Global Oil and Gas Market

The slowdown in global GDP growth in 2018 had an impact on global demand for liquid hydrocarbons (LH)Hereinafter, LH demand indicates the consumption of petroleum products from oil and gas condensate; consumption of oil as fuel; and consumption of hydrocarbon components from unconventional sources (biofuel, GTL, CTL, and etc.).. According to the International Energy Agency (IEA), growth in global demand for liquid hydrocarbons in 2018 slowed to 1.3% (against 1.6% in 2017). World demand amounted to 99.2 mmb per day. The bulk of the increase in LH demand in 2018 was provided by Asian (56% of world growth) and North American countries (36%), which accounted for 35% and 25% of world demand for liquid hydrocarbons, respectively.

According to IEA, global LH outputHereinafter, LH output indicates the production of crude oil, gas condensate, gas condensate liquids, and production of hydrocarbon components from unconventional sources (biofuel, GTL, CTL, and etc.). Global production of liquid hydrocarbons includes the cubical expansion of hydrocarbons during processing. in 2018 grew by 2.7 mmb per day to 100.1 mmb per day. LH production growth accelerated from 0.5% year-on-year in 2017 to 2.8% year-on-year in 2018.

The United States became the leader in LH production growth in 2018, providing 82% of the world output increase. Daily output of liquid hydrocarbons in the United States in 2018 grew by 16.7% year-on-year to 15.5 mmb, including crude oil daily production – by 17.1% to 11.0 mmb. The actual growth rates of crude oil production in the USA in 2018 were above the IEA projections of January 2018 (+11.8% year-on-year).

Another country enjoying significant increase in LH production in 2018 was Canada – by 8.1% year-on-year to 5.2 bbm per day, while Mexico exhibited the fall in this figure by 7.0% year-on-year to 2.1 mmb per day. The country participates in OPEC + agreement to cut oil production, and in 2018 it significantly overfulfilled the obligations under the agreement due to a natural decline in production at the major fields.

In 2018, the production of liquid hydrocarbons in Asian countries continued on the downward track, but at a slower rate of 1.8% year-on-year (3.3% year-on-year); by the end of the year, the daily output of liquid hydrocarbons in the region amounted to 7.6 mmb. The LH production in China in 2018 decreased by 0.8% year-on-year (by 2.8% year-on-year) and amounted to 3.8 mmb per day.

The total daily output of liquid hydrocarbons in OPEC-countries15 OPEC-countries as of 31 December 2018. in 2018 decreased by 0.2% year-on-year to 39.4 mmb, including crude oil daily output – by 0.4% year-on-year to 32.5 mmb. Production trends varied across OPEC-countries. The largest decline in production in 2018 was in Venezuela and Iran. With further year-on-year decline in the daily production of liquid hydrocarbons in Venezuela in 2018 by 28% to 1.5 mmb (-43% against the 2014 level), including crude oil – by 29% 1.4 mmb, the economic crisis in the country got more intensified.

Iran showed a 3.6% year-on-year decrease in LH production to 4.6 mmb per day, including crude oil – by 6.1% to 3.6 mmb per day. The falling production is attributable to the USA withdrawal in May 2018 from the Joint Comprehensive Plan of Actions (JCPOA) to resolve the Iran’s nuclear program issue and the resumption of US sanctions against Iran in August and November 2018.

As a result, in mid-2018 there was a significant over-fulfillment of commitments by countries to cut oil production amid an existing undersupply and expected shrinkage in Iranian oil exports due to sanctions. In June 2018, the regular meeting of OPEC + representatives resolved to strive for a 100% fulfillment of obligations to curtail the output. To this end, crude oil daily output by OPEC + countries was projected to rise by a total of 1 mmb. Thus, the production of liquid hydrocarbons in Saudi Arabia in 2018 increased by 3.1% year-on-year to 12.4 mbb per day, including crude oil production – by 3.7% year-on-year to 10.3 mbb per day.

