Application for an Exemption from Regulated Third Party Access pursuant to Article 22 of Directive 2003/55/EC

Transcription

1 September 2008 Application for an Exemption from Regulated Third Party Access pursuant to Article 22 of Directive 2003/55/EC Shannon LNG Terminal Kilcolgan Lower, County Kerry

2 Table of Contents Purpose of Document Introduction The Project Overview and background Ownership and Project Structure The Facility Project Benefits Schedule The LNG Industry Background The LNG Supply Chain Natural Gas in Ireland Overview National Transmission Network Demand Supplies Request for RTPA exemption Legal and Regulatory Background Scope of RTPA Exemption Exemption Criteria Condition (a) - the investment must enhance competition in gas supply and enhance security of supply Condition (b) the level of risk attached to the investment is such that the investment would not take place unless an exemption was granted Condition (c) the infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose system that infrastructure will be built Condition (d) charges are levied on users of that infrastructure Condition (e) the exemption is not detrimental to competition or the effective functioning of the internal gas market, or the efficient functioning of the regulated system to which the infrastructure is connected Anti-Hoarding and Use-It-Or-Lose-It Proposals Annex A - Figures accompany Shannon LNG application Annex B - Brattle Group Report on the Shannon LNG Terminal, July Annex C - Confidential - Project Business Risks Annex D - Confidential - Financial Information Annex E - Brattle Group Memo to Shannon LNG on an open season Annex F - DKM Report on Shannon LNG Economic Benefits to the Irish Economy

3 Purpose of Document This document is Shannon LNG Limited s application for a full exemption from all applicable third party access obligations set out in Articles 18, 25 (2), (3) and (4) of Directive 2003/55/EC. The applicant is seeking an exemption for the full capacity of the terminal (including expansion capacity) of 28.3 million standard cubic metres per day (mscmd) of regasified LNG. This application is seeking an exemption term of 35 years from the date of commencement of commercial operations of the LNG terminal. 1. Introduction 1.1 Shannon LNG Limited ( Shannon LNG ) proposes to construct a liquefied natural gas (LNG) import terminal on a 104 hectare (ha) (257 acre) site owned by Shannon Development and subject to purchase option by Shannon LNG. The site is located on the Shannon Estuary between Tarbert and Ballylongford in Co. Kerry. The proposed development will consist of a marine jetty with secure mooring, LNG offloading facilities, up to four LNG storage tanks, an LNG pumpout and vapourisation system and related buildings and facilities. The LNG terminal will receive LNG from ocean-going tankers, store it, then regasify it and deliver natural gas into the national transmission network in Ireland. The site location is shown in Figure A1 in Annex A. 1.2 In order to proceed with the project, pursuant to Article 22 of Directive 2003/55/EC (the Directive ) Shannon LNG is seeking a full exemption from all applicable third party access obligations as set out in Articles 18, 25 (2), (3) and (4). 1.3 The granting of an exemption will assist the Shannon LNG affiliated terminal capacity holder ( TradeCo ) in securing the optimal upstream LNG supply and shipping arrangements. The granting of the exemption will also facilitate Shannon LNG s shareholder in financing the terminal from internal funds. Both these objectives will be enhanced by the certainty and security of capacity access and associated capacity payments which an RTPA exemption will provide. 1.4 Statutory Instrument No. 320 of 2005, European Communities (Internal Market in Natural Gas) Regulation 2005 was enacted for the purpose of giving effect to Directive 2003/55/EC of the European Parliament in Ireland. Article 22 of the Directive outlines the criteria under which new gas infrastructure may be exempt from Regulated Third Party Access (RTPA). 2

4 1.5 The Directive outlines five conditions that must be achieved if an exemption is to be granted.the conditions are as follows: (a) (b) (c) (d) (e) The investment must enhance competition in gas supply and enhance security of supply; The level of risk attached to the investment is such that the investment would not take place unless an exemption was granted; The infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built; Charges are levied on users of that infrastructure; The exemption is not detrimental to competition or the efficient functioning of the regulated system to which the infrastructure is connected. 1.6 The Commission for Energy Regulation (the Commission ) is the statutory body in Ireland responsible for granting RTPA exemptions. 1.7 This document sets out the basis by which the Shannon LNG terminal meets the exemption criteria set out in 22 (1) (a)-(e) of the Directive. 3

