European gas demand and import scenarios: can we connect the future to the present?

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1 European gas demand and import scenarios: can we connect the future to the present? Professor Jonathan Stern, Chairman and Senior Research Fellow OIES Gas Programme GAC Seminar on Scenarios and Forecasts, Workstream 1, October 18, Moscow

2 How should the GAC connect the generality of the EU-Russia Energy Roadmap (scenarios and gas chapters) with the specifics of GAC concerns about future exports of Russian gas to EU countries? GAC concerns are quite specific; EU- Russian RM scenario building is quite general

3 Workstream 1 Scenario Group: specific question How much gas will Europe wish to import from Russia, and will Russia wish to export to Europe, over the next several decades to 2050? 2008 levels ie around 160 Bcm/year Significantly above 2008 levels ie 200 Bcm/year and above levels ie Bcm/year Below 140 Bcm/year The answer will determine: many of the specifics of WS2 and WS3: how much transportation capacity for Russian gas will be needed, existing and new, over what time frame and where? The future importance of gas in EU-Russia energy relations and cooperation

4 GAC SCENARIO QUESTIONS: What have we been trying to do? What can we realistically expect to achieve? Scenarios we discussed RM2050 v IEA v Eurogas v others: Battle of the numbers and the assumptions business as usual versus decarbonisation Back-casting versus forecasting is there any common ground? Bottom-up versus top-down trying to achieve different aims? Long term versus short term : what can we say about that bears any relation to what we see in 2011/12? We are unlikely to make any progress towards agreeing likely EU decarbonisation paths and their impact on gas, especially post-2030

5 GENERAL GAC SCENARIO QUESTIONS Do existing scenarios/projections/roadmaps simply say what their clients or bosses want to hear: eg gas demand/imports will go up or go down? Have they decided on the result before they conduct the analysis? ie to what extent can GAC use scenarios which have been designed for other purposes? How does this scenario work connect to the basic GAC questions: How could European gas demand evolve? How could European gas production evolve? What other non-russian gas supplies are available to Europe? The impact of these developments on demand for Russian gas in Europe

6 The purpose of a scenario is to tell a story that could be realistic given certain assumptions Which are the important countries in the story Europe is countries What is the main focus of the story economic growth, end-use sectors, carbon reduction? What is the main time horizon of the story: 2020, 2030, 2050? These are the basic decisions which need to be taken in devising scenarios for future gas and especially Russian gas requirements in Europe

7 Slides 8-21 are based on: Honoré A. (forthcoming 2012/13), The Outlook for Natural Gas Demand in Europe Post- Fukushima, OIES, PLEASE DO NOT CITE OR CIRCULATE THESE SLIDES UNTIL THE STUDY IS PUBLISHED Dr Anouk Honoré Senior Research Fellow OIES Gas Research Programme

8 The EU and National Stories: one-size fits nobody ; methodological framework needs adapting to each country/region Maturity / expansion Prices NWE vs Turkey Pricing mechanisms: NBP vs Central Europe Level of prices: NBP vs PSV Impact of gas prices: Spain ( ) vs NL ( ) in the power sector Existing electricity generation capacity => inertia for a number of years to come France vs Germany vs Spain Gas in national policies Gas as green fuel vs fossil fuel (UK) Access to diversified supply (Turkey, Eastern Europe) Meeting environmental targets NL (renewables) vs Germany / UK Source: A. Honore (OIES, forthcoming 2012/13)

9 One-Size Fits Nobody cont d Uncertainty on energy policies France: nuclear down to 50% of elec mix by 2025? => 2/3 scenarios Germany: replacing nuclear by renewables => 2 scenarios UK: EMR/nuclear/renewables => 2 scenarios EU ETS, LCPD, IED, etc. Not the same impact on each market, potentially major crisis in some countries (UK vs Germany) Interconnections (gas and electricity) Germany vs Spain to deal with renewable intermittency => Different stories to tell across Europe => Different stories to tell across the sectors => Different time frames / scenarios Source: A. Honore (OIES, forthcoming 2012/13)

10 European gas demand: connecting the future to the present Recent trends Examples of different countries: UK and Germany

Natural Gas Demand 1990-2011 (bcm) 2011: 7 markets = 80% of total demand Source:

