European gas markets and LNG, 2017

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Kelley Norman
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1 European gas markets and LNG, 2017 Simon Pirani Senior visiting research fellow, Oxford Institute for Energy Studies ENERGETIKA CONFERENCE, ST PETERSBURG NOVEMBER 2017

2 European gas markets and LNG European demand. A recovery in after a sharp fall in previous years. Will this continue over the next ten years? ETS prices and power plant closures are factors to watch European supply. Domestic supply from the Netherlands is decreasing, more rapidly than was expected. Other supply is more stable The future of gas in decarbonising European energy markets. Gas has had a price competitiveness problem; the ETS has failed to support gas; renewables costs are coming down; security of supply issues and politics don t help LNG. A supply surge is on the way

3 European natural gas demand trends Gas demand in 31 countries in Europe, (bcm) Natural gas demand in OECD Europe, (bcm) OXFORD INSTITUTE FOR ENERGY STUDIES Sources: IEA, JODI, A. Honoré Source: IEA : decline of 100 bcm All main sectors affected, but the power sector alone lost 65 bcm Difficult economic times + better efficiency => low power demand Rising renewables + low coal and carbon prices => improved the competitiveness of coal vs gas in an already limited market 2015: +4% and 2016: +6% How long can this recovery be expected to last? Source: Anouk Honoré (OIES) NATURAL GAS PROGRAMME

ENTSO-E Power generation: gas demand started to increase again Despite stagnation of electricity demand and continued

4 What role for gas in power generation? Electricity generation mix, (TWh) Weekly generation mix, (%) Source: OECD Europe - IEA Source: EU 28, ENTSO-E Power generation: gas demand started to increase again Despite stagnation of electricity demand and continued increase ofpenetration of renewables, the share of gas rose (18.6%); mainly to the detriment of coal-fired power plants Source: Anouk Honoré (OIES) OXFORD INSTITUTE FOR ENERGY STUDIES NATURAL GAS PROGRAMME

5 Reasons to be cautiously optimistic about gas for power demand in Europe in the next ten years Coal plants IED impacts (UK, Poland, Spain, Cz Rep, Romania, Greece ) Other measures and policies (UK, Germany, Netherlands, France ) Nuclear plants Phase out and moratorium (Germany by 2022; uncertainties on others) Economic shut down (Sweden) Delays for new nuclear (UK) Potential: as much as 100 GW of firm capacity could be shut down across Europe in the next five to ten years or so No one scenario fits all : each market its own story Role of gas in the generation mix Active support / dismissal (UK vs Turkey) Expectations in question / uncertain signals (Germany / Belgium / Spain) Switching from coal to gas saves CO2 emissions and meet 2020 targets OXFORD INSTITUTE FOR ENERGY STUDIES Source: Anouk Honoré (OIES) NATURAL GAS PROGRAMME

6 The power sector will continue to be the key, but it is also the biggest uncertainty Uncertainties on the economics of gas vs competing fuels and policies to support gas Lower gas prices will help gas compete with coal in the next ~5+ years, but mostly at peak times unless something happens in the coal / gas / CO2 relationship (maybe at the national level?) Coal plants closures are already having an impact, esp. in the UK., but at some point in the 2020s, major coal and nuclear capacity will close in other countries and will need to be replaced Renewables will continue to grow but at a slower pace, building of large hydro, coal and even nuclear plants is going to be complicated / limited => potential role for gas, but will CCGTs be in place when needed? => how will gas manage its status as a fossil fuel in the 2020s? => in any scenario: gas for power will not be back at 2000s levels OXFORD INSTITUTE FOR ENERGY STUDIES Source: Anouk Honoré (OIES)

At the same time, indigenous production is falling Natural gas production in EU+Norway, 2000-2016 (bcm) Sources: IEA, JODI, A.

7 At the same time, indigenous production is falling Natural gas production in EU+Norway, (bcm) Sources: IEA, JODI, A. Honoré OXFORD INSTITUTE FOR ENERGY STUDIES Indigenous production peaked in 2004 Max: 341 bcm 2016: 257 bcm Minus 84 bcmsince 2004! 3 countries: 84% In decline in 2016 Except for the UK, Hungary, Ireland & Norway These are likely to be short term upward trend, then expected decline 84% from the UK, the Netherlands and Norway NATURAL GAS PROGRAMME

the mid 2010s and will decline again from 2017 Netherlands output falling

8 UK, Netherlands and Norway production falling The UK continental shelf (bcm) The Netherlands (bcm) UK production plateaued in the mid 2010s and will decline again from 2017 Netherlands output falling more rapidly than expected Norway output projection to 2035 NATURAL GAS PROGRAMME