5 2. The Project 2.1 Overview and background The site, presently owned by Shannon Development, was acquired by the state as a national strategic location for large-scale maritime related industry. It enjoys access to deep water and the Shannon Estuary is suitable for navigating large ships. The site is also close to the national gas and electricity grids, presenting a suitable location for an LNG import terminal Subject to receiving the necessary regulatory and planning consents, the Shannon LNG terminal will be used to regasify LNG being imported to the site. A new gas connection pipeline about 26km in length, is being developed by an affiliate of Shannon LNG to transport the gas to the national transmission network which is owned by Bord Gáis Éireann and operated by the independent system operator, Gaslink The rationale for the LNG terminal project is described below and discussed in detail in the following sections: Existing indigenous gas production in Ireland and the UK is rapidly depleting requiring increasing levels of gas imports, accompanied by steep increases in the price of natural gas and electricity in the face of continuing energy demand growth. Anticipated new domestic supplies (i.e. Corrib) are insufficient to offset these declines. The development of an LNG terminal in Ireland will allow access to more diversified and flexible gas supply sources providing increased energy supply security. Access to LNG will reduce Ireland s reliance on less environmentally friendly fossil fuels such as coal and oil. Additional gas supplies for Ireland will increase the level of competition in the market and should bring downward pressure on wholesale gas prices. Increased deliveries of natural gas will support the development of additional supplies of renewable energy, in particular wind generation, which must be backed up by rapid response generation due to its intermittent production profile. The short term delivery flexibility afforded by an LNG terminal through rapid adjustment of the vapourisation system will assist in meeting fluctuating demands on the gas grid from backup power generators Ireland lies at the very end of the European natural gas pipeline system and a considerable distance from the major producing fields in Norway, Russia and Algeria. For many years the Kinsale Head gas field was Ireland s only indigenous source of natural gas. However, this field is now supplying less than 10% of 4

6 Ireland s natural gas requirements and is forecast to supply a very limited quantity of natural gas by the time the proposed Shannon LNG terminal enters commercial operations In the Gas Capacity Statement 2007, the Commission for Energy Regulation forecast that the Corrib field will come on-line in 2009, initially supplying up to 39% of Ireland s 2 peak day demand. By 2012 however, in the face of declining production and rising demand, Corrib will supply only 18% of Irish peak day demand. While the Corrib field provides welcome indigenous gas supplies for a number of years, it is not an adequate long term solution for addressing Ireland s growing demand Ireland currently imports over 90% of its natural gas requirements from the UK. Irish wholesale gas prices are set primarily by UK market conditions plus the cost of transporting gas from the UK to Ireland. The national transmission network is shown in Figure A2 in Annex A In recent years, the UK North Sea was the source of the natural gas supplied to Ireland, but that too is now rapidly depleting. National Grid, the UK pipeline operator forecasts that the UK will import 55% of its natural gas requirement in 2010/11, rising to 80% by 2016/17 3. Much of this gas will be sourced from remote fields in Russia, Algeria, offshore northern Norway and elsewhere. The UK is rapidly developing LNG terminals to help meet the growing gap between demand and supply. Northwest Europe is also expanding its LNG terminal infrastructure With the UK and Northwest Europe rapidly becoming net importers of gas, and LNG expected to be the marginal supply in this region of the world, it no longer makes sense for Ireland to continue to expand its imports from the UK. Ireland can develop the ability to import LNG directly, thereby avoiding the added cost and risk of transporting LNG through the UK grid and across the Irish Sea The market and supply motivations of the UK LNG importers may not be as aligned with Irish interests as would be the interests of a domestic Irish LNG terminal operator, nor are the unique risks to Irish energy security (e.g. of a pipeline break in the Irish-UK Interconnector) mitigated by imports of LNG into the UK. LNG imports into the UK will be increasingly tailored to meet the unique needs and flexibility of the UK, which may not match the requirements of users of natural gas in Ireland. For example, Ireland has a much higher reliance on gas for power generation than the UK, and will also have an increasing share of windgenerated power which will place different flexibility demands on the Irish gas grid compared to the UK gas grid. Expanding the Irish-UK gas interconnectors to accommodate the fluctuating requirements of back-up generation for wind power will result in low pipeline utilisation and much higher gas transmission costs The development of the Shannon LNG terminal will add storage and deliverability to the Irish market more cost effectively than would be the case if Ireland relied on the UK market to provide these services. 1 Commission for Energy Regulation, Gas Capacity Statement Unless otherwise stated, Ireland refers to both Northern Ireland and the Republic of Ireland. 3 Transporting Britain s Energy 2007, Development of Investment Scenarios, National Grid, Page 9. 5

7 2.2 Ownership and Project Structure Shannon LNG is a wholly owned Irish subsidiary of Hess LNG Limited and was established to pursue, develop and implement the proposed Shannon LNG terminal. Hess LNG Limited is a joint venture of Hess Corporation and Poten & Partners, both US companies and highly experienced in the international oil and gas business Hess Corporation is a global integrated energy company engaged in oil and gas exploration and production, refining of crude oil and the sale of refined products, natural gas and electricity. Hess Corporation s stock is listed on the New York Stock Exchange Poten & Partners provides brokerage, consulting and project development services related to trading and transportation of crude oil, petroleum products, natural gas, LNG, liquefied petroleum gas and other commodities Shannon LNG has assembled a highly experienced project development team to design the LNG terminal. This includes staff in offices in Dublin, Listowel and the United States. About 50 people will be recruited for the long term operation of the terminal facility Shannon LNG will secure all necessary permits, consents, approvals and licences from the relevant authorities, and build, own and operate the terminal. Shannon LNG will ask the Commission to grant a Licence to operate the LNG terminal TradeCo will enter into a long-term terminal use agreement with Shannon LNG for the full capacity of the terminal. TradeCo will enter into LNG purchase and shipping arrangements with upstream LNG suppliers and will seek gas sales agreements with wholesale purchasers of gas in Ireland and large scale consumers of gas such as power stations Shannon LNG will generate revenue by contracting the long term capacity of the terminal to TradeCo for a fee; Shannon LNG will not be involved in buying and selling LNG and gas The structure of the project is shown below in Figure

