The Impact of the Recession on Gas Markets

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2 The Impact of the Recession on Gas Markets What has changed in our Brave New World Gas demand dropped by 2% Bigger drops in OECD region, FSU, Latin America But some notable exceptions: China, India Some suppliers suffered more than others Pipeline supplies particularly affected, while LNG trade increased (even not as much as expected) Prices diverge, converge and diverge again Sustained gap between oil-linked gas prices and spot prices NBP and HH spot prices converged in 2009 but diverged again Much talk about delinkage from oil prices Unconventional gas change the world The US thinks about exporting LNG General excitement about unconventional gas across the world Invest or not? Two fundamental questions: In the short-term: how fast is demand recovering In the long-term: what is the role of gas in the future mix

3 Demand in the OECD region by country -2.5% -5.5% -3.2% -8.3% -8% 1% -3.4% -5.2% 0.6% -11.4% -4.3% -2.4% -2% -13.8% 0.2% 1.3% -5.8% -4.2% -9.6% -16.2% -3.1% 1.1% 3.1% -0.4% -2.6% 2.7% 35% -4% Source: IEA, MTOGM 2010 US demand dropped by 1.7% to 647 bcm.

4 Demand drop was impressive in Europe When you look at seasonally adjusted data Source: IEA, MTOGM 2010 OECD Europe gas demand fell by 5.6% in 2009 Demand fell substantially in major countries (Spain ( 11%), UK and Italy ( 8%), Germany ( 6%)) Seasonally adjusted demand fell back to early 2004 levels BUT Trend has been increasing since mid 2009

5 Recovery is in sight And Europe is back on track much faster than expected OECD Europe & Pacific gas demand is recovering (+10% during H1 2010) OECD North America growth is more modest (3%), but dropped less in H OECD gas demand back to the levels of H Part is due to cold weather, but also increased use of gas for power and partial industry recovery Increased gas use for power in Belgium, the UK, the Netherlands, and Germany

6 OECD power demand is recovering as well +3.2% TWh +3.9% +0.7% +1.2% +15.7% Total OECD electricity production reached 5003 TWh (+3.2%) in H1 2010, +3.2% vs H but still lagging behind H In Europe: power production still behind 2008 levels, getting closer in North America and above 2008 in the Pacific region Renewables are growing fast (+16%) but they still represent only 3% of total generation

7 The power sector is the main uncertainty Along with the economy Large gas demand variations can be seen depending on renewables and prices Gas fired plants are often at the margin, therefore competing against coal, but also hydro and renewables In the United States, coal fired plants were displaced by gas fired plants in 2009 Spanish example: gas demand varies significantly depending on hydro, wind and solar production, and competition with coal US: electricity generation by fuel Spain: gas demand in power sector Low hydro levels Recession, increasing renewables, CCGTs at the margin Source: EIA Source: cores

8 China already 3 rd non OECD gas consumer China s gas demand has been increasing by 10bcm/y over the past years Gas demand increased by 20% in H Chinese companies see gas demand reaching 300 bcm by 2020 China has been investing to secure new supplies The Turkmenistan-China pipeline started in December 2009 Myanmar-China is now under construction Chinese companies have been securing LNG under long-term contracts (Australia, Qatar, PNG) Plans to boost domestic gas production (shale gas/cbm) Domestic prices are increasing Prices increased by 25% in June 2010 An evolutionary step to continue to attract investments in gas

9 India important policy changes under way India had been suffering from Insufficient supplies, Low domestic prices for some customers (power, fertilisers), Regulatory and policy issues and Insufficient infrastructure A new field Krishna Godavari KG-D6 started in April 2009 It will double domestic production by 2012 Indian gas demand increased from 43 bcm to 59 bcm in 2009 In particular in the power sector India remains relatively underexplored Major pricing reforms under-way APM prices increased from $1.8/MBtu to $4.2/Mbtu in June 2010 Government has an important role in fixing gas price in PSCs

10 Massive new LNG supply expected Source: IEA, MTOGM 2010 LNG liquefaction capacity will increase by 50% over So far, 80 bcm of liquefaction capacity have started since early 2009 Most of the LNG is coming from Qatar New countries (Russia, Yemen, Peru) have also appeared Two FIDs taken in 2009, one or two expected in

11 LNG trade increased by 5.3% in 2009 Most additional LNG supply arrives in 2010 Source: IEA, MTOGM 2010 Despite new LNG plants, LNG trade increased modestly in 2009 Many upstream, feedgas and technical issues (Algeria, Nigeria) US LNG import requirements remain limited Asian LNG demand increasing fast Recovery in traditional markets (Japan, Korea, Chinese Taipei): +16% (11 bcm) Exponential growth in China (5.5 mt in 2009, 4.1 mt in H1 2010)

