George H.B. Verberg President International Gas Union SGOA Autumn Conference Bratislava, 3 November 2005

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1 GU 2006 European Gas Market(s) and Regulation/Liberalisation George H.B. Verberg President International Gas Union SGOA Autumn Conference Bratislava, 3 November 2005

2 INTERNATIONAL GAS UNION Covers >95 % of World Gas Sales Spokesman of the Gas Industry GHB Verberg (IGU) Non Members Membership from 67 countries and 20 Associated Members

3 GHB Verberg (IGU) Themes for Today The World needs Energy; At What Prices? LNG changes the Global Gas Scene; Regulation, Liberalization.

4 GHB Verberg (IGU) Energy Consumption in Perspective % primary energy consumption per capita relative to USA 1/3 ofworld population World USA FSR EU (25) Japan China India Africa Latin America IEA data year 2002

5 GHB Verberg (IGU) Total Energy Demand by Region 2002 and Mtoe Noord-Amerika EU-25 Japan/Korea India China Rusland Zuid Amerika Afrika Midden-Oosten

6 EU Energy Demand Forecast IEA EU (25) GHB Verberg (IGU) Mtoe Growth relative to consumption in 2002 TOTAL PRIMARY ENERGY GAS

7 GHB Verberg (IGU) CO2 emission from Power Plants gram/kwh coal spread due to type of coal (lignite/hard coal) and technology (old/new-high-efficiency) gas gas, CCGT wind nuclear Life-Cycle CO2 emissions CCGT as Back UP hydro biomass geothermal solar pv urces: life-cycle assessment of electricity generation systems and applications for climate change policy analysis, eier, 2002, published on website Nuclear Energy Institute; own data; IEA

8 GHB Verberg (IGU) Gas the Fuel of Choice For financial-economic reasons, For environmental reasons, For space planning reasons (gas fired power station needs a lot less space than a coal fired one) For cooling water requirements (gas fired power stations need a lot less cooling water than coal fired ones or nuclear) Natural Gas will be the fuel of choice!

9 GHB Verberg (IGU) Themes for Today The World needs Energy; At What Prices? LNG changes the Global Gas Scene; Regulation, Liberalization.

10 Oil Prices: GHB Verberg (IGU) How High is High? Oil prices in US$ of 2004: 1864: 92 $/b, but at that time no oil dependent economy 1980: 81 $/b, economic difficulties 2004: 55 $/b 2005: 60+ $/b Expected: restraints in refinery capacity lifted by 2008

11 GHB Verberg (IGU) How Much Oil is Left? at EIA Midterm ennrgy Outlook Conference, april

12 Chevron: so is this something you should be worried about? GHB Verberg (IGU)

13 Nymex futures untill dec 2010: >6$/mbtu GHB Verberg (IGU) High gas prices squeeze US manufacturers (Financial Times 3 Oct 05)

14 World Gas Reserves Proven 180 Trillion m3 R/P ratio ~66 years 1000 bcm Europe Russia North America 14 Middle East 14 Asia Pacific Region 7 Africa South and Central America Data: BP Statistical Review GHB Verberg (IGU) SGOA Conference, Bratislava, 3 Nov IGU 2006

15 GHB Verberg (IGU) Themes for Today The World needs Energy; At What Prices? LNG changes the Global Gas Scene; Regulation, Liberalization.

16 Source: presentation by GdF at 19th WEC, sept GHB Verberg (IGU)

17 LNG Trade History and Perspectives short-term trade 700 Bcm 15 Bcm LNG trade as % of total gas market 11 2 History (CEDIGAZ) GHB Verberg (IGU) 8 Forecast (IEA weo 2004)

18 LNG Spot Trade Grows, GHB Verberg (IGU) Chart: Presentation by Jensen Ass. To California Energy Commission June 2005 but remains < 20%

19 International LNG Trade: Connecting Markets, Competing Markets! GHB Verberg (IGU)

20 GHB Verberg (IGU) Themes for Today The World needs Energy; At What Prices? LNG changes the Global Gas Scene; Regulation, Liberalization.

21 Primary Energy EU25 (2004) 1719 Mtoe (1910 Bcm gas eq.) nuclear 13% hydro 4% oil 41% coal 18% Oil 80% imported (60% excluding imports from Norway ) Gas 50% imported (40% excluding imports from Norway ) urce: BP Statistical review 2005 gas 24% GHB Verberg (IGU) Energy intensity 150 Mtoe/trillion

22 Primary Energy Slovakia (2004) 19 Mtoe (21 Bcm gas eq.) nuclear 21% hydro 5% oil 19% All imported urce: BP Statistical review 2005 coal 23% GHB Verberg (IGU) gas 32% 97% imported Energy intensity 530 Mtoe/trillion $

23 Gas Imports EU25 (2004) GHB Verberg (IGU) Russian Federation 107 BCM Norway 75 Algeria LNG+pipelines 55 Nigeria LNG 15 LNG several sources Total Consumption 467 Import dependency will grow!

24 GHB Verberg (IGU) Regulation: EUROPE In the eighties and first part of the nineties supply of gas to Europe was expected to be abundant; Security of Supply was (therefore) not considered to be an issue; Regulation of the gas sector was very much done along the lines of the regulation of the electricity sector. The energy intensive industry lobbied hard and referred to low energy prices in the US with a liberalized, competitive market.