9 The European market: some conclusions Gas demand recovered in 2015 and 2016; +5% poss. in 2017 Specific circumstances (hydro, nuclear, coal + some switching) Reasons to be cautiously optimistic about gas for power demand in Europe in the next ten years Main reason: firm capacity closure Uncertainties: measures on emissions reductions; financial supports to generators; renewables and development new technologies (batteries) But, natural gas will need to decarbonize sooner rather than later At the same time, indigenous production is in decline Dutch production: down by 36 bcmin 3 years and further reductions are expected Other sources of conventional gas are in decline or will be in the 2020s Unconventional production will not help while green gas is expected to grow much faster, but uncertainties on how much / where Net imports will need to increase from about 50% of total demand in 2016 to about 2/3 in 2030 Source: Anouk Honoré (OIES) OXFORD INSTITUTE FOR ENERGY STUDIES NATURAL GAS PROGRAMME

10 The future of gas in decarbonising European energy markets European Gas Advocacy has failed to convince policy makers (and public opinion) that gas should be considered a transition or destination fuel The industry was confident that gas was lower carbon than coal and cheaper than renewables, and therefore the obvious low carbon solution BUT failed to recognise that: Renewables were politically popular because of environmental benefits and meeting targets; subsidies not as important as fossil energy community believed Coal was politically popular because of local employment Gas was not popular because: it was very expensive Political tensions with Russia, and security lack of employment connection in most countries (and still)

11 Did COP 21 change anything for European gas? Decarbonisation already confirmed in Europe from previous targets/budgets Nothing specific `changed with COP 21 except that policy is even more publicly committed to decarbonisation.. MESSAGE FROM COP 21: DECARBONISATION IS ONGOING AND UNSTOPPABLE!! Meaning that unless CCS can be introduced on a large scale, all fossil fuels have a limited future (albeit one which could still last for several decades) but CCS has made very little (no?) progress CO2 targets mean decarbonisation of power by 2030, decarbonisation of heat

12 European Gas: what has gone wrong in the 2010s? FIVE DIFFERENT PROBLEM AREAS: COMMERCIAL: utilities, networks, upstream producers and exporters SECURITY BUSINESS MODEL ENVIRONMENTAL FRAGMENTATION

13 OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Impact of Fragmentation on Commercial Interests Along the Value Chain PRODUCERS AND EXPORTERS: want to sell large quantities of methane over long time periods (if possible) underpinned by long term contracts NETWORK COMPANIES: Want to prolong the life of their assets not necessarily transporting methane (also biogas, biomethane, hydrogen) SUPPLIERS AND TRADERS: Supply power as well as gas and (unless they are producer affiliates) can switch from gas to power OWNERS OF POWER, REGAS AND STORAGE ASSETS: Maximise life of assets: shorter for power than regas/ storage; may be stranded if others decarbonise

14 OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Future of Gas in a Carbon-Centric Europe the dilemma facing the gas industry European gas has another 10 years of stable or slowly declining demand, but will need more imports as domestic production declines; these could be good years for upstream and networks (but not downstream) MANY IN THE GAS INDUSTRY BELIEVE: decarbonisation is ongoing and unstoppable only CCS will provide credibility for gas advocacy BUT WITH INVESTMENT/PLANNING HORIZONS OF 5-7 YEARS: CCS investment is not happening (corporate fragmentation and costs are also issues) Therefore post-2030 the future is decline, which will accelerate if governments adopt more aggressive decarbonisation policies `The future for the next decade is strong, but investments on a longer time scale may be more problematic

15 BCMA LNG: a supply surge is on the way Existing, Under Construction & FID d Trinidad Malaysia Source: Howard Rogers (OIES) Qatar USA Australia Russia Nigeria Indonesia Algeria USA Tanzania Senegal Russia Qatar Australia Yemen Trinidad Peru Papua New Guinea Oman Norway Nigeria Mozambique Malaysia Libya Indonesia Eq. Guinea Canada Cameroon Egypt Brunei Angola Algeria Abu Dhabi

16 BCMA 1, Potential Requirement for New LNG to 2035 under Low and High LNG Demand Scenarios Low LNG Demand Case 200 bcma 300 bcma Existing Source: Platts, Howard Rogers (OIES) USA Qatar Senegal Papua New Guinea Mauritania 700 Malaysia Iran Eq. Guinea 600 Canada Cameroon Brunei 500 Brazil BCMA 1,000 Angola Nigeria Australia 400 Russia Tanzania Mozambique 300 Qatar USA Existing High LNG Demand Case 400 bcma Australia Nigeria Russia E. Africa Senegal Papua New Guinea Mauritania Malaysia Israel Iran Indonesia Eq. Guinea Canada Cameroon Brazil Angola Australia Nigeria Russia Tanzania Mozambique Qatar USA Existing

17 THANK YOU! Simon Pirani, Oxford Institute for Energy Studies

The Future of Gas in Decarbonising European Energy Markets

The Future of Gas in Decarbonising European Energy Markets Jonathan Stern Sedigas Annual Meeting, Madrid, May 30, 2017 Published in January 2017, reaction has been general agreement with the main thesis,