8 Figure 2.1 Shannon LNG Project Structure LNG Supplier LNG Sales and Purchase Agreement Shannon LNG Terminal Company Terminal Use Agreement TradeCo Gas Sales and Purchase Agreement Customers 2.3 The Facility The proposed Shannon LNG terminal will comprise a number of components as illustrated in Figure A3 in Annex A and discussed below. LNG Jetty The jetty will be capable of receiving and providing secure berthing for LNG ships up to 265,000 m 3 cargo capacity. The double hulled LNG ships carry the LNG at near atmospheric pressure in specially insulated cargo tanks. LNG Storage Tanks There will be up to four full-containment LNG storage tanks each with a capacity of up to 200,000 m 3. Vapourisation Process Equipment This equipment will convert the LNG from a liquid to a gaseous state. Administration and security building, stores, workshops, various other buildings and process equipment The terminal is being designed to have an ultimate peak day send out capacity of 28.3 million standard cubic metres per day (mscmd). As is usual with LNG projects, construction of the terminal will be phased; the initial peak day send out 7

9 capacity will be 17 mscmd, with planned baseload operations of 11.3 mscmd after the initial ramp-up period The terminal is being designed to serve demand on an all-island basis. Average daily demand on an all-island basis in 2006 was about 17.1 mscmd. By 2012/13, average daily all-island demand is forecast to be about 25.7 mscmd 4. Peak day demand in Ireland was about 25 mscmd in 2006 and is forecast to be about 34 mscmd by 2012/ In addition to the proposed Shannon LNG terminal, a gas connection pipeline will be installed to connect the LNG terminal to the existing national gas transmission network (close to Foynes in County Limerick). 2.4 Project Benefits Security of Supply Benefits Security of energy supply has recently assumed a high profile on the international arena and energy security is increasingly affected by political factors between countries and regions As the EU becomes increasingly reliant on pipeline imports from Russia and other remote areas, security of supply is of increasing importance. This came sharply into focus in the recent dispute over gas pricing between Russia and Ukraine, when Russia cut supplies to the Ukraine As LNG can theoretically be sourced from any country with a liquefaction plant, it can provide unmatched supply diversity and security as compared to gas supplied by long distance pipeline This issue is particularly important for Ireland as it is at the end of the European gas pipeline network and currently imports 90% of its gas from the UK, which is itself a net gas importer. Natural gas is used to generate over 60% 5 of electricity produced in Ireland and almost 600,000 homes use natural gas for heating and cooking purposes. The development of an LNG terminal in Ireland will allow access to more diversified supply sources providing increased energy supply security Shannon LNG commissioned DKM to prepare the attached report ( the DKM Report ) to assess the economic benefits of the Shannon LNG terminal to the Irish economy. DKM made the following statements on how the Shannon LNG terminal will improve Ireland s security of gas supply: Ireland is situated within economic transportation distance of over 70% of global gas reserves which at current production levels will last for in excess of 60 years. Shannon LNG will make it possible to source natural gas from a diverse range of countries, including ones not supplying Ireland by pipeline. Shannon LNG will 4 Source: Annual growth factors in the Commission for Energy Regulation Gas Capacity Statement 2007 applied to 2006/07 gas demand published on BGÉ website. 5 Commission for Energy Regulation Report on Ireland s Security of Supply of Electricity, July

10 thus significantly improve Ireland s security and diversity of supply, as well as bringing a range of other economic benefits. The most important benefit of this project, however, is that it gives Ireland access to the world market for natural gas, and confers very significant security and diversity of supply benefits. It insures Ireland against exposure to supply disruptions and large hikes in price, due to infrastructural breakdown or geopolitical difficulties. The value of this benefit is difficult to measure, but is very considerable. The social and economic consequences of a disruption in natural gas supplies for even a short period of time would be extremely serious The DKM Report also highlights the economic benefits detailed below that will accrue to Ireland as a result of the Shannon LNG terminal DKM has determined that the following national economic benefits will accrue to Ireland from the Shannon LNG terminal over the life of the project: Increase to Irish Gross National Product of approximately 1.35 billion in 2007 prices; Tax revenues paid to exchequer of approximately 410 million; More competitive natural gas prices, through increased supply to the market; Significantly improve Ireland s security and diversity of energy supply; Benefits in the electricity market, through improving the economics of electricity generation; and The Shannon LNG terminal will enable and encourage further switching to natural gas which will generate environment benefits as natural gas is a relatively benign fuel from an environmental point of view DKM has determined that the following regional and local benefits will accrue to the South-West of Ireland: Shannon LNG is expected to generate 100 permanent jobs (including direct and spin-off) when operational and about 600 jobs at the peak of construction; Shannon LNG is expected to generate regional expenditure of 42 million per annum during the construction phase and 21 million per annum during the operational phase; The location of the Shannon LNG terminal will improve the viability of supplying natural gas to local towns as the national transmission network will be extended to the area; and 9