12 New LNG importing countries have appeared Under construction bcm Existing (from 2005) Existing (before 2005) 2009 imports Japan United States Korea Spain United Kingdom Source: IEA, MTOGM 2010 China India By 2013, China and India will have a combined LNG import capacity of 65 bcm roughly what Europe imported in 2009

13 Unconventional gas A Global Game Changer Unconventional gas has fundamentally changed the US Supply/demand picture The US has virtually withdrawn from the global (LNG) scene US gas production continues to increase in 2010 Is this sustainable? To watch : EPA study and attempts to regulate UG US production growth has had regional and global consequences on LNG imports More LNG available for other markets 10% utilisation of LNG terminals North America thinks about exporting LNG Future infrastructure investments (in North America as well as liquefaction targeting North America) Interest in unconventional gas resources in other regions Producing countries: Australia (CBM to LNG projects), Indonesia Importing countries: China, India, but the outcome is more uncertain in Europe

14 Can the US unconventional gas success story be reproduced elsewhere? The potential of unconventional resources is still poorly mapped and quantified Even in the United States Difficulty to apply the same methodology as for conventional gas Uncertainties on how much of this gas is actually recoverable? Some key success factors Geology: access to geological data, identification of the location and potential of the best areas Companies: presence of companies with UG knowledge, availability of rigs and of engineers Country factors: Market for this gas Acceptance by local communities, landowners Environmental issues (water management) Fiscal and regulatory framework Possibility to link to existing pipeline infrastructure Prices: pricing regime, cost of drilling and services

15 Global unconventional gas developments Australia the front runner Existing CBM production Five CBM/CSM to LNG (Gladstone), some close to FID Investigating shale gas China, India, Indonesia looking seriously at it Ambitious targets in China First moves in India: after CBM licensing rounds, India plans tenders for shale gas Large CBM resources in Indonesia: around 20 PSCs signed Growing interest in Europe, in particular for shale Poland is attracting many players Both major companies and smaller players are active Most companies are at the pre drilling stage, with drilling planned for end for the most advanced Still many uncertainties Potential investigated in Latin America and Africa Argentina (Neuquén basin) South Africa, Algeria

16 Impact of oversupply on regional prices Some signs of spot indexation? A bump or NBP living its own life? Source: IEA, MTOGM 2010 based on ICE, German ministry of economics, Japanese customs. Large gap between spot prices (NBP, HH) and oil linked gas prices since early 2009 Contracts renegotiations in Europe German border price seems to see increased signs of spot indexation Spot price convergence lasted one year, but is breaking down since April 2010 while Continental and NBP prices get closer European gas price convergence based on coal gas switching?

17 Two different price systems coexist For how long? Divergence between spot and oil-indexed gas prices Consequences Buying gas at spot prices has been very attractive Pressure on buyers to respect minimum TOP quantities Renegotiations of some long-term contracts These concessions are temporary Whether we see spot indexation staying in the long-term contracts, receding or increasing will depend on 1. The supply/demand situation by Oil price level 3. Henry Hub price level

18 Trading is growing quickly on Continental European markets In Particular in Germany Source: IEA, MTOGM 2010 based on transmission systems operators data.

19 Investments along the gas value chain How companies respond to the crisis Uncertainties due to current oversupply, economic recovery Careful evaluation and refocus on a few projects Some projects cancelled (storage, LNG terminals) Wait and see approach in particular for uncertain markets Shift from uncertain areas to areas of growth Gazprom now looks at China Yamal postponed (but real money already spent) Uncertainties for Shtokman Most FIDs on LNG projects will be in the Pacific basin over the next 3 years (Australia) Focus on domestic markets for some NOCs Many producing countries give priority to their markets rather than to exports Rise of DMOs (Domestic gas market obligations) Egypt, Peru, Indonesia, Nigeria, Oman

20 Most of import infrastructure planned and under construction is LNG In Europe, many regions have opted to LNG Source: IEA, MTOGM 2010

21 Gas oversupply The impact on infrastructure use Surplus of bcm versus 60 bcm in 2007 (which was tight) But strong regional differences Pipelines less flexible, likely to be more affected And some surplus capacity is also desirable for security of supply reasons

22 New Publications Available July 2009 Natural Gas in China Market evolution & Strategy September 2010 Natural Gas in India Upcoming end 2010 The contribution of natural gas vehicles to sustainable transport

23 Thank you for your attention Questions and comments welcome at Anne