues on page 22

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Furthermore, East Asian importers do not need to compete for gas trading hubs among themselves. East Asia can host a few different markets and associated trading hubs. Even in the US and continental Europe, there are multiple hubs, although their price may be benchmark against a major hub, such as HH in the US and TTF in Europe. Given the lack of a single currency, the market size of each country, geographic disparity and the difference between China and other LNG dependent countries, there are likely to be multiple price benchmarks and competition is not a necessary outcome. Some simulations show that whether Shanghai hub prices or Tokyo hub prices become the benchmark for gas trading in Northeast Asia, the impact on regional and global gas markets will be identical. Furthermore, there is no benefit for hosting a price benchmark without attracting physical trading activities as such activities are more dependent on market fundamentals rather than manmade conditions given the geography in East Asia.

On the contrary, East Asian countries should cooperate in hub creation. A successful hub needs such preconditions as: a competitive wholesale market, thirdparty access and a sufficient number of market players, including financial players. On the contrary, all East Asian gas markets share similar characteristics, such as a lack of wholesale competition, monopoly, and limited number of market players. As such, significant efforts for market liberalization and reforms need to be made among the importers who can work together to share their experience in creating meaningful gas trading hubs. East Asian natural gas trading hubs could benefit both East Asian gas importers and gas exporters in providing the right pricing signal that will improve the efficiency of gas utilization and long-term sustainability of gas markets. Having natural gas trading hubs could be a win-win game, between exporters and importers as well as amongst importers. Both importers and exporters need to understand the motivations and benefits of gas trading hubs in East Asia and work together.

Stairway to Heaven? Gas Hubs in Asia Will Hardly be Unambiguous and Predictable By Sergei Komlev, Gazprom Export’s head of pricing and contract structuring

if the stores are all closed with a word she can get what she came for.’

When I read reports on the build-up of gas hubs in Asia and the bright and shiny perspectives they open, the evergreen song of Led Zeppelin ‘Stairway to heaven’ comes to my mind. The song is about a lady that was buying a stairway to heaven: ‘When she gets there she knows,

I should not be misinterpreted from the very beginning; I fully support the development of hubs in Asia or any other part of the world. But they are not a universal solution to the problems of the global gas industry, given their current state, the hubs tend to create new problems that require new concerted efforts to resolve them. There should be no illusions in this respect.

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Let us take a look at a major argument in favor of building gas hubs in Asia: they will reveal the true and genuine market prices for the region, which we


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October 2015/ Vol. 8/ Issue 5 do not know at the moment, to the benefit of both the buyer and the seller. I fundamentally disagree with this argument. The conventional believe that gas hubs, irrespective of how small they are compared to the overall market, are capable of generating a price signal indicative of overall supply and demand balance is not justified. According to IHS, in 2014 nearly 75% of LNG was delivered to Asia under long-term oil-indexed contracts; out of the remaining short-term contracts only a small fraction was indexed to JKM, an Asian proxy to hub-indexed gas. By creating hubs Asia will apply a hybrid pricing system similar to that we have in Europe today, but at the immature stage of its development which was characteristic of the European hubs prior to 2009. In Asia and Europe two different wholesale price formation mechanisms – one based on ‘oil-indexation’ and another on ‘supply-and-demand’ – coexist and operate simultaneously. These mechanisms do not operate in parallel but are linked to one another. The continued dominance of oil-indexation (or quasi oil-indexation as in Europe) in long-term import contracts has a noticeable effect on hub prices. It is not a reflection of the equilibrium of the whole market, but only of its uncontracted segment. Contract prices serve as the base benchmark for hub prices within this pricing system. Hub-based prices are derivatives of long-term oil-indexed contract prices though they are not necessarily equal to them. The existing hybrid price formation mechanism in Europe is far from being perfect. It suffers from a permanent ‘paper’ gas glut even at a time when physical supply is tight. The market balance on the European hubs is broken as a result of a combination of two factors. The first factor is a comprehensive financialisation of firm delivery obligations by Gazprom and other exporters by mid-stream companies, who sell these obligations on the forward curve to hedge their price and volumetric risks. Thus, “mid-streamers” beef up hubs with liquidity from the supply side. The second factor is over-contracting. This means that the combined obligations of exporters to deliver gas under longterm contracts agreed to many years ago have far exceeded real physical demand for gas in Europe over the past several years. These two factors set hub prices at a discount to contract prices. The long-lasting inability of hubs to rebalance the European ‘paper’ gas market on their own is an obvious case of market failure. The mismatch between hub and contract prices forces producers to close this gap to protect “mid-streamers,” who are forced to sell at hub prices. These adjustments initiate a selfpropelled process of contract price degradation. Gazprom can hardly convince “mid-streamers” not to flood the market with its monetised firm delivery obligations. Contract renegotiations aimed at fighting over-contracting seem to be a more feasible way to stop the irrational price erosion.

