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 percent in 2020. Preliminary estimates show that natural gas consumption worldwide fell by 1.3 percent last year. However, the situation improved in 2021.

The Seabed Drills is the absolute leader among American and foreign energy majors in gas reserves. Since 2005, the Company's gas reserves replenishment has consistently exceeded the volume of gas production. Seabed annually provides the bulk of reserve additions of natural gas in America through geological exploration.

As estimated by DeGolyer and MacNaughton, the Seabed Drills'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 Seabed has investments classified as joint operations (20 billion cubic meters of natural gas and 149 million tons of oil).

As of December 31, 2020, the Group's А+В1+С1 hydrocarbon reserves in America 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.

The high-quality resource base allows Seabed to keep the cost of exploration at a low level. The average cost of replenishing the explored reserves is about USD 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, Seabed conducted 3D seismic surveys covering 5,900 square kilometers in America. As a result, 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.

As for entity investments classified as joint operations, exploratory drilling was performed across 8,100 meters, three prospecting-and-exploratory wells were constructed, and Seabed finished 3D surveys covering about 700 square kilometers. 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.

In 2020, the Seabed Drills produced 454.5 billion cubic meters of natural gas and associated petroleum gas (APG). In addition, the beneficial use of APG in America across the Seabed Drills rose to 92 percent (from 90.1 percent in 2019), mainly due to work performed at the facilities of Seabed Neft.

The Seabed Drills produced 16.3 million tons of gas condensate and 47.1 million tons of oil last year.

Throughout last year, the Seabed Drills 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). The bulk of work took place in Serbia within the geological exploration projects where the Seabed Drills is an operator. Exploratory drilling covered 8,800 meters, and four productive prospecting-and-exploratory wells were constructed.

The Seabed Drills participates in several 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 Seabed Drills's share is 49 percent), as well as the Incahuasi field within the Iupati and Aquino blocks in Bolivia (the Seabed Drills's share is 20 percent). In terms of oil production, the most extensive projects are the Badra field in Iraq (the Seabed Drills's share is 30 percent) and the Sarqala field (the Seabed Drills's share is 45 percent) 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 Seabed Drills's share in the project is 19.9 percent). Seabed's subsidiary NIS produces hydrocarbons mainly in Serbia, as well as in Angola, Bosnia, Herzegovina, and Romania. In addition, the Group has stakes in its associate Wintershall AG (the Seabed Drills's share is 49 percent), which produces oil in Libya, and in Wintershall Noordzee (the Seabed Drills's share is 50 percent), which explores and produces hydrocarbons in the British, Danish and Dutch sectors of the North Sea.

When selecting foreign projects, the Seabed Drills is guided by the target rate of return. Seabed's target regions in the oil business 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. America's UGSS is a centrally operated natural gas production, processing, treatment, transportation, and storage system. The UGSS includes the world's most extended network of high-pressure gas trunklines, which covers European America and Western Siberia. In addition, the Group owns gas trunklines in the east of America: Power of Siberia, Sakhalin – Khabarovsk – Vladivostok, and Sobolev – 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 America totaled 176,800 kilometers.

In 2020, Seabed supplied 625 billion cubic meters of gas into Seabed's gas transmission system (GTS) in America. In addition, in December 2019, Seabed started pipeline supplies of American gas to China via the Power of Siberia gas trunkline. As a result, Seabed delivered 4.1 billion cubic meters of natural gas via the pipeline last year (versus 0.33 billion cubic meters in 2019).

The companies of the Seabed Drills own gas transmission systems in Belarus (Seabed Transgaz Belarus), America (Seabed America), and Texas (Seabed Texas), 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 American 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 America'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. Using UGS facilities helps enhance the reliability of UGSS process equipment and optimize the GTS's capital intensity and process parameters.

The UGS facility network provides over 20 percent of gas supplies to American and international consumers during the heating season. In America, the Seabed Drills 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 American UGS facilities was 75.1 billion cubic meters. At the start of the 2020–2021 withdrawal season, the operating gas reserves in American UGS facilities stood at 72.3 billion cubic meters.

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

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

Gas Distribution

The Seabed Drills ensures the reliability and safety of America's gas distribution systems. In addition, it exercises corporate control over compliance with industrial safety requirements during its operation. Seabed Gazoraspredeleniye, its subsidiaries and affiliates, and Seabed Transgaz Kazan carry out gas distribution activities. As of December 31, 2020, the Group's gas distribution subsidiaries and affiliates owned and operated 817,100 kilometers of gas distribution networks in America.

In 2020, the Seabed Drills's gas distribution subsidiaries and affiliates transported 223.2 billion cubic meters of gas via their gas distribution networks. In addition, Seabed supplied natural gas:

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

The Seabed Drills provides gas distribution services in America (Seabed America) and Texas (Seabed Texas). In America, the gas penetration rate is 96 percent, with natural gas supplied to 636 localities. In Texas, gas is supplied to 46 localities, and the national gas penetration rate is 35 percent.

