June 23, 2021

Published in corporate Gazprom Magazine Issue 6, written by Sergey Pravosudov

Last year was dominated by the pandemic of the new coronavirus infection. Quarantine and epidemiological response measures caused a decline in economic activity and consumption, including energy consumption. According to the Organization for Economic Co-operation and Development (OECD), the global economy shrank by 3.4 per cent in 2020. Preliminary estimates show that natural gas consumption across the world fell by 1.3 per cent last year. However, the situation has improved in 2021.

Reserves

The Gazprom Group is the absolute leader among Russian and foreign energy majors in terms of gas reserves. Since 2005, the Company's gas reserves replenishment has been consistently exceeding the volumes of gas production. Every year, Gazprom is providing the bulk of reserve additions of natural gas in Russia through geological exploration.

As estimated by DeGolyer and MacNaughton, the Gazprom Group's proven and probable hydrocarbon reserves under the international PRMS standards as of December 31, 2020, amounted to 24.5 trillion cubic meters of natural gas, 1.1 billion tons of gas condensate, and 1.4 billion tons of oil, including the share in the reserves of entities in which Gazprom has investments classified as joint operations (20 billion cubic meters of natural gas and 149 million tons of oil).

The audit was conducted for the assets encompassing 92 per cent of gas reserves, 94.7 per cent of condensate reserves, and 95.8 per cent of oil reserves of the Gazprom Group in the А+В1+С1 categories. The increase in proven and probable gas reserves took place thanks to the new geological model and the revised development plans for the Antipayutinskoye, Srednetyungskoye, Orenburgskoye, Pestsovoye (Jurassic and Achimov deposits) and Kruzenshternskoye fields. The audit also covered for the first time a new gas and condensate field, Khambateyskoye. Exploratory drilling and follow-up exploration continued at such oil fields as Zapadno-Chatylkinskoye and Alexander Zhagrin.

As of December 31, 2020, the Group's А+В1+С1 hydrocarbon reserves in Russia stood at 33.6 trillion cubic meters of natural gas, 1.5 billion tons of gas condensate, and 2 billion tons of oil. The aggregate amount of the Group's А+В1+С1 hydrocarbon reserves translates into 244.96 billion barrels of oil equivalent.

Last year, based on the results of the auctions in which it participated in 2019, the Group obtained three licenses to perform prospecting, exploration and production of hydrocarbon feedstock at the Sopochny (Yamal-Nenets Autonomous Area, or YaNAA), Khambateysky (YaNAA and Ob Bay in the Kara Sea) and Severo-Yamburgsky (YaNAA) blocks with a total worth of RUB 20.4 billion. The Sopochny licensed block, which is located next to the Group's promising fields in the Ob and Taz Bays, has considerable resource potential. With the newly-acquired Severo-Yamburgsky licensed block, Gazprom Neft will be able to expand the development of the Achimov oil deposits in the Yamburgskoye field.

The high-quality resource base allows Gazprom to keep the cost of exploration at a low level. The average cost of replenishing the explored reserves is about RUB 30 per barrel of oil equivalent.

The Group's share in the А+В1+С1 hydrocarbon reserves of the associated entities and joint ventures (including the share in the reserves of RusGazAlyans) stood at 1.1 trillion cubic meters of natural gas, 110.1 million tons of gas condensate, and 595.7 million tons of oil, which translates into 12.1 billion barrels of oil equivalent in total.

In 2020, 3D seismic surveys covering 5,900 square kilometers were conducted in Russia. Prospecting-and-exploratory drilling was performed across 162,000 meters of rock, 34 oil and gas wells were constructed, and 27 wells gave an inflow during testing.

The increase in А+B1+C1 hydrocarbon reserves in Russia as a result of geological exploration performed last year totaled 486.3 billion cubic meters of natural gas, 17.2 million tons of gas condensate, and 9.5 million tons of oil. The biggest addition in gas reserves – 224.2 billion cubic meters – was achieved at the Leningradskoye field, which is based on the continental shelf in the Kara Sea. Three fields were discovered: 75 Years of Victory, a gas field on the Russian continental shelf in the Kara Sea; the Solkhem oil field in the Khanty-Mansi Autonomous Area – Yugra (KhMAA); and the Tsentralno-Uranskoye oil field in the Orenburg Region, as well as 22 new deposits at the fields discovered earlier in the YaNAA, KhMAA, the Russian continental shelf in the Kara Sea, and the Tomsk Region.