At the same time, in light of the high growth rates of oil production in the USA (mainly due to shale oil production), in September 2018 the production deficit on the oil market gave way to production surplus. As the sanctions imposed by the USA against Iran turned out to be not as harsh as expected – the USA granted temporary (180 days) easing of its sanctions regime for 8 countries (China (including Taiwan), Greece, India, Italy, Japan, South Korea, Taiwan, and Turkey) in terms of acquiring oil from Iran – the global oil market got more imbalanced. Due to the growing oversupply and falling oil prices in December 2018, OPEC + representatives decided to curb daily oil production from January to June 2019 by a totalFrom 1 January 2019, Qatar has withdrawn from OPEC. Qatar does not participate in the agreement. of 1.2 mmb against the level of October 2018For all countries, except Azerbaijan (September 2018), Kuwait (September 2018), and Kazakhstan (November 2018)..

At the end of 2018, an oversupply of 0.9 mmb per day was recorded in the oil market according to IEA. Commercial crude inventories of OECD countriesOfficial national estimates of crude inventories, IEA data. The discrepancies in crude stock estimates for 2010–2017 as compared to the previous annual report of the Company are due to IEA’s updates and revisions made during the year. in December 2018 amounted to about 1.08 mmb, down 1.7% year-on-year.

As projected by IEAForecast of March 2019., the global demand for liquid hydrocarbons in 2019 will increase by 1.4% year-on-year to 100.6 mmb per day.

The US Energy Information Administration (EIA) forecasts that in 2019–2020 there will still be a small surplus of production of liquid hydrocarbons in the global market. According to EIA estimates, global demand for liquid hydrocarbonsForecasts of global LH demand and supply for 2019–2020 were based on EIA data, since IEA’s Oil Market Report contains global demand outlooks for 2019 only. The discrepancy between EIA’s LH demand and supply data for 2018 and IEA’s data are due to different calculation methodologies. in 2019 will rise by 1.5% year-on-year to 101.4 mmb per day, global production of liquid hydrocarbons – by 1.1% year-on-year to 101.6 mmb per day.

The global demand for gas grew by 4.2% to 3.85 tcmIHS Markit preliminary estimates. in 2018. The global demand growth is supported by the policy of stricter environmental standards in many countries, including those related to CO2 emission monitoring, as well as the development of the gas infrastructure and transportation technologies, specifically in form of liquefied natural gas (LNG). The increasing popularity of gas as a motor fuel is an important trend facilitating the gas demand increase.

In 2018, the gas consumption went up in all regions, except for Latin America, where the gas demand reduced by 0.6% year-on-year and achieved 175.6 bcm (4.6% of the global gas consumption). North America became the leader in the gas demand growth (+62 bcm or +6.5% year-on-year to 1.0 tcm, 26.5% of the global gas consumption) mainly on account of the USA due to higher gas demand in electric-power industry, housing and utilities. Asia-Pacific provided the second largest total growth of the gas consumption (+48.1 bcm year-on-year or +6.1% year-on-year) that reached 830.6 bcm (21.6% of the global consumption).

The demand growth was accompanied by an increase in global gas outputIHS Markit preliminary estimates. to 3.85 tcm, with 27% of the global output attributable to North America, approximately 23% to Russia and CIS, 17% to Asia-Pacific, and 17% to the Middle East. Natural gas production in Europe decreased to 240.5 bcm (-1.9% year-on-year).

The annual export rate is approximately 31% of the natural gas produced all around the world. According to the Company’s assessmentBased on IHS Markit, IEA data., about 1.2 tcm of gas were exported in 2018. Approximately 65% of global gas exports are transported by pipelines, and 35% as LNG. Russia, the largest gas exporter in the world, provided about 21% of global gas supplies to the international market in 2018 (247.5 tcm, +8.3% year-on-year).

A slowdown in the growth rate of the global gas demandIHS Markit estimates. is expected in 2019 and 2020 to 2.4% year-on-year and 1.8% year-on-year, respectively. Gas consumption will reach 3.9 tcm in 2019 and 4.0 tcm in 2020.