11 Natural Gas Demand (bcm) 2011: 7 markets = 80% of total demand Source: OECD Europe, IEA Major markets: UK, Germany, Italy, Netherlands, Turkey, France and Spain

Recent demand trends 2010-2012 Changes in natural gas demand Natural gas demand (bcm) Source: IEA 2010: Weather effect for about half of the rise (cold temperatures in early/late 2010) 2011: Mild

12 Recent demand trends Changes in natural gas demand Natural gas demand (bcm) Source: IEA 2010: Weather effect for about half of the rise (cold temperatures in early/late 2010) 2011: Mild temperatures in early/late : -8.6% Electricity demand was flat, but gas lost market share in the generation mix 2012: Very cold Feb 2012, but otherwise mild winter , and GDP growth near zero expected for 2012 Electricity generation (TWh) Source: OECD Europe, IEA Source: Author s calculations, 16 European countries, UCTE

13 Monthly gas demand in Europe (bcm) y-o-y Jan-Jul 2009 vs vs vs vs vs vs vs Source: OECD Europe, IEA

14 Monthly gas demand in the UK (bcm) y-o-y Jan-Jul 2009 vs vs vs vs vs vs vs Source: IEA

15 Monthly gas demand in Germany (bcm) UK y-o-y Jan-Jul 2009 vs vs vs vs vs vs vs Source: IEA

16 The European economic and energy big picture : main factors are mostly negative for gas Economic recession / time frame for recovery Slow growth of gas demand, if any at all, especially given competition from North America and Middle East for the industry sector Possible exception if electrification of the economy? Gas prices currently promoting coal in the short term (renewables in the longer term?) Energy policies 20/20/20 targets Cut carbon emissions by 20% by 2020 Raise renewable sources to 20% of total energy use by 2020 Achieve a 20% cut in energy use by 2020 Efficiency Directive (Oct 2012) National policies (nuclear, coal, CO2, renewables) Source: A. Honore (OIES, forthcoming 2012/13)

17 Possible Hypotheses Temperature-corrected European gas demand has been in decline since the mid-2000s; this represents a sharp break with the past which was indeed a Golden Age of Gas in Europe Seven countries in Europe account for 80% of total demand; this situation will not change; European gas demand futures are highly dependent on what happens in these countries The Eurozone crisis could take the rest of the 2010s to resolve; if it does then (of the 7 big gas markets) only Germany and Turkey currently seem likely to maintain/resume significant economic growth Possible conclusion: European gas demand may not recover significantly from 2010/11 levels before 2020 BUT even if true will the 2010s prove to be: a blip after which growth will resume the start of a decline of gas in European energy balances?

18 Major European Markets in 2011: UK, Germany, Turkey, Italy, France, Spain, Netherlands THESE 7 COUNTRIES ACCOUNTED FOR: 80% of European gas demand 60% of Russian gas exports to Europe DEVELOPMENTS IN THESE MARKETS WILL DETERMINE MUCH OF THE FUTURE OF: GAS DEMAND AND GAS IMPORT REQUIREMENTS FROM RUSSIA (AND OTHER SOURCES)

19 The Example of the UK: decarbonisation with gas => Need of new capacity in the 2010s => Much will depend on the Electricity Market Reform Gas will need to back up the intermittent renewable energy but also replace some baseload generation (coal/nuclear) But gas for power could remain fairly high until baseload generation is replaced by new nuclear (or other form of renewables/ccs?) => Uncertainty in the 2020s and new nuclear (and potentially development of indigenous shale gas) => High possibility of a wind and gas dominated system by 2030 Ministerial announcement (July 2012): We see gas continuing to play an important part in the energy mix well into and beyond 2030 (...) We do not expect the role of gas to be restricted to providing back up to renewables, and in the longer term we see an important role for gas w/ CCS Source: A. Honore (OIES, forthcoming 2012/13)