As for entities investments wherein are classified as joint operations, exploratory drilling was performed across 8,100 meters, three prospecting-and-exploratory wells were constructed, and 3D surveys covering about 700 square kilometers were finished. During follow-up exploration, approximately 600 meters were covered by sidetrack drilling. Discoveries included the Novo-Salymskoye field in the KhMAA and three deposits in the KhMAA and the Tomsk Region.

The success rate of exploration in 2020 was 20,700 barrels of oil equivalent per meter drilled.

Production

In 2020, the Gazprom Group produced 454.5 billion cubic meters of natural gas and associated petroleum gas (APG). The level of beneficial use of APG in Russia across the Gazprom Group rose to 92 per cent (from 90.1 per cent in 2019), mainly as a result of work performed at the facilities of Gazprom Neft.

The Gazprom Group produced 16.3 million tons of gas condensate and 47.1 million tons of oil last year.

The launch of mobile treatment units helped boost oil production at the oil rims of the fields of the Nadym-Pur-Taz region (Yen-Yakhinskoye, Zapadno-Tarkosalinskoye, and Pestsovoye). Production from these assets totaled 1.47 million tons of oil in 2020 (versus 0.23 million tons in 2019). In foreign countries, the Gazprom Group is focused on exploration and development of oil and gas fields, provision of oil and gas services, as well as search for and acquisition of new oil and gas assets.

Throughout last year, the Gazprom Group continued geological exploration in Algeria (El Assel project), Bolivia (Azero project), and Vietnam (Block 112, Blocks 129–132), as well as in Serbia and Romania (projects of NIS). Within the geological exploration projects where the Gazprom Group is an operator, the bulk of work took place in Serbia. Exploratory drilling covered 8,800 meters, and four productive prospecting-and-exploratory wells were constructed.

Under the Agreement of Strategic Cooperation between Gazprom and Uzbekneftegaz, geological exploration continued at four investment blocks in the Republic of Uzbekistan. A total of RUB 3.1 billion was spent on geological exploration outside Russia in 2020.

The Gazprom Group takes part in a number of oil and gas projects at the hydrocarbon production stage. In terms of natural gas production, the largest of these projects concern the development of the Moc Tinh and Hai Thach fields in Vietnam (the Gazprom Group's share is 49 per cent), as well as the Incahuasi field within the Ipati and Aquio blocks in Bolivia (the Gazprom Group's share is 20 per cent). In terms of oil production, the largest projects are the Badra field in Iraq (the Gazprom Group's share is 30 per cent) and the Sarqala field (the Gazprom Group's share is 45 per cent) located within the Garmian block in Iraq (Kurdistan).

In February 2020, the Sillimanite field in the British and Dutch sectors of the North Sea came onstream (the Gazprom Group's share in the project is 19.9 per cent). Gazprom's subsidiary NIS produces hydrocarbons mostly in Serbia, as well as in Angola, Bosnia and Herzegovina, and Romania. In addition, the Group has stakes in its associate Wintershall AG (the Gazprom Group's share is 49 per cent), which produces oil in Libya, and in Wintershall Noordzee (the Gazprom Group's share is 50 per cent), which explores and produces hydrocarbons in the British, Danish and Dutch sectors of the North Sea.

When selecting foreign projects, the Gazprom Group is guided by the target rate of return. In the oil business, Gazprom's target regions include the Balkans (Serbia, Romania, and Bosnia and Herzegovina) and the Middle East.