In 2018, global LNG exports grew by 9.5% year-on-year to reach 319.7 mmt (or 441.0 bcm)IHS Markit preliminary estimates.. The LNG share in the global natural gas consumption in 2018 was 11.4% (11.3% in 2017)The estimate calculated based on IHS Markit data..

Thereat, the expected LNG surplus production and fall of prices did not occur in 2018. The prices remained high for most of the year.

The LNG demand exceeded the forecasted value mainly due to China that suddenly increased the imports in 2018 (to 55 mmt, +40.6% year-on-year). South Korea did not manage to become the second among the largest importers irrespective of a noticeable growth in demand (up to 45 mmt, +17% year-on-year). LNG demand in Japan, a major global LNG importer, went down by 1.1% year-on-year to 82.9 mmt.

The demand in India jumped to 23.2 mmt (+20.4% year-on-year), in the European countries to 50.1 mmt (+7.0% year-on-year), in the inter-American region to 17.9 mmt (+4.5% year-on-year).

LNG demand in the Middle Eastern and Northern African countriesEgypt, Israel, Jordan, Kuwait, UAE. significantly reduced by 38.9% year-on-year and achieved 9.7 mmt resulting from the discovery and development of gas fields in the region – in Egypt and UAE. Start-up of the Zohr field allowed Egypt to become self-sufficient considering gas and stop LNG imports in October 2018. The field is developed by an international consortium including PJSC NK Rosneft with a 30% stake.

In general, the LNG market expands ahead of schedule and will probably maintain high growth rates in 2019 as well.

The growth was largely attributable to new LNG trains commissioned in 2018:

• start-up of the second train at Wheatstone LNG Plant, and the first train at Ichthys LNG Plant (each line capacity is 4.45 mmt per year) in Australia that has remained the leader by the total LNG exports growth since 2015 (+21.5% year-on-year to 68.5 mmt, 21.4% of the global exports in 2018);
• start-up of the second and third trainsThe first train at Yamal LNG Plant with an annual capacity of 5.5 mmt was commissioned in December 2017. at Yamal LNG Plant having the total capacity of 11.0 mmt per year in Russia (+70.0% year-on-year to 18.9 mmt, 5.9% of the global LNG exports);
• start-up of Cove Point LNG Plant (5.25 mmt per year) in the USA (+63.7% year-on-year to 21.1 mmt, 6.6% of the global LNG exports).

Moreover, Qatar recovered the export rate (+2.3% year-on-year to 78.5 mmt) after its reduction in 2017 and accounted for 24.6% of the global LNG exports.

In 2018, the final investment decisionFinal investment decision (FID) is the decision to proceed with a project. It is usually made after completion of the design stage, obtaining necessary permissions, signing the EPC contract, specifying the investment sources and areas of the project products sales. was made for three projects of 21 mmt total capacity: LNG Canada (Canada), Tortue FLNG (Mauritania/Senegal) and Corpus Christi T3 (USA).

A possibility of fossil fuels substitution with renewables has natural limits, and top global energy agencies expect that the hydrocarbons will be the major energy resources and their weight in the global energy balance will remain largely unchanged until 2040. While oil will continue dominating other resources in global energy consumption, its share, as with coal, will decline in favor of gas, nuclear energy, alternatives, and renewables.

Under IEA’s baseline forecast scenario as of November 2018, global oil demandHerein, oil demand is understood as consumption of petroleum products made of oil and gas condensate, as well as consumption of oil as a fuel. will increase by 11,5 mmb per day year-on-year and reach 106.3 mmb per day by 2040. The bulk of this growth will be attributable to Asia-PacificRegional demand does not include demand from international aviation and bunkering., which will account for approximately 37% of global oil demand (39.5 mmb per day).

In North America, oil demand will decline to 19.3 mmb per day in 2040, and in Europe – to 8.7 mmb per day in 2040. These regions will provide 18% and 8% of global oil demand in 2040, respectively.