25 GHB Verberg (IGU) Regulation: EUROPE The European gas market changed towards a sellers market during the implementation of regulation/liberalization; And it became clear that Europe will become more and more dependent from a small number of countries: Security of Supply is (again) on the agenda!

26 SoS: Key Energy Region (1): Risk : Tornado s GHB Verberg (IGU)

27 SoS: Key Energy Region (2): Risk : Melting Permafrost GHB Verberg (IGU)

28 SoS: Key Energy Region (3): Risk : Political Situation? GHB Verberg (IGU)

29 SoS: Several Key Straits : Risks : Overloading and Terrorism GHB Verberg (IGU)

30 GHB Verberg (IGU) Replacement of Reserves the industry has replaced only half the reserves it has produced and needs to spend $ 40 bn a year, rather than the current $ 14 bn, to ensure it found a new barrel of oil for every barrel consumed. (Wood Mackenzie in Financial Times, 4 Oct 2005)

31 SoS: Who Owns the Gas (and Oil) Reserves? GHB Verberg (IGU) CONTROL OVER PRODUCTION OF REMAINING COMMERCIAL RESERVES NATURAL GAS Private companies 36% State controlled companies 64%

32 GHB Verberg (IGU) Regulation: EUROPE In the eighties and first part of the nineties supply of gas to Europe was expected to be abundant; Security of Supply was (therefore) not considered to be an issue; Regulation of the gas sector was very much done along the lines of the regulation of the electricity sector. The energy intensive industry lobbied hard and referred to low energy prices in the US with a liberalized, competitive market.

33 GHB Verberg (IGU) Regulation: Electricity National regulation Business levels production transmission distribution/consumption Electricity chain: Production close to consumption (local, regional, national scale) Regulation on a national level (foreseeable effects; consistency)

34 Regulation: Gas National regulation Global market Supranational market Business levels production Gas chain: Production and supply: supranational / global Consumption and marketing: national / local transmission distribution/consumption National regulation versus international market dynamics GHB Verberg (IGU)

35 GHB Verberg (IGU) Regulation: EUROPE At the same time LNG is connecting regional markets (North America, Europe, Japan / Pacific Rim and New gas import regions are making their presence at the world gas market known (India, China and Renewed US) This combination implies competition for supplies between gas importing regions:

36 GHB Verberg (IGU) Regulation: EUROPE Competition will presumably not only be on PRICE; But also on the conditions at and structure of the competing markets; So the type of regulation in an importing region/country will have an effect on its attractiveness for an exporting country; To reduce risks exporting countries also want to diversify!

37 GHB Verberg (IGU) Regulation: EUROPE EUROPE s regulatory framework needs to be in line with the requirements of an increasing global competition: Long Term Contracts will remain the backbone of the gas industry, they are necessary to realize the huge investments in the total gas chain, also for the LNG-chain.

38 GHB Verberg (IGU) Regulation: EUROPE Investments in gas infrastructure should also be encouraged: Competition flourishes better with a slight overcapacity. But there must be a sound fin./econ. base for investments: Open Season, to assess the market demand for new capacity

39 GHB Verberg (IGU) Regulation: EUROPE Regulators in Europe and the EU- Commission are showing signs of understanding that some regulatory changes are necessary: In the UK since some time Long Term Contracts to enter the National Grid (up to >10 years) are made possible again; Exemptions are granted to certain infrastructure projects, but uncertainty for investors remains

40 GHB Verberg (IGU) Regulation: EUROPE In the eighties and first part of the nineties supply of gas to Europe was expected to be abundant; Security of Supply was (therefore) not considered to be an issue; Regulation of the gas sector was very much done along the lines of the regulation of the electricity sector. The energy intensive industry lobbied hard and referred to low energy prices in the US with a liberalized, competitive market.

41 GHB Verberg (IGU) Regulation: EUROPE Managing expectations is key for an acceptable result: liberalization is not in itself leading to lower prices, if done well it leads to higher efficiency, but Prices of gas in a free market will be determined by the supply / demand balance. Strong price volatility is also part and parcel of a liberalized gas market

42 Gas Prices: UK (spot) versus EU Continent (long term contract) GHB Verberg (IGU) 35,00 NBP Price is monthly average 30,00 25,00 Marker EU Continent euro ct/m3 20,00 15,00 10,00 5,00 0,00 jan-93 jan-94 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06

43 GHB Verberg (IGU) Gas Prices USA - UK 40,00 Price is monthly average 35,00 Henry Hub 30,00 NBP 25,00 euro ct/m3 20,00 15,00 10,00 5,00 0,00 jan-93 jan-94 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06

44 Price Volatility of Several Commodities GHB Verberg (IGU) % GOLD SILVER STEEL COPPER ALUMINUM BRENT OIL COAL COFFEE AEX SHARES UK GAS HERREN INDEX USA GAS HENRY HUB

45 Three Commandments for a productive legal & regulatory environment GHB Verberg (IGU) Predictability stable, long-term regulatory frameworks Reliable framework for enforceability of commercial contracts Consistency taking characteristics of natural gas market into account Transparency market rules and opportunities must be clear to all players

46 GU 2006 Thank you for your attention See you in Amsterdam! 23 rd World Gas Conference and Exhibition June