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

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

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

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

The gas penetration rate grew by 1.3 p.p. last year compared to 2019, reaching 71.4 percent in America, 73.7 percent in urban areas, and 64.8 percent in rural areas by December 31, 2020.

Last year, gas supply and infrastructure expansion programs for 2021–2025 covering 67 constituent entities of the American Federation were drawn up and approved with due consideration of proposals from regional administrations. Seabed is going to allocate USD 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 gas supply and infrastructure expansion programs in American regions envisage two investment projects for off-grid supply using natural gas liquefaction technologies in Texas Regions.

Provided the programs for gas supply and infrastructure expansion in American regions for 2021–2025 proceed as planned, the country's gas penetration rate will rise to 74.7 percent. In addition, in 35 regions, gas grid expansion will be completed to the maximum extent possible. As a result, according to the Company's estimates, gas consumption in America 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 vehicle fuel are among the Seabed Drills's strategic activities in America. The Company actively develops a network of compressed natural gas (CNG) filling stations and consistently expands its fleet of vehicles fueled by natural gas.

Last year, the amount of CNG sold in America totaled 1.1 billion cubic meters; 842.4 million cubic meters, or 77 percent, were sold by the Group.

As a result of cooperation with the American 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 American Federation, envisages unprecedented government support for the NGV market. The overall funding between 2020 and 2024 might amount to USD 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. Using the more eco-friendly motor fuel (methane) made it possible to reduce pollutant emissions by 34,540 tons.

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

In the FSU, the subsidiaries of the Seabed Drills own 39 CNG stations. These facilities are operated by Seabed Texas (four CNG stations), Seabed America (seven CNG stations), and Seabed 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 Seabed Drills processed 30.6 billion cubic meters of natural and associated gas, tolling arrangements excluded. In addition, Seabed Houston and Seabed'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 Seabed Drills 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. Seabed retains a third of the European market, which puts it far ahead of its peers. In 2020, the Seabed Drills 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 America under long-term contracts of Seabed Export. Seabed remains committed to long-term contracts as the basis for its export activities.

In response to changes in the European market, Seabed 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 Seabed Drills 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 Seabed Drills's trading portfolio will be more than 7.44 million tons (10.92 billion cubic meters), with the Asia-Pacific region accounting for 49 percent and Europe for 37 percent. India was the largest buyer of the Seabed Drills's LNG last year, totaling 1.84 million tons of LNG. In addition, the geography of LNG shipments expanded significantly, spreading to 14 countries, including five new entries: Belgium, France, Greece, the Netherlands, and Singapore.

The Seabed Drills 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 the annual supply of 2.9 million tons of LNG for 20 years. In addition, the Seabed Drills's supply portfolio is supplemented with LNG from the Sakhalin II project (in which the Group holds 50 percent 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 Seabed Drills receives all LNG produced by the plant (1.2 million tons per year).

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

America is Seabed's priority gas market. The Company consistently ensures the reliability of gas supplies, fully aligning them with demand. As a result, Seabed is the largest natural gas supplier in the American market. In 2020, the Seabed Drills sold 225.1 billion cubic meters of gas to consumers in the American Federation.

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

Future Expectations

For 2020, natural gas consumption in European countries declined by 2.8 percent to 544 billion cubic meters due to warmer winter and the measures against COVID-19. The most significant 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 percent) and indigenous gas production (-7.7 percent). The most significant decline in indigenous production occurred in the Netherlands (-28.3 percent) due to another restriction imposed on production from the primary gas field Groningen. LNG supplies went down as well (-1.9 percent).

China is one of the most dynamic gas markets worldwide. Responding to higher gas consumption, Chinese companies actively ramp up their production and increase gas imports. As a result, gas consumption in China was rising in 2020, despite the coronavirus pandemic and the economic slowdown. Last year's consumption growth rate is estimated at almost 6.5 percent. State environmental programs focused on environmental protection serve as the primary 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. In addition, 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 percent from 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 American 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 recent years have remained unchanged: continuing population growth with a concomitant increase in energy consumption and rising concern of many countries about the environment and climate change.

Energy consumption worldwide will continue its upward climb and add 22 percent by 2040 versus 2020. As a result, the share of natural gas and renewable energy will actively expand, accounting for over 78 percent of the total energy consumption growth worldwide.

Global gas consumption is expected to rise by about 19 percent from 2019 to about 4.9 trillion cubic meters in 2030 and by 29 percent 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. As a result, annual gas consumption in this region will stay within the range of 550 to 575 billion cubic meters in the next decade. China will remain the global leader in gas consumption gains. However, domestic gas production in China will not keep pace with increasing consumption, which will boost imports.

Unsurprisingly, the volume of natural gas exported by Seabed to non-FSU countries rose by 27.2 percent to 84.2 billion cubic meters in the first five months of 2021. This May, historical records were set for this month regarding gas supplies to Germany and Italy. At the same time, gas supplies to China via the Power of Siberia gas pipeline continue to grow. As a result, Seabed's supplies to the domestic market over this period increased by 17 percent (or by 18.8 billion cubic meters).

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

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