11 The location of the Shannon LNG terminal will also increase the viability and reliability of a power generation facility in the area, which would enhance the region s general economic attractiveness. 2.5 Schedule Due to the scale and nature of the project, the overall period for construction and pre-commissioning of the initial phase of the terminal project is expected to be up to 48 months Subject to the project receiving planning permission and other consents and approvals in 2009, the project is expected to enter commercial operations no earlier than The natural gas pipeline connecting the LNG terminal to the national transmission network is planned for construction no earlier than

12 3. The LNG Industry This section is included to demonstrate the large capital investments required in all segments of the LNG supply chain and the correspondingly long commercial agreements which are negotiated to underwrite the investments. 3.1 Background LNG is produced primarily in locations close to the sea where large gas reserves have been discovered and which are far above the needs of the local market.. However these reserves may be too distant from market areas to allow for economic transport of the gas via pipelines or the pipelines may have to cross technically challenging or politically unfriendly territories. When converted to a liquid, natural gas takes up far less storage space. This makes gas converted to LNG easier and more economic to transport over long distances in specially designed ships Natural gas is liquefied and exported from many locations. LNG exporters include Algeria, Qatar, Egypt, Nigeria, Norway, Oman, Trinidad, Indonesia, Malaysia, Abu Dhabi, Equatorial Guinea, Libya and Australia. LNG exports are also planned from a number of other countries including Russia, Angola, Peru, Venezuela and Yemen (LNG exporting and importing countries worldwide are illustrated in Figure A4 in Annex A) The use of LNG to transport gas to market is by no means new. LNG trades have been growing around the world since the 1960s with LNG import terminals generally located close to areas with high gas demand but with limited or no local supply. Terminals are frequently located in or near cities such as Boston, Tokyo, and Barcelona to name a few. Japan, Korea and Taiwan, major industrialised nations, source almost 100% of their natural gas supplies from imported LNG. In order to meet the expected growth in LNG demand in the US, more than 50 new import facilities have been proposed. Many new LNG terminals are proposed for Europe. Refer to Figure A5 in Annex A for a map of LNG terminals and developments in Europe In order for Ireland to compete effectively in this global market it needs direct access to global supplies and it is crucial that a regulatory and commercial environment exists in Ireland that is conducive to attracting LNG from these producing countries. Current Trends Demand for LNG is currently increasing in the EU with imports rising from 28 billion cubic metres (bcm) in 2000 to 47 bcm in 2007 in the EU 27 countries, an increase of about 70% 6. 6 BP Statistical Review of World Energy

13 3.1.6 World LNG liquefaction capacity is increasing rapidly with new LNG liquefaction plants being installed around the world. Overall production capacity is expected to double by Qatar is forecast to be the world s largest producer of LNG (108 bcm per year 7 ) by The LNG tanker industry is also undergoing significant expansion. Between 2003 and 2010, the total tanker capacity is expected to more than double The LNG Supply Chain The LNG supply chain is the industry term applied to the series of activities that are used to link the gas producer to the gas consumer. It is generally taken to consist of the following elements: (i) (ii) (iii) (iv) Natural gas upstream production facilities; Natural gas liquefaction and export facilities; LNG shipping; and LNG import, storage and regasification terminals. Figure 3.1 The LNG Delivery Chain Production Liquefaction Shipping Regasification Source: Poten & Partners Very significant investments (typically billions of euro) are required for the upstream natural gas production and liquefaction facilities. Generally the upstream facilities are developed by joint ventures between large international oil companies, often in partnership with the state oil company of the host country Special purpose LNG tankers are used to transport LNG from the liquefaction plant to the LNG regasification terminal. Depending on the tanker size, typical LNG tanker capital costs can range from 150 to 250 million. LNG tankers are 7 Equivalent to 77 million tons of LNG per year ships at the end of 2003, 255 ships at the end of 2007 and 369 ships at the end of The average size of ships is also increasing. Source: Poten and Partners. 12