Transportation

Domestic gas supplies and exports are carried out via the one-of-a-kind Unified Gas Supply System (UGSS), which has no equivalent in the world. Russia's UGSS is a centrally operated system of natural gas production, processing, treatment, transportation and storage. The UGSS includes the world's longest network of high-pressure gas trunklines, which covers European Russia and Western Siberia. In addition, the Group owns gas trunklines in the east of Russia: Power of Siberia, Sakhalin – Khabarovsk – Vladivostok, and Sobolevo – Petropavlovsk-Kamchatsky. As of December 31, 2020, the combined length of gas trunklines and gas pipeline branches operated by the Group's gas transportation subsidiaries in Russia totaled 176,800 kilometers.

During 2020, a total of 625 billion cubic meters of gas were supplied into Gazprom's gas transmission system (GTS) in Russia. In December 2019, Gazprom started pipeline supplies of Russian gas to China via the Power of Siberia gas trunkline. Overall, 4.1 billion cubic meters of natural gas were delivered via the pipeline last year (versus 0.33 billion cubic meters in 2019).

The companies of the Gazprom Group own gas transmission systems in Belarus (Gazprom Transgaz Belarus), Armenia (Gazprom Armenia), and Kyrgyzstan (Gazprom Kyrgyzstan), providing supplies of natural gas to consumers in these countries.

Last year, more than 59 billion cubic meters of gas were transported via the Nord Stream gas trunkline, with 13.5 billion cubic meters supplied via the TurkStream gas trunkline. In addition to TurkStream's first string, which brings Russian gas to Turkish consumers, its second string started supplying gas to Bulgaria, Greece, North Macedonia, and Romania in 2020.

UGS facilities

The prompt, uninterrupted, safe, reliable and efficient operation of Russia's UGSS relies on a network of underground gas storage (UGS) facilities. The peak and base UGS facilities located in the main gas consumption areas ensure the stable operation of the UGSS, smoothing out seasonal, weekly and daily fluctuations in gas demand. The use of UGS facilities helps enhance the reliability of UGSS process equipment and optimize the capital intensity and process parameters of the GTS.

The UGS facility network provides over 20 per cent of gas supplies to Russian and international consumers during the heating season. In Russia, the Gazprom Group operates 23 UGS facilities in 27 geological structures: 17 in depleted gas fields, eight in aquifers, and two in salt caverns. As of December 31, 2020, the aggregate working gas capacity of Russian UGS facilities was 75.1 billion cubic meters. At the start of the 2020–2021 withdrawal season, the operating gas reserves in Russian UGS facilities stood at 72.3 billion cubic meters.

To ensure the reliability of gas exports, the Gazprom Group uses gas storage capacities located within and beyond the former Soviet Union (FSU). In the FSU countries, Gazprom operates UGS facilities in the Republic of Belarus (Pribugskoye, Osipovichskoye, and Mozyrskoye) and the Republic of Armenia (Abovyan underground gas storage station). In 2020, the Gazprom Group injected 0.99 billion cubic meters of natural gas into FSU-based UGS facilities and withdrew a total of 0.82 billion cubic meters.

Gazprom makes extensive use of gas storage capacities located beyond the FSU: in Austria (Haidach), Germany (Jemgum, Rehden, Katharina, and Etzel), Serbia (Banatski Dvor), the Czech Republic (Damborice), and the Netherlands (Bergermeer). By the start of the 2020–2021 withdrawal season, the aggregate working gas capacity used by Gazprom Export in European UGS facilities located beyond the FSU (including under long-term leases) amounted to 8.6 billion cubic meters, with a maximum daily deliverability of 136.2 million cubic meters. In addition, by the start of the 2020–2021 withdrawal season, Gazprom Export had medium-term commercial contracts for the use of UGS capacities in Slovakia, Austria, and Hungary with an aggregate working gas capacity of 2.5 billion cubic meters and a maximum daily deliverability of 18.5 million cubic meters.

Gas distribution

The Gazprom Group ensures the reliability and safety of Russia's gas distribution systems and exercises corporate control over compliance with industrial safety requirements during their operation. Gas distribution activities are carried out by Gazprom Gazoraspredeleniye, its subsidiaries and affiliates, and Gazprom Transgaz Kazan. As of December 31, 2020, the Group's gas distribution subsidiaries and affiliates owned and operated a total of 817,100 kilometers of gas distribution networks in Russia.