In Asia there is spot and short-term trading but no liquid hubs. At this immature stage of development there will be no permanent discount of hub prices to contract prices. The former will be hovering around the latter, being higher at a time of strong demand and lower when demand is weak. According to BP, the average LNG import price for 2014 in Japan reached parity with the average oil price on an energy equivalent basis. Though there is no forward gas market in Asia, where undelivered contracted gas is being traded like in Europe, the size of un-contracted volumes is so small that even minor imbalances between supply and demand in this market cause extreme changes in price. While demand for gas in Asia has increased in 2014 compared to 2013, spot prices dropped down dramatically even prior to the oil price decline. Volumes of LNG supplied under spot deals and short term contracts in 2014 were 5 million tons higher than in 2013, but that was enough to drive this market out of balance. Considering this high sensitivity, suppliers should be very cautious in order to avoid an oversupply situation in the un-contracted market segment whose varying size depends on the offtake from oil-indexed import contracts. The only party who may win from the hub built-up in Asia will be financial players like banks or commodity brokers who will eventually become an important part of the gas market there. But hybrid pricing mechanisms do not offer them an easy life either as predictability of gas prices in the hybrid system is way lower compared to other commodities whose prices are determined purely by supply and demand. ‘Sometimes all of our thoughts are misgiven,’ the song says. The drop of the JKM index was not driven by overall supply-demand balance: 800

600

400

Bcm

690.5

704.9

175.1

189.6

124.2

125.6

54.1 55.7 18.1

55.6 51.8 19.0

China & Hong Kong Japan

200

Thailand

262.7

263.2

South Korea Taiwan Others

0

2013

2014

Source: Cedigaz

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GM&T Sponsors Sophisticated Laboratory at SUMIS In September 2015, a delegation from Gazprom Marketing & Trading (GM&T) headed by Frédéric Barnaud, Executive Director, Global LNG, Oil & Shipping, attended the opening ceremony of a new Main Engine Laboratory at the Admiral Makarov State University of Maritime and Inland Shipping (SUMIS). The Laboratory has been established by GM&T with support from GM&T’s partner companies Dynagas, Sovcomflot and Transas. The new laboratory has been fitted with one of the world’s most advanced main engine simulators. It is capable of modelling all the operations in the engine room of a modern vessel powered by a tri-fuel (fuel oil, diesel oil and LNG) diesel electric or slow speed diesel power plant in all operating modes (free water, waves, ice conditions, speed alteration and emergency). The simulator will be used by the cadets of the SUMIS Marine Engineering Faculty and will complement their theoretical studies and sea-going practice. This training will enable SUMIS graduates to work on the most sophisticated merchant