14 typically owned by the upstream project company (or affiliates thereof), the downstream importer or by independent ship-owners who charter the ships to the upstream or downstream companies In order for the supply chain to function effectively, each segment needs to be aligned with and closely linked to the adjacent components. In order for the upstream project companies to achieve the assurance required to make the multi-billion dollar investments in the upstream part of the chain, they need to see that the buyers they are contracting with for LNG sales have secure, long term access to market(s) on known terms and conditions, including costs. Demonstration of secure access on known terms and conditions can be achieved through a long term terminal use agreement between the LNG buyer and the import terminal operator. Similarly, the LNG buyer seeking to enter into a long term LNG supply contract, which will usually incorporate onerous take-or-pay provisions will need the assurance of secure market access to ameliorate the risk of these contractual arrangements TradeCo will only be able to enter into long term LNG sale and purchase agreements with upstream suppliers to the extent that it can secure similar long term access to the regasification terminal to which an RTPA exemption is granted. TradeCo will shortly be entering discussions with a number of LNG suppliers. In order to secure supplies, TradeCo will have to demonstrate that it has or can readily obtain a long term terminal use agreement for the Shannon LNG terminal Recently, in the world LNG market, LNG is being increasingly traded on a spot basis, particularly in the Atlantic market. It is important however to note that LNG spot trade is not expected to become predominant over long term trade. While currently accounting for about 10% of global LNG trade, some forecasts estimate that by 2020, LNG spot trade could account for 30% of the global LNG trade 9. The implication of this is that 70% of trade will remain under long term contracts. The 30% forecast could be considered at the high end of predictions for LNG spot trading by LNG industry participants 10. Even if there was an expectation of an increasing supply of spot LNG, TradeCo and Shannon LNG wish to secure a significant portion of their LNG supply under long term arrangements to underwrite the financial viability of the terminal investment, permit the financing of the terminal and secure term sales commitments with downstream buyers in the Irish market. 9 Volume III, EU Commission Staff Working Document accompanying the communication from the Commission Inquiry pursuant to Article 17 of Regulation (EC) No. 1/2003 into the European gas and electricity sectors (Final Report) page 263, Brussels, SEC (2006) The percentage could vary depending on the definition of spot trade and the methodology of the assessment. If it is assessed at LNG export points it would be a much smaller percentage, i.e. the volume uncommitted to long term contracts at the original producer s discretion is very limited while the percentage will increase if it is assessed at LNG import points to the extent significant number of cargoes lifted under term contracts are resold to other buyers on a short term and/or a spot basis which is often referred to as an arbitrage deal. 13

15 4. Natural Gas in Ireland 4.1 Overview 4.1 The Shannon LNG terminal is being designed to serve demand on an all-island basis. The potential for an all-island market was recently made possible by the completion of the South-North Pipeline linking the Northern Ireland gas network and the Irish gas network. In addition to this, the regulatory authorities in the two jurisdictions published an All-Island Energy Market Development Framework which sets the policy context for the creation of an all-island energy market in November National Transmission Network The national transmission network is shown on Figure A2 in Annex A. There are currently two entry points (the Inch and Moffat entry points) to the system The Moffat entry point, located in Scotland, connects the national transmission network to that of National Grid in the UK, and allows for the importation of gas from the UK to Ireland via three sub-sea interconnectors. Interconnector 1 (IC1) connects the UK network in Scotland to Loughshinny in Dublin. Interconnector 2 (IC2) connects the UK network in Scotland with Gormanston, north of Dublin. The Scotland to Northern Ireland Pipeline (SNIP) connects the UK network in Scotland to Ballylumford in Northern Ireland The Inch entry point, located in Cork, connects the Kinsale and Seven Heads gas fields to the national transmission network An additional entry point to the national transmission network is planned in Mayo to allow production of the planned Corrib gas field. It is anticipated that the Corrib gas field will be in commercial operation by the end of A new entry point to the national transmission network will also be required for the Shannon LNG terminal There is a natural gas storage facility at the southwest Kinsale gas field which is owned and operated by Marathon Oil Ireland Limited. This storage facility is connected to the national transmission network at the Inch entry point in Co. Cork. 11 All Island Energy Market Development Framework November 2004, published by the Department of Communications, Marine and Natural Resources, the Department of Enterprise, Trade and Investment in Northern Ireland, the Commission for Energy Regulation and the Northern Ireland Authority for Energy Regulation. 12 Commission for Energy Regulation, Gas Capacity Statement

16 4.3 Demand Total natural gas demand in Ireland 13 in 2006 was about 6.3 billion cubic meters (bcm) According to the Gas Capacity Statement 2007, power generation accounted for 62% of total demand, the industrial and commercial sector accounted for 20% and the domestic sector accounted for 16% of total demand 15. As power generation is the dominant demand for natural gas in Ireland and is reasonably constant year round, this helps to smooth the seasonal nature of demand Peak day demand in Ireland was about 25 mscmd in 2006 and minimum day demand was about 12 mscmd Peak day demand in Ireland is forecast to be about 34 mscmd by 2012/13. A projected load duration curve for Ireland for the 2012/13 Gas Year is shown below Unless otherwise stated, Ireland refers to both Northern Ireland and the Republic of Ireland. 14 BGÉ website: 15 The Gas Capacity Statement considers demand in the Republic of Ireland only. 16 BGÉ website: 17 The data used to develop Figure 4.1 is taken from daily demand data published by BGÉ for the 2006/07 Gas Year and then extrapolated to 2012/13 using the annual growth forecast in CER Gas Capacity Statement