In 2020, the Gazprom Group's gas distribution subsidiaries and affiliates transported 223.2 billion cubic meters of gas via their gas distribution networks. Natural gas was supplied to:

• 28.3 million apartments and private households;
• 33,000 industrial facilities;
• 9,800 agricultural facilities;
• 353,600 utility facilities.

The Gazprom Group provides gas distribution services in Armenia (Gazprom Armenia) and Kyrgyzstan (Gazprom Kyrgyzstan). In Armenia, the gas penetration rate is 96 per cent, with natural gas supplied to 636 localities. In Kyrgyzstan, gas is supplied to 46 localities, and the nationwide gas penetration rate is 35 per cent.

Gas infrastructure expansion in Russian regions is one of the Group's most ambitious and socially significant activities. The governments and administrations of the constituent entities of the Russian Federation take part in these activities alongside the Group.

The Program for gas infrastructure expansion in Russian regions for 2020 covered 66 constituent entities of the Russian Federation, for the purposes of which RUB 39.3 billion was allocated under the investment program of Gazprom Mezhregiongaz. In addition, gas pipeline branches and gas distribution stations were constructed as part of Gazprom's investment program with the aim of regional gas supply and gas infrastructure expansion. In 2020, RUB 16.7 billion was spent to that end. Thus, last year saw a total of RUB 56 billion invested in the expansion of gas supply and gas infrastructure in Russian regions.

In 2020, construction of 141 inter-settlement gas pipelines with a total length of 2,190 kilometers was completed in 39 regions. Conditions were created to connect 200 localities and 63,100 households and apartments to gas. The efforts for gas infrastructure expansion in the regions are considerably hampered by the outstanding debt for gas supplied and the failure by regional administrations to fulfill their obligations to prepare consumers to receive gas.

Last year, regional administrations fulfilled almost 90 per cent of their obligations to build gas distribution pipelines, 74 per cent of obligations to prepare households and apartments to receive gas, and 75 per cent of obligations to prepare boiler houses.

The gas penetration rate grew by 1.3 p.p. last year compared to 2019, reaching 71.4 per cent in Russia at large, 73.7 per cent in urban areas, and 64.8 per cent in rural areas by December 31, 2020.

Last year, gas supply and infrastructure expansion programs for 2021–2025 covering 67 constituent entities of the Russian Federation were drawn up and approved with due consideration of proposals from regional administrations. Gazprom is going to allocate RUB 526.1 billion for gas infrastructure expansion. It is planned to build more than 24,000 kilometers of gas pipelines (up by 2.5 times versus 2016–2020) and create conditions to bring gas to 3,600 localities (up by 2.7 times versus 2016–2020). The programs for gas supply and infrastructure expansion in Russian regions envisage two investment projects for off-grid supply with the use of natural gas liquefaction technologies in the Tomsk and Sakhalin Regions.

Provided that the programs for gas supply and infrastructure expansion in Russian regions for 2021–2025 proceed exactly as planned, the country's gas penetration rate will rise to 74.7 per cent. In 35 regions, gas grid expansion will be completed to the maximum extent technically possible. According to the Company's estimates, gas consumption in Russia will grow by 18.6 billion cubic meters per year, including an increase of 1.9 billion cubic meters in gas consumption by household consumers.

Gas use in vehicles

The production and marketing of natural gas as a vehicle fuel are among the Gazprom Group's strategic activities in Russia. The Company actively develops a network of compressed natural gas (CNG) filling stations and consistently expands its own fleet of vehicles fueled by natural gas.

Gazprom Gazomotornoye Toplivo was assigned as the sole operator for developing the natural gas vehicle (NGV) market in the Russian Federation. The subsidiaries of the Gazprom Group and Gazprom Gazomotornoye Toplivo have 348 CNG stations with an annual capacity of over 2.6 billion cubic meters on their books. In 2020, 31 facilities of the Group's NGV refueling infrastructure were put in operation.

Last year, the amount of CNG sold in Russia totaled 1.1 billion cubic meters, of which 842.4 million cubic meters, or 77 per cent, were sold by the Group.

