Page 123 - RusRPTMay21

Although the upcoming Carbon Border Adjustment Mechanism (CBAM) is unlikely to cover the oil and gas sector, we believe the growing price of emissions is supportive for the pace of the coal-to-gas replacement in Europe. That, in turn, cements Gazprom’s near- and medium-term fundamental position. Buy reiterated.
CO2 price reached $56/t. CO2 prices have historically been characterised by their relatively high volatility (Figure 1). Nevertheless, since October 2020 they have demonstrated a sustainable growth trend, adding 13% since early April and 42% YTD to reach historical highs of $56/t.
Neutral for oils... We have already incorporated CO2 costs of $50/t into our oil and gas company models starting from 2023, which results in an average EBITDA decrease of some 3% for the industry.
Although this is 11% lower than the current CO2 spot, we doubt that investors are going to be concerned, given the still relatively low potential effect and the fact that oil and gas is not supposed to be the part of the pilot CBAМ stage, which is to be launched in the EU in 2022 (according to the summary of stakeholder responses to the public consultation for a carbon border adjustment in the EU, published by the ERCST in November 2020). However, CO2 price growth is an indicator that the general ESG story is gathering steam, which in itself is not a positive development for hydrocarbon producers in the long run.
... supportive for gases. Nevertheless, higher CO2 prices add to the gas demand from European power gencos, which will accelerate their move from dirtier coal to gas, in our view. This, in turn, is supportive for gas prices in the region (Figure 3). We believe that Gazprom is the main beneficiary of the current environment. The company is able to increase gas deliveries in response to higher demand and is also benefiting from the still elevated gas prices.
Russia ranked among the top three European Union’s largest liquefied natural gas (LNG) suppliers in 2020, the European Commission said in a quarterly report on the European gas market on Friday. Russia supplied 17bn cubic meters of LNG to the E.U. in the year, being third after the US with 19bn cubic meters and Qatar with 18bn cubic meters.
Gazprom approved a feasibility study for the 50bcm Soyuz-Vostok pipeline. The pipeline will connect Russia and China via Mongolia (Interfax, Kommersant). Analysis: Only one piece of the puzzle for raising exports to China. Negotiations over the so-called Western Route gas contract go back 15 years, and the shape of the project has changed repeatedly, while the two
123 RUSSIA Country Report May 2021 www.intellinews.com