20 The Example of Germany: decarbonisation without gas Post Fukushima => Energiewende Phase out of nuclear by 2022 (20 GW) Decarbonisation targets remain, largely via renewables and efficiency GHG emissions: -40% to 2020, at least -80% by 2050 (/1990) Renewables : 35% of gross electricity consumption by 2020, 50% by 2030, 65% by 2040 and 80% by 2050 Wind energy to play a decisive role in electric supply in 2050 Efficiency / energy saving policies No tightness in 2011 despite nuclear shut down: replaced by coal and renewables (exports during the cold spell in Feb. 2012) Renewables are developing quickly 25% of electricity generation from renewables 30 GW wind installed (2 nd producer of electricity from wind in Europe) 30 GW solar installed Backup of renewable power production with coal-fired plants, fuelled by domestic lignite Source: A. Honore (OIES, forthcoming 2012/13)

21 The Example of Germany cont d , low baseload power prices (not above ~300 euros/mwh => prices not expected to rise to LRMC) Prices are not high/volatile enough to encourage investments E.On and RWE => investments in renewables as a substitute for other power generation E.On => no new investment in large conventional generation before s: slow electricity demand growth and overcapacity Old generation portfolio is old : >15 GW online longer than originally scheduled, but still +3.5 GW net by 2015 => no need of new capacity anyway! => Phase out of nuclear in Germany not necessarily translate into extra gas demand for power in the 2010s => In the 2020s, possible growth if no/limited new coal plants => Potential for additional gas demand: industry sector Economic situation + gas prices Source: A. Honore (OIES, forthcoming 2012/13)

22 Other Major Markets: what to say about the future of gas? Italy Spain Turkey France Netherlands Turkey is the only major growth market, others likely to be at best slowly increasing but maybe flat/declining?

23 Imports: sources and prices ALTERNATIVES TO RUSSIAN GAS: Pipeline gas: Norway, Netherlands, Algeria LNG Southern Corridor WILL ALL GAS BE THE SAME PRICE: OIL-LINKED VERSUS HUB-BASED? IF ALL GAS IN EUROPE IS EXPENSIVE WILL THIS ACCELERATE A DECLINE IN EUROPEAN GAS DEMAND? All of these issues can be subjected to scenario analysis

24 EU Gas Production: the picture up to the early 2020s UK production in rapid decline; will flatten slightly up to 2015 and then continue to decline Dutch production at plateau will decline slowly post 2015 Norwegian production will plateau and without additional discoveries (which are possible) will decline post-2020 Other Continental European production flat or declining The story post 2025: continued decline, possibility of future additional conventional or unconventional gas? development

25 Natural Gas Research Programme RM 2050 Scenarios: gas production (mtoe) At least one scenario should have flattening gas production post-2025 due to new conventional or unconventional gas 25

26 EU post 2020/25/30: how far ahead can you tell stories? After that, models have to take over? Some critical scenario storylines/assumptions: Economic recovery in Europe Retention/abandonment of decarbonisation targets Nuclear phase-out/renaissance Renewable/CCS cost reduction/technical advance EU gas production recovery unconventional gas In order to be understood and considered relevant, scenarios have to engage the present. They need to be very clear about how far ahead the story is coherent. They have to very clear at what point the story ends, and the modelling (numbers) takes over

27 The Major Gas Scenario Conundrum of the GAC MUCH OF THE GAS DEMAND/IMPORT SCENARIO DISCUSSION AROUND THE GAC OVER THE PAST YEAR HAS CONSISTED OF: EUROPEANS TELLING RUSSIANS THAT EU GAS DEMAND (and possibly imports) WILL DECLINE OR CERTAINLY NOT INCREASE - SIGNIFICANTLY OVER THE NEXT 3 DECADES RUSSIANS TELLING EUROPEANS THAT THEY WILL NEED A LOT MORE GAS AND A LOT MORE RUSSIAN GAS - OVER THE NEXT THREE DECADES We are probably not going to agree on the likely outcome, so maybe what we need to focus on are the consequences of one or the other proving to be correct

28 Thank You

Eeekonomics: BEG/CEE UT Annual Meeting. Commentary: European Live Issues, Post recession Demand. European gas demand post Fukushima Outline

Gas Research Programme ENERGY STUDIES Natural G Eeekonomics: BEG/CEE UT Annual Meeting Houston, 7 December 2011 Commentary: European Live Issues, Post recession Demand Dr Anouk Honore Senior Research Fellow