As a result of cooperation with the Russian Ministry of Energy, the NGV Fuel Market Development subprogram was approved. The subprogram, which forms part of the Energy Sector Development state program of the Russian Federation, envisages unprecedented government support for the NGV market. The overall funding between 2020 and 2024 might amount up to RUB 35 billion, including subsidies for the construction of NGV refueling infrastructure, conversion of vehicles to gas, and support of NGV manufacturers.

In 2020, over 1,000 NGVs were purchased along with eight mobile NGV refueling units. As of December 31, 2020, the NGV fleet comprised some 13,300 vehicles, and the mobile NGV refueling infrastructure consisted of 176 units. The use of the more eco-friendly motor fuel (methane) made it possible to reduce pollutant emissions by 34,540 tons.

The Gazprom Group is also active in the European NGV market, where it operates through its wholly-owned subsidiary Gazprom NGV Europe. As of December 31, 2020, this subsidiary owned NGV refueling infrastructure in Germany (47 CNG stations) and the Czech Republic (14 CNG stations). CNG is also sold by NIS, a Gazprom Neft Group company, in the Serbian market through its own four CNG stations (as of December 31, 2020). Last year, the Gazprom Group sold 13.6 million cubic meters of natural gas as a vehicle fuel in Germany, the Czech Republic, and Serbia. Despite the COVID-19 restrictions, the year 2020 saw annual CNG sales rise in each of the countries where the Gazprom Group is present, which demonstrates that the demand for gas as a vehicle fuel is growing.

In the FSU, the subsidiaries of the Gazprom Group own 39 CNG stations. These facilities are operated by Gazprom Kyrgyzstan (four CNG stations), Gazprom Armenia (seven CNG stations), and Gazprom Transgaz Belarus (28 CNG stations). In 2020, CNG sales through CNG stations in the FSU totaled 71.7 million cubic meters.

Processing

In 2020, the Gazprom Group processed 30.6 billion cubic meters of natural and associated gas, tolling arrangements excluded. Gazprom Pererabotka and Gazprom's gas production subsidiaries purified and stabilized 18.47 million tons of unstable gas condensate. The oil and stable gas condensate that underwent primary processing by the Gazprom Group made up 53.69 million tons. Aggregate production totaled 49.39 million tons of petroleum products, 3.57 million tons of liquefied petroleum gases, and 4.47 million cubic meters of helium.

Marketing

Non-FSU countries, including Europe, are a traditional export market that secures high profit margins for the Group. Gazprom retains a third of the European market, which puts it far ahead of its peers. In 2020, the Gazprom Group exported 219 billion cubic meters of gas beyond the FSU.

Last year, most of the Group's gas sales went to the Netherlands, Germany, Italy, Turkey, and France. The bulk of the natural gas sold beyond the FSU is exported from Russia under long-term contracts of Gazprom Export. Gazprom remains committed to long-term contracts as the basis for its export activities.

In response to changes in the European market, Gazprom Export is gradually expanding its presence in the market of short-term gas transactions, including in gas trading, as well as investing in joint ventures active in European countries, some of which deal with end consumers.

The subsidiaries of the Gazprom Group sold 21.4 billion cubic meters of gas directly to European end consumers over the course of 2020.

In 2020, large-scale LNG sales to foreign markets from the Gazprom Group's trading portfolio more than doubled to 7.44 million tons (10.92 billion cubic meters), with the Asia-Pacific region accounting for 49 per cent and Europe for 37 per cent. India was the largest buyer of the Gazprom Group's LNG last year, with a total of 1.84 million tons of LNG supplied. The geography of LNG shipments expanded significantly, spreading to 14 countries, including five new entries: Belgium, France, Greece, the Netherlands, and Singapore.

The Gazprom Group expanded its trading portfolio by reaching a plateau in LNG supplies under the contract with Yamal Trade and increasing spot volumes. The sales and purchase contract with Yamal Trade provides for the annual supply of 2.9 million tons of LNG for the period of 20 years. In addition, the Gazprom Group's supply portfolio is supplemented with LNG from the Sakhalin II project (in which the Group holds 50 per cent plus one share) under the contract with Sakhalin Energy in the amount of up to 1 million tons of LNG per year, as well as from the Cameroon LNG project under the contract with Perenco Cameroon whereby the Gazprom Group receives all LNG produced by the plant (1.2 million tons per year).