17 4.3.5 The load duration curve in Figure 4.1 demonstrates that under the forecast demand conditions in Ireland, there will be many days of the year, when demand in Ireland is almost the same as the peak day sendout capacity of the Shannon LNG terminal. The size and nature of demand in Ireland versus the potential send-out capacity of the LNG terminal would seriously compromise the practicalities of a multi-user terminal in Ireland The Irish Government has set a target for 33% of electricity to be produced by renewable energy by The majority of this renewable energy target will be met by wind generation. Due to the intermittent nature of wind generation, quick start gas fired generation will have to be available as back-up to the system when wind generation is low 19. This means an extremely flexible gas supply will have to be available to the gas fired generators in the future. The uncertainty over the level of hourly, daily and monthly gas demand in the power generation sector in Ireland in the future will also lead to practical difficulties in the scheduling of a multi-user terminal in Ireland. 4.4 Supplies According to the Gas Capacity Statement 2007, 91% of gas supplies were imported from the UK in 2006, with the remaining 9% of supplies coming from indigenous gas from the Kinsale and Seven Heads fields 20. A peak day supply/demand forecast for Ireland from the Gas Capacity Statement 2007 is provided below. 18 Government White Paper, Delivering a Sustainable Energy Future for Ireland, the Energy Policy Framework , March EirGrid report Wind Powered Generation, An Analytical Framework to Assess Generation Cost Implications, June Commission for Energy Regulation Gas Capacity Statement The Gas Capacity Statement considers supplies into the Republic of Ireland only. 16

18 Figure 4.2 Peak Day Supply/Demand Forecast for Ireland 21 GWh/day (Source: CER Gas Capacity Statement 2007) The peak day supply/demand forecast above shows that from 2009/10 additional indigenous gas supplies will come from the Corrib field reducing the amount of imported gas for a number of years. However, after a short number of years the Corrib field is forecast to decline and imports from the UK will start to increase again for a period of time. The Shannon LNG terminal is currently anticipated to commence operations in Republic of Ireland only 17

19 5. Request for RTPA exemption 5.1 Legal and Regulatory Background In order to proceed with the project, pursuant to Article 22 of Directive 2003/55/EC (the Directive ) Shannon LNG is seeking a full exemption from all applicable third party access obligations as set out in Articles 18, 25 (2), (3) and (4) Statutory Instrument No. 320 of 2005, European Communities (Internal Market in Natural Gas) Regulation 2005 was enacted for the purpose of giving effect to Directive 2003/55/EC of the European Parliament. Article 22 of the Directive outlines the criteria under which new gas infrastructure may be exempt from Regulated Third Party Access The Directive outlines five conditions that must be achieved if an exemption is to be granted.the conditions are as follows: (a) (b) (c) (d) (e) The investment must enhance competition in gas supply and enhance security of supply; The level of risk attached to the investment is such that the investment would not take place unless an exemption was granted; The infrastructure must be owned by a natural or legal person which is separate at least in terms of its legal form from the system operators in whose systems that infrastructure will be built; Charges are levied on users of that infrastructure; and The exemption is not detrimental to competition or the efficient functioning of the regulated system to which the infrastructure is connected. The applicability of these five conditions to Shannon LNG are discussed in Section 6 below To assist in making the RTPA exemption application, Shannon LNG commissioned the Brattle Group to carry out an independent assessment of the effect of the Shannon LNG terminal on competition in the relevant markets. The Brattle Group also considered whether the level of risk associated with the investment is such that the investment would not take place without an exemption The Brattle Group s report on the Shannon LNG terminal can be found in Annex B. 18

20 5.1.6 The scale of the capital investment required for the Shannon LNG terminal and the level of risk attached to it is such that the project shareholders are unwilling to proceed beyond the planning phase without confirmation that the Shannon LNG terminal will be exempted from regulated third party access for a term of at least 30 years. 5.2 Scope of RTPA Exemption Shannon LNG is seeking an exemption for the full capacity of the terminal (including expansion capacity) of 28.3 mscmd of regasified LNG. The study undertaken by the Brattle Group demonstrated that the Shannon LNG terminal will increase competition in the relevant markets in both its base case (17 mscmd) and expanded form (28.3 mscmd) Shannon LNG has requested the exemption to apply to both the initial phase of the project and the expanded terminal because each phase cannot be considered in isolation. Shannon LNG s final investment decision will partly be based on the ability to increase the send-out capacity to 28.3 mscmd in order to respond to market conditions. Shannon LNG notes Ofgem s decision to grant an exemption to the South Hook LNG terminal in the UK was based on the initial and expanded phases of the project Shannon LNG will own and operate the terminal. TradeCo, an affiliate/subsidiary of Shannon LNG will be responsible for the delivery of LNG to the terminal and the sale of gas from the terminal. The Shannon LNG business model is therefore a combination of an own-use terminal and a tolling terminal The scope and term of the exemption request reflects the level of certainty that Shannon LNG requires to proceed with the project. While exemptions of up to 25 years have been granted for LNG terminals in the UK, Shannon LNG considers that the risk profile of an LNG terminal in Ireland is greater than that in the UK and therefore a longer exemption period is required. Confidential Annex C outlines some of the the risks facing the Shannon LNG terminal TradeCo also requires this level of long term certainty in order to secure the necessary upstream LNG supply and transportation arrangements. LNG sale and purchase agreements normally have durations of 20 to 25 years, plus buildup and extension periods, to facilitate the construction and financing of the liquefaction plant, the gas production fields and the shipping requirements Taking account of the level of project risk, the need to optimise and recover project costs, the requirement to minimise scheduling constraints and compete with other gas suppliers in Ireland and the UK, Shannon LNG is not in a position to bear the costs and risks associated with providing surplus capacity for regulated third party access use. 22 Application by South Hook LNG Terminal Company Ltd (SHTCL) (owned by Qatar Petroleum and ExxonMobil) under section 19C of the Gas Act 1986 for an exemption from section 19D of the Gas Act 1986, Ofgem final views, November

