Chalmers University of Technology

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1 NATURAL GAS AS A TRANSITION FUEL - AN OUTLOOK ON THE EUROPEAN GAS MARKET Jan Kjärstad, Filip Johnsson Department of Energy and Environment, Energy Conversion Workshop on Climate Change and Energy Pathways for the Mediterranean June 21-22, 2005 University of Cyprus Nicosia, Cyprus

2 Part of a broader study with the aim to develop a methodology for a detailed analysis of possible development paths for the European energy system. Including the Energy infrastructure

3 Thermal Power Plants in EU25 (>100 MW e ) Chalmers University of Technology Example of Energy Infrastructure: Thermal Power plants

4 Presentation Natural Gas Demand Supply Comments on Financing and Price of Gas Conclusions

5 DEMAND Chalmers University of Technology

6 Gas demand (PJ) BIG-6 + RoE (RoE: Rest of Europe) Increase mainly in Power & Heat sector Avg annual GR: 3.7% France Germany Italy Netherlands Spain UK RoE Source: IEA Gas Database

7 Power Plant Capacity by fuel and age: Thermal power plants EU 25 (excluding biomass and peat) GW gas feasible between 2003 and 2010, TWh, bcm* GWe Source: Chalmers Power Plant Database > 40 years years years years 0-10 years Planned EU-24 Planned Italy Coal Lignite Gas Oil Nuclear * 57-80% Capacity factor 60% efficiency, 40 MJ/m 3

Southern Gas Zone Chalmers University of Technology Distribution Planned Plants by fuel, EU-25 (same color code as previous slide, includes bio/peat) Northern Gas Zone UK: Declining reserves,

8 Southern Gas Zone Chalmers University of Technology Distribution Planned Plants by fuel, EU-25 (same color code as previous slide, includes bio/peat) Northern Gas Zone UK: Declining reserves, domestic production down > 60% by 2013 (JESS 5). Belgium & Germany: 26.4 GW nuclear capacity to be phased out by 2026 Italy: Projected demand up 25% , 40% by 2015 (ENI). Spain: Projected demand up 9% p.a (Electricity and Natural Gas Plan). Greece: Demand up 60% p.a. since 1997 Source: Chalmers Power Plant Database

9 35 Chalmers University of Technology Examples Germany and UK: Current power plant age structure by fuel and age (excluding hydro and planned onshore wind farms) GERMANY 30 UK B 0.5 W GWe N W 0.1 B B B 0.3 O 0.5 O > 30 years years years 0-10 years Planned GWe ,1 W B 0.7 O 0.2 C > 30 years years years 0-10 years Planned Natural gas Coal Lignite Oil Biomass/Waste Nuclear Wind Natural gas Coal Lignite Oil Biomass/Waste Nuclear Wind Based on the Chalmers Power Plant database

10 Example: UK natural gas demand Chalmers University of Technology BAU 2050: 442 TWh PJ MED 2050: 335 TWh LOW 2050: 236 TWh LOW Coal 2050: 118 TWh NG for power: Up 70% 120% (gas scenarios) Only this scenario meets the year % CO2 - reduction target (assuming this target also applies to the power sector) Three scenarios with respect to growth rates in demand for electricity (BAU, MED and LOW). Phasing out old plants according to SUS age. Replacing MEDby Max. BAU Realistic SUS Amount Coalof Renewables and the remaining generation demand by Gas (50/50 Coal/Gas in Low Coal ). For details, see Kjärstad and Johnsson, Proc. The 7th Int. Conf on Greenhouse Gas Control Technologies, 2004.

11 Projected demand and supply gap , bcm EU25 (Data from IEA WEO 2004) Avg annual GR demand: 1.8% Supply gap bcm 400 Supply gap 639 bcm bcm bcm 147 bcm Production Net Imports

12 Conclusion - demand Rapid increase in EU gas demand up to Gas demand post 2012 difficult to project (will continue to increase), but will to a large extent depend on Further restrictions on CO 2 emissions Success or failure of capture and storage of CO 2 Nuclear phase-out (assuming large employment of renewable generation)

13 SUPPLY Chalmers University of Technology

14 Remaining proven and estimated undiscovered resources, Tcm 84% of proven reserves 68% of undiscovered ', ', ', ', ', ', Proven: Black Undiscovered: Red ', Sources: BP 2004 Annual Statistical Review, USGS 2000 mean estimates

15 Current and emerging suppliers Chalmers University of Technology Current suppliers Emerging suppliers Source: Chalmers Fuel Database

16 External pipelines, existing (red) and planned/suggested (blue) Existing capacity: 305 bcm Construction: 39 bcm Planned/Sugg: 69 bcm Uzghorod Source: Chalmers Fuel Database

17 LNG Decreasing costs Vertical Integration gives access to markets (oil companies downward, utilities upward) Shipping control (Free on Board (FOB)) Globalization/flexibility Currently buyer s market

LNG (squares with dots) and Gasification (squares) terminals (Existing: Red; Construction: Green; Planned: Blue) Capacity existing LNG terminals: 57 bcm.