According to the IEA’s forecast, global gas demandRegional demand does not include international bunkering. under the baseline scenario will reach 5.4 tcm in 2040 with gas consumption expected to grow in all the regions except for Europe. The major gas consumption in the forecast period will be attributable to Asia-Pacific, where the oil demand will increase by approximately 804 bcm year-on-year to 1.6 tcm exceeding the consumption level of North America (1.2 tcm of gas in 2040, +201 bcm year-on-year) North America will remain the leader in natural gas production (1.33 tcm in 2040, about 25% of global production). The major increase in gas production (approximately 25% of global growth) in the forecast period will be attributable to the Middle Eastern countries (1.0 tcm in 2040).

Russia is one of the three leading global oil producers (USA, Saudi Arabia). Oil and gas condensate production in Russia amounted to 555.9 mmt in 2018, up by 1.7% year-on-year. The production growth in Russia resulted from the resolution on a partial increase of oil production made by OPEC+ countries in June 2018 to offset deficient supply (and expected USA sanctions relative to Iraq) in the oil market.

The major production growth was provided by the Ural Federal District (+1.4% year-on-year to 307.0 mmt; 55.2% of Russia’s production) and the Far Eastern Federal District (+11.8% year-on-year to 31.5 mmt; 5.7% of Russia’s production). Oil production in the Ural Federal District went up in the Khanty-Mansi Autonomous Area (by 0.5% year-on-year to 236.4 mmt; 42.5% of Russia’s production), in the Yamal-Nenets Autonomous Area (by 2.4% year-on-year to 58.0 mmt; 10.4% of Russia’s production), in the Tyumen Region (by 14.5% year-on-year to 12.6 mmt; 2.3% of Russia’s production). Oil and gas condensate production in the Far Eastern Federal District increased in the Sakhalin Region, including shelf (by 8.3% year-on-year to 19.3 mmt; 3.5% of Russia’s production), in the Republic of Sakha (by 17.7% year-on-year to 12.2 mmt; 2.2% of Russia’s production).

In 2018, production decline continued in the Northwestern Federal District (–1.2% year-on-year to 31.6 mmt; 5.7% of Russia’s production) mainly due to a production drop in the Nenets Autonomous Area (–4.3% year-on-year to 16.6 mmt; 3.0% of Russia’s production), as well as in the Volga Federal District (–0.1% year-on-year to 117.3 mmt; 21.1% Russia’s production) largely owing to lower production in the Republic of Bashkortostan (–1.2% year-on-year to 16.1 mmt; 2.9% of Russia’s production), the Samara Region (–5.2% year-on-year to 15.6 mmt; 2.8% of Russia’s production), the Republic of Udmurtia (–1,7% year-on-year to 10.6 mmt; 1.9% of Russia’s production).

In 2018, Russian oil and gas condensate refining volumes increased by 2.5% year-on-year and reached 287.0 mmt, while oil exports increased by 0.3% year-on-year to 257.7 mmt, so the export share in total oil and gas condensate production accounted for 46.4% (–0.6 p.p. year-on-year) by the end of 2018.

Growth in oil and gas condensate exports was related to the expansion of supplies to countries outside the CIS to 239.7 mmt (+0.3% year-on-year). Almost 61% (approximately 145.6 mmt) of export volumes outside the CIS were transported by sea, including 16.1% via Primorsk and 12.7% via the Kozmino oil port. Meanwhile, oil and gas condensate exports to CIS countries in 2018 decreased by 0.2% year-on-year to 18.0 mmt due to lower supplies to Uzbekistan (by 47.2% year-on-year to 36.0 thousand tonnes).

The “big tax manoeuvre” in the Russian oil industry resulted in a 5.5% increase in oil production compared with 2014. Exports grew by 16.3%, while oil refining volumes decreased by 0.7%.

Russia is the second largest gas producer (after the USA) and the first gas exporter in the world.

In 2018, natural and associated gas production in Russia increased by 5.0% year-on-year, reaching 725.3 bcmCDU TEK data are referenced proceeding from the conditions: temperature is 20 degrees Celsius, pressure is 101,325 Pa. International agencies’ data: temperature is 15 degrees Celsius, pressure is 101,325 Pa.. Rosneft produced 64.3 bcm of gas, constituting approximately 9% of the country’s total production.

