Leslie Palti-Guzman +1 (646) Eurasia Group. How piped and liquefied gas may successfully co-exist.

Transcription

1 Leslie Palti-Guzman +1 (646) Eurasia Group How piped and liquefied gas may successfully co-exist January 2013

2 Eurasia Group overview Founded in 1998, Eurasia Group has offices in New York, Washington DC, London, and Tokyo 50+ full-time country experts all trained as political scientists Global network of several hundred in-country experts Eurasia Group services corporations, financial institutions, and government organizations Eurasia Group Office Locations London New York City Washington, DC Tokyo 1

3 What is political risk? The probability that a political action (or non-action) alters the expected value of a given economic action or the expected outcome of a government policy Levels of risk Global Country Industry Firm Project Examples War Migration Regime instability Economic and social turmoil Regional instability Regulatory efficiency Key legislation Environment/social license Regulatory compliance Regional/sub-state politics Permitting/corruption Forced equity transfer Global economic rebalancing Resource nationalism Policy change/instability Expropriations/rule of law Capital controls/credit defaults National champions/protectionism Corruption Breaches of contract Labor & stakeholder management Self-generated risks Stakeholder management 2

4 Eurasia Group political risk tools Business need Management strategy Eurasia Group service Comparative risk assessments and rankings Country/thematic analyst workshops and risk identification exercises M&A support Government and stakeholder relations strategy Monitoring Geopolitical/policy advisory service Unconventional gas focused advisory Analyst access/help desk Market entry Frontier and emerging market country risk/due diligence Political risk power maps 3

5 Outlook: LNG versus pipe in Europe State of play: in terms of volume, pipe gas will always be dominant compared to LNG, but increasingly LNG is the favored option for diversification of routes and supply. From Lithuania to Poland, this is the best way to cut on Russia s gas dependence Suppliers: LNG and pipe are competing for market share and pricing. Is there room for cooperation? What about suppliers that can do both? Buyers: Pipe and LNG should coexist for increased security of supply and promote gas-on-gas competition. But at what cost? What about shale gas? 4

6 State of play: LNG versus pipe in numbers LNG is progressing EU LNG import capacity: 23 regasification terminals, 198 bcm/yr (144.5 million tons per year). Turkey and Israel included However utilization rate is around 30-40% for some terminals 4 terminals are under construction and will add 32.5 bcm (24 million tons) by 2014 There is only one European liquefaction plant in Norway Pipe is diversifying The EU has three major non-european sources for pipeline gas: Russian supplies from the east, Norwegian gas from the north, and North African gas from the south Russia provides 28% of EU pipe imports Azerbaijan is planning to export 10 bcm of gas to the EU by 2018 The total non-eu volume transported via these pipeline routes is 245 bcm 50% of EU LNG is imported from Qatar, 18% from Algeria and 17% from Nigeria 5

7 Europe plans more import terminals Despite the predicted tightness in supplies over the next three years 6

8 The great pipeline game 7

9 Suppliers: More competition than cooperation 8

10 Competition: Russia pipe versus Qatar LNG Qatari LNG exports to Europe have created pipeline/lng pricing competition and Gazprom is concerned that Qatar will chase additional market shares in Europe. Russia Qatar Market shares in Europe Pricing 30% 9.4% Gazprom is addressing pricing concerns, but only on a case-by-case basis. It does not treat all European markets alike: spot-indexed in the UK; renegotiated contracts in markets that are partially liquid like in Germany, Italy and France. But in Central/Eastern Europe, the Russian giant continues to operate in the way that will be the most economically and politically favorable for itself. Qatar is reportedly selling its spot LNG into Europe at a discount to NBP. Continuing to sell LNG to Europe even at a discount to NBP allows Qatar to protect its oil-linked prices in Asia by avoiding a supply glut. Notwithstanding these factors, Qatar's willingness to sell LNG to Europe despite poor economics could change in the future as Europe's LNG importance declines relatively to emerging niche markets. Influence Russia s political influence in Europe remains a reality, especially in CEE, where it uses Gazprom s heavy-handed negotiating tactics. Qatar has developed its soft power capabilities in Europe and in France. It invests billions of dollars a year, including millions in the real estate, hotel, sports and media sectors. 9

11 Cooperation between suppliers: a gas cartel in Europe? What is left of the GECF? The GECF is a long way from becoming another OPEC, notably because of its members different positions in the gas market and their divergent gas strategies. The GECF s members are almost equally divided between pipeline exporters and LNG exporters. Given the regional nature of the natural gas market, the GECF s emergence is most worrisome for the EU, which depends heavily on pipeline gas imports from Russia, as well as pipeline and LNG imports from Algeria, Libya, Egypt, and Qatar. The EU long-term transition towards hub-based gas pricing which is encouraged by the European Commission remains a long-term goal and is not without risks. One of the main risk under such model is that Gazprom and other suppliers that could even collude in a price cartel could try to become a dominant player influencing prices at the spot market by changing their supply volumes. 10

12 A good bargaining tool: pipe and/or LNG Russia: plays Europe against Asia While Gazprom is increasingly challenged in its core market, Europe, it is shifting towards an Asia-Pacific LNG strategy while still hoping to ink a pipeline deal with China. It makes sense after the shelving of Shtokman LNG. Azerbaijan hedges against delays SOCAR is moving ahead with the Southern Gas Corridor (SCGP, TANAP, TAP or Nabucco West) while also progressing on the AGRI project, both to serve EU market East Med gas could do both Both Israel and Cyprus are courted for LNG and pipe gas 11

13 Buyers: Coexistence for more security of supply 12

14 The EC s key driver is supply diversification and security of supply Cost of diversification: The environment for financing of extremely large, cross-border gas projects is challenging given weak European gas demand, high gas prices, and the impact of the ongoing eurozone crisis. Many investors have lost interest in the European gas market and do not see any commercial sense in building costly pipelines or LNG infrastructure that may be underutilized. But the European Commission continues to push its agenda of supply diversification and reduced dependence on Russian gas by promoting new routes and entry points. EC will finance priority projects through Connecting Europe facility 13

15 A surge in output is expected but key risks to watch in

16 Winners and losers in shifting landscape The status quo will continue for the most part, but with gradual erosion of Gazprom s market share due to increased gas-on-gas competition, evolving pricing and EU gas market integration/liberalization Russia will implement new strategies to retain its geopolitical clout and market power in Europe Ukraine will lose its importance, while Turkey will replace it as the new unavoidable transit country Europe s other traditional gas suppliers Norway, Algeria, and Libya face numerous challenges to retain their market share in EU gas market 15

17 Outlook post-2020: More liquid and transparent EU internal gas market More gas-on-gas competition: pipe, LNG but also shale gas More powerful gas hubs and trading platforms, but it does not mean that the price of gas will necessarily be much cheaper More short-medium term contracts along with spot purchase; much less long-term contracts This model will work only in a well-supplied market where gas is abundant 16

18 Eurasia Group is the world s leading global political risk research and consulting firm. This presentation is intended solely for internal use by the recipient and is based on the opinions of Eurasia Group analysts and various in-country specialists. This presentation is not intended to serve as investment advice, and it makes no representations concerning the credit worthiness of any company. This presentation does not constitute an offer, or an invitation to offer, or a recommendation to enter into any transaction. Eurasia Group maintains no affiliations with government or political parties Eurasia Group Executive office 149 Fifth Avenue, 15 th floor New York, NY Washington office 1818 N Street NW, 7th floor Washington, DC London office Great Sutton Street, 1st floor London EC1V 0NA United Kingdom 17