18 LNG (squares with dots) and Gasification (squares) terminals (Existing: Red; Construction: Green; Planned: Blue) Capacity existing LNG terminals: 57 bcm. Under construction: 24 bcm Planned (feasible): 70 bcm Contracted annual sales to EU (long-term): > 100 bcm Emerging major suppliers: Egypt, Nigeria, Qatar. Additionally: Libya, UAE, Norway, Oman, T&T, and possibly Angola, Iran, Equatorial Guinea. Source: Chalmers Fuel Database

19 EU projected import capacity vs IEA WEO demand Additional capacity need to keep capacity-to to-import ratio at 1.5: : 2020: 150 bcm : 2030: 220 bcm bcm/yr Exist cap. Jan 1st 2005 LNG-terminals Pipe expansions Statfjord-Flags IC Medgaz Turkish-Greece IC Langeled Galsi Nabucco NEGP IEA import need Source: Chalmers Fuel Database and IEA 2004 WEO

20 Russia Rapid depletion of super-giant fields Increased cost for developing new supplies Huge investment needs combined with large debts Expansion into Far East and North America However: Additional supply from Caspian States and independents Zapolyarnoye reached plateau in 2004, but a number of new fields into operation since 2002 gives + 90 bcm annual production 2007/08 relative to 2003.

21 Shtokmanov: 3.2 Tcm Yamal region: 10.5 Tcm Russia Yamburg: 4.1 Tcm (40% Dpl) Urengoi: 5.4 Tcm (49% Dpl) Zapolyarnoye: 3.4 Tcm (plateau) Medvezhye: 0.5 Tcm (76% Dpl) Russkoye: 0.8 Tcm (NEGP) NEGP Chayandinskoye: 1.2 Tcm Sakhalin LNG Orenburg: 0.8 Tcm Kovykta: 1.4 Tcm Astrakhan: 2.5 Tcm Source: Chalmers Fuel Database

22 Ample supply Increased Security of Supply: Diversification of suppliers. Diversification of transport routes. Conclusions - Supply Chalmers University of Technology Entry capacity sufficient up to ~ 2013 if all projects are carried out Pending on long-term contracts already negotiated: Norway and North Africa likely to increase market share in the medium-term (up to ). Russia s market share likely to decrease in the medium-term. Main suppliers in the long-term: Russia and the Middle East Long term investments along the entire supply chain will be crucial while market liberalization, CO 2 -emissions, nuclear phase-outs create uncertainties.

23 FINANCING Chalmers University of Technology

24 Cumulative global energy investments Cumulative global energy investments : US $ 16 trillions Power: US $ 9.8 trillions Oil: ~ US $ 3 trillions Gas: ~ US $ 3 trillions By far too less with respect to gas in Russia and oil and gas in other developing regions OECD NA OECD Europé OECD Pacific Trans econ China Other Asia Middle East Africa Latin America Source: IEA 2004 WEO Coal Oil Gas Power

25 Financing natural gas infrastructure in developing regions, depends on: Domestic Savings Domestic Investments Present Future Banking Sector External Debt Foreign Direct Investments (FDI) by oil companies Loosening of state restrictions on involvement from foreign companies Improving terms of conditions

26 FDI and Millions US $ Algeria Egypt Libya Nigeria Eq. Guin Angola Iran Oman Qatar UAE Azerb. Turkm. Russia Source: UNCTAD 2004

27 PRICE OF GAS Chalmers University of Technology

28 Price of Natural Gas Piped gas cheaper than LNG downward pressure on gas prices North Africa competitive with respect to supply to South Europe Location near EU market Limited resources Norway competitive for supply to UK Near UK market Existing UK gas infrastructure Limited resources ~ 30 years Take or Pay Contracts Shorter periods, smaller volumes, increased flexibility, FOB Increased price volatility More spot

29 Overall conclusions Rapid increase in EU gas demand up to 2010 Increase mainly in power generation sector Increased dependency on import (80% by 2030) Increased demand in Southern Europe and declining production in Northern Europe (mainly UK) Ample supply for the next two decades or so Long-term investments required (Investment freeze?) Enough FDI provided by oil companies?

30 Overall Conclusions cont. EU member states are forced into a high dependency on natural gas SoS electricity SoS gas Effect of the combined effect of Middle East as major oil and gas supplier? Globalization Increased competition on both supply and demand side

31 Acknowledgements Financial support by Chalmers Environmental Initiative, the AGS and Vattenfall AB is greatly appreciated

32 Supply costs (OME: costs incr supply ex prod. royalty; DG: Delivery costs marg. supplier; IEA: Indic. supply costs) T&T LNG-Spain Venezuela LNG-Spain Nigeria LNG-Spain Qatar LNG-Italy Egypt LNG-Spain Algeria LNG-Spain Turkmenistan-Germany Yamal-Germany via Belarus Russia-NPT via Ukraine Russia NPT via Baltic Russia NPT-Germany via Bel Iran-Germany via Turkey Azerbaijan-Austria via Turkey Norway (NS)-Germany Libya-Italy via Sicily Algeria-Spain via Morocco? US $/Mbtu OME DG Tren IEA 2001 Source: OME 2001, DG TREN 2002, IEA 2001/03

33 Break even costs gas to UK Chalmers University of Technology Venezuela LNG Oman LNG Expansion Qatargas 4 Qatargas 2 Rasgas lll/lv West of Shetlands Yamal Nenets Yamal Peninsula Algeria LNG Egypt LNG ll Brass River LNG Eq Guinea (Alba LNG) NLNG Plus Norway NNS (exist) Turkmenistan Tengiz Ormen Lange Mid-Norway Norway CNS Norway NNS (new) Source: ExxonMobil 2004 US $/mmbtu

European Gas Sources and Supply Costs Graham Freedman Principal European Energy Global Insight

EU RO PEA N FU EL PRI CE CO N FEREN CE 12 European Gas Sources and Supply Costs Graham Freedman Principal European Energy Global Insight Outline Sources of Gas Pipeline Considerations LNG Considerations