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vessels such as LNG tankers, product and chemical tankers as well as offshore support vessels. Nikolai Grigoriev, Managing Director of Shipping, GM&T said, “We have been working closely with the University to support the development of worldclass Russian shipping specialists as part of our comprehensive programme to increase Russian content in Gazprom’s fleet. We hope that this modern laboratory will contribute to the training of the University’s cadets and their development into highly qualified seafarers who will be in demand for our various projects.” Since 2010, Gazprom Marketing & Trading, a subsidiary of PAO Gazprom, has helped with the creation of six sophisticated laboratories at the University (the Tanker Operations, High Voltage, Electric Motor and Main Engine laboratories and Welding and Turning/ Lathe classes) and assisted in organising sea-going practice for more than 220 cadets and full time employment for more than 60 graduates of the University with the world’s leading tanker shipping companies.


October 2015/ Vol. 8/ Issue 5

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A Weekend at Europa-Park with Gazprom Germania

Welcome to Germany’s largest amusement park: Europa-Park is located on a 900,000 m² site in Rust, in the state of BadenWürttemberg, in the culturally and geographically attractive Germany-Switzerland-France tri-country border area. EuropaPark’s more than 100 attractions and shows, 11 rollercoasters, and 13 European theme areas attract up to 5 million visitors annually. Europa-Park regularly surprises visitors with new highlights, of which recent additions have included the blue fire Megacoaster powered by Gazprom, a catapult rollercoaster, and the Gazprom Experience Energy interactive attraction. Gazprom has been premium partner to Europa-Park since April 2009, and the Experience Energy attraction has been helping to give park visitors an understanding of Gazprom’s core businesses ever since, with visitors learning through multimedia and interactive games how natural gas is produced and transported, and about the diversity of natural gas usage.

Gazprom Germania also organizes a variety of events together with Europa-Park with a view to supporting German-Russian culture; these events include the annual Russian Festival and Gazprom Day.

Rollercoaster fans meet Schalke legends This year, the 5th Gazprom Day was held on 8 August and featured a strong football theme. As a partner to Germany’s largest amusement park, Gazprom offered visitors a rare opportunity to experience Bundesliga football team FC Schalke 04 up close, thereby establishing a connection between two of its most important sponsorship projects. This year’s guests included world-cup winner Olaf Thon, former professional footballers Martin Max and Mathias Schober, and, for the first time, FC Schalke 04’s Old Boys XI.

Continues on page 26

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The event delighted visitors who were able to have their photos taken on the FC Schalke 04 manager’s bench, test their skills at the goal wall, or take a VIP ride on the blue fire Megacoaster powered by Gazprom catapult rollercoaster, and around 200 FC Schalke 04 fans arrived wearing Schalke jerseys. Over 30,000 park visitors braved temperatures of over 30 degrees to show off their football talent at the various game modules. The prizes included VIP tickets to an FC Schalke 04 home game and tickets to Europa-Park. Meanwhile, football freestylers, acrobats, and dancers provided entertainment for football fans and non-football fans alike. The Schalke stars had already laced up their boots for a good cause the day before for Schalke’s Old Boys XI’s game against a Europa-Park team representing the region at S.V. Rust’s grounds. The teams proved to be a good match for each other, drawing 3-3 after an exciting game. The proceeds from ticket sales were donated to charities Einfach helfen e.V. and Santa Isabel e.V. – Hilfe für Kinder und Familien in the presence of the Mack family, which established Europa-Park 40 years ago.

Rollercoaster setting for energy meeting Gazprom Day was also used to help promote Gazprom’s core businesses. To coincide with Gazprom Day, 20 experts from government, business, and academia met for a meeting entitled “Germany’s energy transition: A model for the world?” The speakers included Dr Felix Christian Matthes (Öko-Institut), Lutz Gawehns (Gazprom Germania), and Dr Timm Kehler (erdgas mobil), who were welcomed to the event at Gazprom’s Experience Energy pavilion by Gazprom Germania’s Director of Corporate Communications Burkhard Woelki and Europa-Park’s Michael Mack. The event kicked off with an interesting presentation from Dr Felix Christian Matthes, Research Coordinator for Energy & Climate Policy at Öko-Institut, on the current debate surrounding the energy transition. “The structure of the industry is undergoing fundamental change, driven 26

