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2 AGENDA 1. Demand and Supply 2. Prices 3. Flexibility 4. Conclusion COPYRIGHT PÖYRY GIE 2

3 Global demand outlook A Golden Age for gas bcm Growth in gas demand A four fold rise in demand over past decade, means China uses today as much gas as Germany & Italy together; Middle East demand is now at 80% of Europe s levels Source: IEA, Pöyry Worldwide demand set to increase by 600bcm in next 8 years, but only marginally in Europe COPYRIGHT PÖYRY GIE 3

4 Other potential areas of demand growth include small-scale LNG Five outlets can be considered for LNG Tighter environmental controls on transport are making operators look at alternative fuels to petrol and diesel, such as LNG (1) This is particularly relevant for use as a bunker fuel for shipping at sea (2) or on rivers (3) It also opens up the opportunity for small communities (4) or industries (5) without gas either along the coast or inland, if accessible by barges or trucks, to establish gas networks. LNG ² ² User 2 Harbour LNG Regas LNG ² ² ² LNG 3 Gas station LNG LNG Regas user 1 I&C user LNG Regas Municipality 5 4 COPYRIGHT PÖYRY GIE 4

5 Supply assumptions Together with higher supply from Russia and Norway Delivery Russian gas available to Europe Norwegian pipeline production Russian gas supply to Europe is expected to increase to over 200bcm by 2018, slightly declining by 2020, due to depletion of West Siberia fields Decline in West Siberian production will partially be offset by production from new Yamal fields Further offshore developments are expected in Russia to maintain production post Norwegian production is expected to exceed 120bcm by 2020 Gas is supplied directly into the networks of five countries, so has some ability to flex deliveries according to demand and price variations COPYRIGHT PÖYRY GIE 5

6 New project outlook: South Stream South Stream will re-route gas flows from Russia via Black Sea, instead of transiting via Ukraine South Stream consortium has finalised permits and FIDs with transit countries: Bulgaria, Serbia, Hungary, Slovenia The final version of the pipeline dropped the potential Southern route and will deliver gas from Russia to Northern Italy Additional offtake opportunities to Bosnia & Source: Gazprom Herzegovina and Croatia Construction started in December 2012 Additional long-term contracts are being signed at present Final capacity of 63bcm will depend on whether Shah Deniz partners decide to sell to Gazprom Commissioning of this route in 2015/16 will have a negative impact on capacity bookings along existing routes via Ukraine and Romania COPYRIGHT PÖYRY GIE 6

7 New project outlook: TANAP and TAP/Nabucco West Southern corridor project is undecided Trans Adriatic pipeline Nabucco West TAP would deliver up to 10bcm of gas from Turkey/Greece border to Italy The project is recognized as a "Project of Common Interest" by the EU Parliament and Council under the EU TEN-E guidelines If built, gives the opportunity to develop IAP and open up markets from Albania to Croatia Nabucco West will deliver the gas from Bulgaria/ Turkey border to Austria The final capacity is not certain between 10 and 23bcm Shah Deniz partners are expected to decide on preferred route next month and FID in the Autumn. Construction to start in 2015 and first gas in Will give some element of competition for SE Europe COPYRIGHT PÖYRY GIE 7

8 Supply: LNG Growing LNG supply is expected By 2020, Global LNG supply is expected to increase by about 100bcm from 350bcm today Major capacity build is expected in Australia, Africa and in the US (operational from 2018) Other North Africa Middle East Nigeria is also expected to increase its LNG output capacity by nearly 10bcm by 2017 Supply (bcm) Americas Asia Pacific Australia Increasing demand from Asia will take most of this but new pipeline supplies to China and shale gas developments will limit the LNG demand COPYRIGHT PÖYRY GIE 8

9 New project outlook: supply US LNG Sabine Pass terminal Source: Cheniere Energy Source: Freeport LNG DOE received 20 applications for LNG export and so far have approved only two (Cheniere Energy, LA and Freeport LNG, TX) for gas export to non-fta countries US DOE conducted two studies of LNG export impact on the domestic market, concluding that LNG exports will be beneficial for the economy Cheniere Energy Secured funding for two trains Started construction completion by 2018 Planned LNG export capacity of 23bcm Signed four contracts, two with European and two with non-european customers Freeport LNG Authorisation received 17 May FID in Q Planned LNG export capacity of 13.7bcm Signed three tolling agreements: Osaka Gas and Chubu for the equivalent of one train BP Energy for the equivalent of the second Other projects are not certain COPYRIGHT PÖYRY GIE 9