21 5.2.7 Shannon LNG is concerned that a potential multi-user terminal providing one or more third parties with capacity would be unworkable given that the terminal can only physically supply demand in Ireland 23. Due to the size of market that the Shannon LNG terminal can physically supply, and the limited storage Shannon LNG may install during the first phase of the project, the shipping and send-out logistics associated with third party access use would make it very difficult to optimise the terminal s throughput. Shannon LNG proposes that third party access by which Shannon LNG and/or TradeCo would offer unutilised cargo discharge slots to third parties is addressed through the introduction of a best practice use-it-or-lose-it (UIOLI) policy that takes account of the particular nature of gas demand in Ireland (see section 7 for more details). 23 The UK/Ireland interconnectors only accommodate one-way physical flows from the UK to Ireland. The UK/Ireland interconnectors connect to the UK grid at Moffat in Scotland. Moffat is only an exit point from the UK grid, not an entry point to the UK grid. 20

22 6. Exemption Criteria 6.1 Condition (a) - the investment must enhance competition in gas supply and enhance security of supply Enhance competition in gas supply Gas sold by TradeCo from the Shannon LNG terminal will be a new source of supply to the UK/Ireland market which is identified by the Brattle Group as the relevant geographic market for the purposes of the competition analysis. TradeCo will have to compete for market share against gas produced in Ireland as well as the UK and Norway, and regasified LNG imported at UK LNG terminals The Brattle Group concluded that the Shannon LNG terminal would enhance competition in gas supply (see Annex B for the full Brattle Report): The Shannon LNG terminal, either in its base case form or expanded form, would enhance competition in both a UK/Ireland gas wholesale market and a peak day market. Even out to 2030 the capacity holder of Shannon LNG does not have the ability and incentive to exercise market power We foresee no competitive problems for the retail market Brattle also noted that the Shannon LNG terminal will enhance competition in all the markets studied. TradeCo will effectively be a new entrant in the UK/Ireland gas market and giving more capacity to a new entrant will have a pro-competitive effect Table 6.1 and 6.2 below are extracted from the Brattle Report and show the reduction in the Herfindahl-Hirschman Index (HHI) in the peak day and wholesale UK/Ireland gas market for both the base case and expanded Shannon LNG terminal. This again demonstrates the pro-competitive effect the Shannon LNG terminal will have. Table 6.1: Effect of Shannon LNG on HHIs in the peak-day and wholesale gas markets, base case With Shannon Without Shannon Reduction in HHI due LNG LNG to Shannon LNG Wholesale Peak-day market

23 Table 6.2: Effect of Shannon LNG on HHIs in the peak-day and wholesale gas markets, expanded terminal With Shannon Without Shannon Reduction in HHI due LNG LNG to Shannon LNG Wholesale Peak-day market To further demonstrate the pro-competitive effects of the terminal, Shannon LNG notes the following points made by the EU Commission in a recent Energy Sector Inquiry paper 24 : First, Regulators and other commentators expressed the view that exemptions must be assessed according to the principles set out in Article 22 of the Directive. This implies, for example, that a new LNG facility should be granted an exemption if the undertaking benefiting from it has a low market share and where this infrastructure will allow such a company access to downstream markets (allowing entrants to challenge incumbent's dominance of imports). TradeCo will effectively be a new entrant to the UK/Ireland market with a low market share even in the expanded terminal case and will be challenging the dominance of existing suppliers in Ireland Second, the Energy Sector Inquiry paper states that the flexibility potential of LNG can contribute to developing spot markets. The Shannon LNG terminal has the potential to assist in the development of a spot market in Ireland, thereby supporting greater levels of competition in the market Third, in the context of new capacity on LNG terminals not being held by national incumbents, the Energy Sector Inquiry paper states As this analysis shows, the ongoing construction of new LNG capacity opens possibilities for new entry. LNG terminals therefore have a potential of promoting market integration and competition within the sector. Enhance Security of Supply The supply of LNG through the Shannon LNG terminal will provide for an entirely new source of gas imports for Ireland and a new entry point to the national transmission network. It is clear the Shannon LNG terminal will enhance Ireland s security and diversity of supply, both from short term physical interruptions, such as a failure of the Ireland-UK interconnectors or a longer term shortage of supplies, due to, for example, an interruption of Russian gas supplies. 24 VOLUME III, Commission Staff Working Document accompanying the communication from the Commission Inquiry pursuant to Article 17 of Regulation (EC) No 1/2003 into the European gas and electricity sectors (Final Report), Page 217, Brussels, SEC (2006)