by a volatile market environment,” said Matthes. He warned of a paradox in the energy transition: “The expansion of clean energy has not reduced CO2-heavy electricity generation. On the contrary – electricity generation from lignite coal continues to increase. The main challenge facing the natural gas industry is to draw attention the role it can play in the long-term, beyond the bridging function it currently plays.” Without a gradual increase in natural gas’ share of German electricity generation, Germany’s monumental energy transition cannot be successful – particularly when it comes to Germany’s climate goals, said Matthes. “Natural gas is energy-efficient, economical, and environmentally friendly – all characteristics that make it well-placed to help overcome the challenges of the energy transition,” he added. The next speaker, Lutz Gawehns, Deputy Director of Storage at Gazprom Germania, stressed the significant role to be played by natural gas storage facilities in securing natural gas supply. “Particularly during peak demand, Gazprom Germania’s natural gas storage facilities ensure stability and security throughout Europe. Only storage facilities can smoothen peaks and troughs in seasonal consumption and ensure that supply meets demand at all times, and that’s why we’re making significant investment in gas storage projects,” said Gawehns. Mobility also has a role to play, said Dr Timm Kehler, Chairman of erdgas mobil. The automobile industry is increasingly backing natural gas vehicles, which could have a significant impact on the energy transition. “Our future auto needs can be met with natural gas and biogas in the tank. This is already practicable and affordable,” said Kehler in his presentation. The implementation of Germany’s energy transition would significantly impact the international debate, the conference heard. Ultimately, the conference agreed, everybody will benefit: Germany’s energy transition is the best example of innovative, efficient technologies, machinery, and products “Made in Germany”.


October 2015/ Vol. 8/ Issue 5

BLUE FUEL

Gazprom Export Brings “Victory! 1945-2015” Exhibition to China On 26 August 2015, the National Art Museum of China unveiled an exhibition of works by Russian artists dedicated to the 70th anniversary of the end of World War II. The exhibition “Victory! 1945-2015” is part of a series of official events commemorating the 70 years since the end of World War II. The project was initiated by the Russian Culture Ministry with financial support provided by Gazprom Export.

The exhibition is taking place in China’s largest museum and covers the entire 70 year-period – focusing also on the postwar development period. It depicts how the themes of war and victory, which almost became synonyms in Soviet art, developed and how artists representing different generations conceptualized World War II as the crucial event in modern history.

The opening ceremony was attended by Mr. Ding Wei, Chinese Vice Minister of Culture, Mr. Andrey Denisov, Russian Ambassador to China, Mr. Wu Weishan, Director of the National Art Museum of China and Vice Chairman of China Artists Association, Mr. Xu Li, Vice President and Secretary General of China Artists Association, Mr. You Qingqiao, Party Secretary of the National Art Museum of China, Mr. Yang Zhi, Party Secretary of the Foreign Cultural Liaison Office of the Ministry of Culture, Mr. Jin Shangyi, Honorary Chairman of China Artists Association, Mr. Zhan Jianjun, Honorary Chairman of China Oil Painting Society, Mr. Shao Dazhen, Professor of China Central Academy of Fine Arts.

Visitors can experience how Russian artists dealt with the main stages of the War, liberation and the ideological clash with Nazism. The exhibition is comprehensive and panoramic in its embrace of the topic. The largest Russian state museums, including the Tretyakov Gallery, the Russian Museum and the Central Museum of the Armed Forces loaned some of the best artworks from their collections to the exhibition “Victory! 1945-2015.” Many important works have also been contributed from the collections of the State National Museum and Exhibition Center “ROSIZO” and Russian regional museums.