10 Expected supply to Europe A shift to higher imports due to the changing supply pattern Supply (bcm) Azerbaijan North Africa Russia Norway LNG Indigenous European indigenous production is in decline and this decline will not be offset by new sources (e.g. shale gas) Increasing imports from Norway and LNG will replace the indigenous production Share of Russian gas is expected to increase from 2018 to match potential demand growth and decline in North African supplies (due to growing domestic demand and dwindling gas supplies) Only small amounts of Azeri gas are expected to reach Europe COPYRIGHT PÖYRY GIE 10

11 AGENDA 1. Demand and Supply 2. Prices 3. Flexibility 4. Conclusion COPYRIGHT PÖYRY GIE 11

12 Gas prices LNG prices behave differently from the spot prices Price (EUR/MWh) HH NBP Japan Fukushima earthquake 0 Jan 11 Jul 11 Jan 12 Jul 12 Fukushima has led to increase in Asian gas prices, which were already high Asian prices have upward pressure from rising Asian demand and downward pressure from new projects (e.g. PNG, Australia) aimed at Asian market European and US gas prices used to be similar in the past when US was importing LNG, but diverged considerably, due to unconventional gas supply growth COPYRIGHT PÖYRY GIE 12

13 European price outlook Gas price is expected to stay similar to today s prices, and even decline as new gas sources enter the market Undelivered gas price ( /MWh, real 2012 money) Pöyry central scenario 5 Historical prices Forward prices Note: NBP forward prices are as of 17 May 2013 Total demand growth is not expected to be significant Gas available from existing and newly available LNG is expected to be able to meet the demand, preventing prices from rising assuming relatively stable oil prices COPYRIGHT PÖYRY GIE 13

14 AGENDA 1. Demand and Supply 2. Prices 3. Flexibility 4. Conclusion COPYRIGHT PÖYRY GIE 14

15 Demand seasonality Demand seasonality is expected to stay largely the same Our multi client European Gas Intermittency Study concluded that in most European countries seasonality stays relatively stable Changes in seasonality also relates to the underlying growth or contraction of demand from the non-power sector Source: Pöyry European Gas Intermittency Study COPYRIGHT PÖYRY GIE 15

16 Daily demand flexibility Demand volatility is expected to rise Net flexi Source Interconnection LNG Norway North Russia Indigenous Storage Africa Demand volatility (daily demand difference) is expected to rise in the future This volatility is met from a number of sources, the major source being storage Storage is likely to be used more to respond to day-to-day fluctuations as other sources become less flexible The changes will be different from one country to another depending on wind and gas penetration and availability of storage Source: Pöyry European Gas Intermittency Study COPYRIGHT PÖYRY GIE 16

17 AGENDA 1. Demand and Supply 2. Prices 3. Demand flexibility 4. Conclusion COPYRIGHT PÖYRY GIE 17

18 Conclusions Total European gas demand is expected to rise slightly by 2020 The outlook for the gas supply is bright even though indigenous European supplies are expected to decline and shale gas is still a long way off There is enough new gas around in Russia and through LNG to supply Europe at competitive prices The biggest infrastructure developments and changes to supply in rest of this decade will be in SE Europe This change in the supply balance will not lead to higher gas prices before 2020 COPYRIGHT PÖYRY GIE 18

19 Contact: Name: Andrew Morris Mail: Phone: COPYRIGHT PÖYRY 19

20 US FTA countries Australia Bahrain Canada Chile Colombia Costa Rica Dominican Republic El Salvador Guatemala Honduras Israel Jordan Korea Mexico Morocco Nicaragua Oman Panama Peru Singapore COPYRIGHT PÖYRY GIE 20

21 PÖYRY MANAGEMENT CONSULTING We are globally recognized advisors of choice for decision makers in selected capital and resource intensive industries based on our deep understanding and thought leadership of the sector dynamics along the entire value chain COPYRIGHT PÖYRY GIE 21

22 GLOBAL EXPERTS IN CONSULTING AND ENGINEERING Pöyry is a global consulting and engineering company dedicated to balanced sustainability and responsible business 7000 experts in about 50 countries Project experience in over 100 countries projects annually Net sales in 2011 EUR 796 million Listed on the NASDAQ OMX Helsinki In the latest ENR annual top-200 international design firms survey Pöyry ranked #6 in global power market #6 in global industrial market COPYRIGHT PÖYRY GIE 22

23 Pöyry Management Consulting Europe s leading specialist energy management consultancy. Offering expert advice from strategy to implementation on policy, regulation, business operations, financing and valuation and sustainability. Providing in-depth market intelligence across Europe. Over 200 energy market experts in 13 offices across Europe Pöyry offices (c) Pöyry Management Consulting offices 23 23