24 The Shannon LNG terminal can contribute to alleviating security of supply concerns in Ireland and Europe as indigenous production declines and a gas supply shortage is forecast to develop Ireland currently imports over 90% of its natural gas requirements from one country, the UK, and through one entry point, the Moffat entry point in the UK. This trend is likely to continue in the long term (i.e. after the Corrib Field is depleted) as indicated in Figure A6 in Annex A Compared to other European countries, Ireland has the lowest volume of natural gas storage relative to annual gas demand and is therefore one of the worst positioned countries to meet unexpected supply interruptions. Even though it is designed primarily for operational purposes, Shannon LNG s storage will add to the overall gas storage capacity in the Irish market. Figure 6.1 Storage Capacity as a % of Annual Gas Demand (IEA Statistics 2007, CER Gas Capacity Statement 2007 for Ireland) 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% Ireland UK Netherlands Spain Denmark German Italy France Hungary Austria % of Ireland s electricity was generated using natural gas in , compared to the European average of about 29% As the nuclear power option has been ruled out in Ireland and existing coal technology carries expensive environmental consequences, there is no realistic 25 Reports on Ireland s Security of Supply of Electricity, Commission for Energy Regulation, August 2006 and July

25 alternative to natural gas as the fuel of choice for power generation in the foreseeable future. As LNG can be sourced from various countries, it can provide supply diversity to compete with oil or coal for power generation purposes The following paragraphs are extracted from the Commission for Energy Regulation s report on Ireland s Security of Supply of Electricity 26 : In Ireland, security of supply of electricity is emphasised as a result of factors such as the large demand growth experienced recently due to Ireland s economic growth, the high dependence on gas (the majority of which is imported) as a fuel for electricity generation and the lack of electrical interconnection between Ireland and Great Britain. Ireland is heavily dependent on imported gas as demonstrated by the level (93%) of gas imported for the gas year 2006/2007. The fact that Ireland relies so extensively on importation means that the security of gas importation infrastructure and import supplies are of vital importance to the security of Ireland s electricity supply. This high dependence on imported gas is as a result of: Decreased indigenous production; and, Increased demand for gas, particularly from the power generation sector. The development of an LNG terminal would further diversify gas supplies into Ireland. At present, all the imported gas is pipeline gas. An LNG terminal will be capable of importing gas supplies from all over the world Ireland is part of the UK/Ireland natural gas market from a competition perspective, but from a physical security of supply perspective, Ireland is in a different position than the UK. The UK has many different supply points of natural gas into its grid combined with diverse supply sources, including LNG. In the long term, without an independent and diverse gas supply, almost all of Ireland s gas will be delivered through one supply point (the UK). UK/Ireland Supply Demand Imbalance Position While Ireland currently imports most of its natural gas requirements from the UK, Figure A7 in Annex A shows that the UK will be importing increasing quantities of natural gas in the long term. National Grid forecasts indicate the UK will have an import dependency of 55% in 2010/11 increasing to 80% by 2016/ Ireland and the UK will become increasingly exposed at the extremity of the European network as their indigenous supplies decline, leading to greater 26 Report on Ireland s Security of Supply of Electricity, Commission for Energy Regulation, July Transporting Britain s Energy 2007, Development of Investment Scenarios, National Grid, Page 9. 24

26 reliance on European piped supplies via interconnectors from countries as far away as Russia and Algeria Figure A8 in Annex A indicates that total indigenous European supplies are predicted to decline in the long term 28. Russia is forecast to be supplying up to 30% of Europe s gas demand by Europe is forecast to be importing over 70% of its natural gas by Condition (b) the level of risk attached to the investment is such that the investment would not take place unless an exemption was granted In their report to Shannon LNG, the Brattle Group considered whether the level of risk associated with the investment is such that the investment would not take place without an exemption. The Brattle Group reached the conclusions detailed below. - To gain an exemption, the applicant must demonstrate that the level of risk associated with the investment is such that the investment would not take place without an exemption. In its guidelines, the European Commission has explained that this means that the investment is large its cost per customer is at least 10 and is subject to significant commercial risks that are difficult to foresee and quantify at the time the investment is made. - We estimate that the cost of the Shannon LNG terminal would be 390/customer significantly higher than the minimum indicated by the Commission. We calculate this number assuming that the costs are divided by connection point, rather than by the size of the connection. However, even if residential customers only paid one-third of the costs (since they provide about one-third of BGE s revenue) this risk per customer would still be over We also identify that LNG re-gasification capacity exceeds LNG production capacity in the Atlantic Basin markets, and this situation is forecast to persist until at least This means that terminals and the markets they serve will need to compete for LNG product, with cargoes being diverted to the market with the highest price. As a result, LNG terminal utilisation will remain uncertain, and could be highly variable. If the terminal were regulated so that its costs were included in a rate base used to determine gas transportation tariffs Irish gas users would be left bearing the risk of an underutilised terminal. We conclude that a regulated terminal would place an unacceptable level of risk on Irish gas consumers. 28 Europe is defined as the EU 27 countries, Croatia, Former Yugoslav Republic of Macedonia, Turkey, Norway and Switzerland. 25