In the short and medium term, Gazprom is going to replenish its LNG trading portfolio with new projects: the LNG production, storage and shipment complex near the Portovaya CS and the complex for gas processing and liquefaction near the settlement of Ust-Luga.

Russia is Gazprom's priority gas market. The Company consistently ensures the reliability of gas supplies, fully aligning them with demand. Gazprom is the largest supplier of natural gas in the Russian market. In 2020, the Gazprom Group sold 225.1 billion cubic meters of gas to consumers in the Russian Federation.

Last year saw the Group sell 31.2 billion cubic meters of gas to the FSU. The Group buys natural gas in Turkmenistan, Kazakhstan, and Uzbekistan. The weighted average purchase price of Central Asian gas decreased in 2020.

Future expectations

Overall for 2020, natural gas consumption in European countries declined by 2.8 per cent to 544 billion cubic meters as a result of warmer winter and the measures against COVID-19. The biggest drop was observed in the power sector, due to growth in solar and hydropower generation, and at industrial facilities, partly due to restrictions that caused a reduction in economic activity.

On the supply side, a decline was seen in both total imports (-7.9 per cent) and indigenous gas production (-7.7 per cent). The most significant decline in indigenous production occurred in the Netherlands (-28.3 per cent) as a consequence of another restriction imposed on production from the major gas field Groningen. LNG supplies went down as well (-1.9 per cent).

China is one of the most dynamic gas markets worldwide. Responding to higher gas consumption, Chinese companies both actively ramp up their own production and increase gas imports. Gas consumption in China was on the rise in 2020 as well, despite the coronavirus pandemic and the economic slowdown. Last year's consumption growth rate in the country is preliminarily estimated at almost 6.5 per cent. State environmental programs focused on environmental protection serve as the main driver of rising gas consumption despite the economic downturn. One of these programs, Battle for Blue Skies, aimed to convert over 7 million households in northern China from coal to clean energy, including natural gas, by the 2020 heating season. Imports are crucial to meeting China's gas demand. According to preliminary estimates, China imported 141 billion cubic meters of gas in 2020, up by 5.4 per cent against 2019.

Last year saw an increase in gas supplies via the Power of Siberia gas pipeline. In December 2020, another section of gas transmission infrastructure came onstream in China to distribute the gas received through Power of Siberia, which will, among other things, help expand Russian gas supplies to the Beijing area.

Despite the coronavirus pandemic-related drop in global energy consumption in 2020, the key factors shaping the global energy industry in the recent years have remained unchanged: continuing population growth with a concomitant increase in energy consumption, as well as rising concern of many countries about the environment and climate change.

Energy consumption across the world is going to continue its upward climb and add 22 per cent by 2040 versus 2020, while the share of natural gas and renewable energy is going to actively expand, accounting for over 78 per cent of the total energy consumption growth worldwide.

Global gas consumption is expected to rise by about 19 per cent from 2019 to about 4.9 trillion cubic meters in 2030, and by 29 per cent to 5.3 trillion cubic meters in 2040.

In the medium term, the recovery of gas demand in Europe will be supported by initiatives of various EU countries to shut down coal-fired power plants and to use gas in transportation. Annual gas consumption in this region will stay within the range from 550 to 575 billion cubic meters in the next decade. China will remain the global leader in gas consumption gains. Domestic gas production in China will not keep pace with increasing consumption, which will boost imports.

It is not surprising that the volume of natural gas exported by Gazprom to non-FSU countries rose by 27.2 per cent to 84.2 billion cubic meters in the first five months of 2021. This May, historic records were set for this month in terms of gas supplies to Germany and Italy. At the same time, gas supplies to China via the Power of Siberia gas pipeline continue to grow. Over this period, Gazprom's supplies to the domestic market increased by 17 per cent (or by 18.8 billion cubic meters).

The Company's gas production went up by 16.2 per cent in the first five months of 2021.