Gas produced in Russia is both sold on the domestic market and exported.

According to data from the Federal Customs Service of Russia and CDU TEK, Russia’s natural gas exports amounted to 247.5 bcm in 2018, up by 8.3% year-on-year. Total supplies via Gazprom’sPursuant to Federal Law of the Russian Federation No. 117-FZ On Gas Export dated 18 July 2006, the exclusive right to natural gas export shall be granted to the owner of the Unified Gas Supply System or to its wholly-owned subsidiary. pipeline system were 220.6 bcm, 184 bcm of which was exported to countries outside the CIS, resulting in a 3.1% increase year-on-year, while exports to CIS countries totaled 36.6 bcm, up 6.6% year-on-year. A total of 26.9 bcm (up 71.7% year-on-year) was exported as LNG, mostly by members of Sakhalin-2 and Yamal LNG PSAPSA – Production Sharing Agreement. consortiums.

Major gas consumers in Russia include power generation companies, households, housing and utilities, companies in the oil, metals, and agrochemical industries, altogether accounting for almost 80% of the country’s total gas consumption.

Rosneft supplies gas to industrial consumers, as well as to households and municipal utilities.

Rosneft’s selling prices of gas are based on agreements with customers and are not regulated by the Government. The wholesale prices of gas produced by Gazprom and its affiliates and sold to domestic consumers are used as a benchmark. The prices are fixed by orders of the Federal Anti-Monopoly Service of the Russian Federation (“regulated gas prices”). Currently, applicable wholesale prices of gas for all categories of Russian consumers (excluding households) were set by Order No. 1088/18 of the Federal Anti-Monopoly Service dated 3 August 2018, and the wholesale gas prices for households were set by Order No. 609/18 of the Federal Anti-Monopoly Service dated 11 May 2018. Pursuant to the above Orders, regulated gas prices for all consumer categories were indexed by 3.4%.

Regulated gas prices differ by region, generally depending on the distance from the gas production hub in the Yamalo-Nenets Autonomous District.

Gazprom owns the Unified Gas Supply System facilities and provides services for gas transportation via trunk pipelines for independent producers, and transportation charges are set by Orders of the Federal Anti-Monopoly Service of Russia (formerly, the Federal Tariffs Service (FTS))The Federal Tariff Service of Russia was relinquished by Presidential Decree No.  373 dated 21 July 2015, with the FAS of Russia appointed as its successor.. Gas transportation service prices are based on a tariff consisting of two fees, one for the use of gas pipelines and the other for gas pumping. The pipeline usage fee is set for the “inlet – outlet” pair and depends on the distance between these points, while the pumping fee depends on Gazprom’s handling and transportation costs.

Current tariffs were approved by Order No. 216-e/1 of the FTS dated 8 June 2015 and were not revised in 2016, 2017, or 2018.

Gazprom also offers underground gas storage (UGS) services to independent gas producers, and 25 underground gas storage facilities are currently located in the main gas consumption regions. Fees for UGS usage are not regulated and are set by Gazprom on a case-by-case basis for each UGS facility for a storage season (from 1 April to 31 March of the next year). Rosneft makes use of UGS facilities to offset fluctuations in gas consumption by end users.

In recent years, the domestic gas market has been characterized by increased competition for consumers and a gradually expanding share of independent gas producers in the total volume of domestic sales.

The St. Petersburg International Mercantile Exchange was launched on 24 October 2014 pursuant to the order of the Presidential Commission for Strategic Development of the Fuel and Energy Sector and Environmental Safety. In 2018, it continued to develop organized trade in natural gas. Exchange contracts may be negotiated on three balance points (Nadym CS, 622.5 km CS (Lokosovo), Parabel CS) with gas supply during the next month. During 12 months of 2018, natural gas supplies under the contracts signed through stock trading accounted for 15.1 bcm. Since its launch, the Exchange has organized the sale of above 60 bcm of gas.

The indexation benchmark for regulated gas prices is the Forecast of Social and Economic Development of the Russian Federation, published by the Ministry of Economic Development of the Russian Federation.