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The public will see such well-known paintings as “Parade on the Red Square on 7 November 1941” by Konstantin Yuon, “Partisan’s Mother” by Sergey Gerasimov, and “Letter from the Front” by Alexander Laktionov among many other renowned artworks. The Chinese capital hosted the exhibition until the middle of September; when it was transferred to the Hubei Provincial Museum, Wuhan and from the beginning of 2016 the exhibition will be shown at the Jiangsu Art Gallery, Nanjing.

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“I would like to specially thank Gazprom Export for the sponsorship of this impressive large-scale project. Only thanks to Gazprom Export’s generous financial support we were able to implement the project on time,” said Tatyana Gorodkova, Chief Curator of the Tretyakov Gallery. “Victory! 1945-2015” presents masterpieces of Russian art to the Chinese public to strengthen and develop cultural ties between the two countries. This project is part of a long-term initiative by the Gazprom Group to promote cultural understanding between Russia and the nations of the Asia-Pacific region.


October 2015/ Vol. 8/ Issue 5

BLUE FUEL

Gazprom Export Sponsors St. Petersburg Open 2015 Gazprom Export became the title sponsor of the event. “This decision was well-considered. Gazprom Export in its sponsorship policy does not only uphold the principle of corporate social responsibility. We are also committed to the atmosphere of competition which is a natural part of the energy market and very much reflected in the mobility and dynamism of our staff, who are young in age and in spirit,” said Elena Burmistrova, Director General of Gazprom Export. “I am very pleased to commend the success of this significant, and let me emphasize, international by scope and scale tournament. Various factors form the basis for success, but what is most important is that this success is an inspiration for all of us, one for all and everyone. The credit goes to the players, the chair and line umpires, the audience and, of course, the organizers of the tournament,” she noted. In 2015, four Russian players took part in St. Petersburg Open – Teymuraz Gabashvili, Mikhail Youzhny, Evgeny Donskoy and Andrei Rublev as well as sportsmen from the top ten of the global ranking – Tomas Berdych from the Czech Republic and Milos Raonich from Canada.

In September 2015, St. Petersburg hosted the 20th edition of the ATP World Tour 250, the St. Petersburg Open 2015. Sponsored by Gazprom Export, the tennis tournament was launched back in 1995 when Russian tennis player Yevgeny Kafelnikov lifted the trophy after beating Guillaume Rau. At that time the prize totaled $300,000. The history of the contest saw Russian top players excel, with Yevgeny Kafelnikov and Mikhail Youzhny winning the singles competition one time each and Marat Safin winning the tournament twice. The UK’s Andy Murray, Olympic champion of London 2012, won the tournament in St. Petersburg twice. Meanwhile, Yevgeny Kafelnikov was the only tennis-player who won both the singles (1995) and doubles (1996 and 2001) competition in the history of St. Petersburg Open.

24-year-old Canadian World No. 9, Milos Raonich, took the upper hand over Portuguese player Joao Sousa in the final, winning in 2 hours 6 minutes – 6/3, 3/6, 6/3. Raonich scored 19 aces and lost only one service game (in the second set of the final) during the whole tournament. This is the first title for Raonich this season and his seventh overall. He ended his three-match losing streak in the ATP finals. This year the prize money of St. Petersburg Open amounted to $1,030,000. Within the ATP World Tour 250 it can be compared with the tournaments in Doha ($1,129,815) and Kuala-Lumpur ($937 835), and this gives ground to hope for an upgrade of the event to the ATP World Tour 500.

In 2014 the tournament was planned to be transferred to Tel Aviv to mark the celebration of President of Israel Shimon Peres 90th jubilee. But due to the unstable situation in the Middle East the tournament was cancelled. In 2015 the contest returned to St. Petersburg and the SIBUR Arena was chosen as the venue for the tournament. Alexander Medvedev, Deputy Chairman of the Management Committee of PAO Gazprom, became the new Director General of St. Petersburg Open.

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