Baltic Gas Supply Security Policy: Cost and Political Choices

Transcription

1 Baltic Gas Supply Security Policy: Cost and Political Choices Pierre Noël with Sachi Findlater & Chyong Chi Kong EPRG, University of Cambridge pn243[at]cam.ac.uk Estonian Foreign Policy Institute, Tallinn October 2010

2 Main messages 1. Baltic States have low levels of gas supply security 2. LNG is the only credible full security option (and strategic storage for Latvia) 3. Pan-Baltic LNG is (somewhat) cheaper, but raises serious political issues 4. National LNG terminals mean ~10% security tax on gas 5. Backing-up heat generation offers a highly flexible option to buy cheaper, partial gas supply security

3 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

4 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

5 Russian gas in Europe

6 Russia-dependent Europe Russian Gas / Tota al Primary Energy Supply 40% Hun 30% LV - LT Lit Lat Slova 20% Aus Est Cz Ita Ger Rom Pol Bulg 10% Fin Slove Gre Nether Fra Por Irld EU27 average Belg+Lux 0% Spain Swe UK 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% Russian Gas / Primary Gas Supply Source: National statistics; BP Statistical Review of World Energy 2009 EE

7 The Baltic States Storage Active: 2.3BCM Withdrawal rate: 24 MCM/day 6.24 X 11? ? X 1.3 Pipeline capacity (MCM/day) 14 Peak consumption (MCM/day) Source: Gas Transmission Europe

8 Baltic Gas Systems and Markets Annual: 1.7 BCM/year (0.17bcf/d) Peak: 14 MCM/day Gas Source: Gazprom Transmission Network: Annual: BCM/year (0.1bcf/d) Peak: 11 MCM/day Gas source: Gazprom Transmission Network: Annual: 3.77 BCM/year (0.4bcf/d) Peak: 18 MCM/day Gas source: Gazprom Transmission Network: Storage Active: 2.3BCM Withdrawal rate: 24 MCM/day Structure of consumption: X? Structure of consumption: Structure of consumption:

9 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

10 What is gas supply security? Gas supply security refers to the ability of the energy system to meet contracted final energy demand under a gas supply disruption. Concretely, in Russia-dependent Europe: What happens if supplies of Russian gas are lost on a peak consumption day?

11 Measuring gas supply security Gas Supply Balance when Russian Gas not Available Demand reduction Dual-fuel for power plants + interruptible industrials Storage withdrawal Peak gas consumption Gas that can be supplied Peak gas consumption Imports available in N-1 Gas production Gas Supply Security Indicator 1 st Day of Total Disruption GSS = + as % of

12 Example: Greece in N-1 Security = 94% of peak

13 Greece in N-1 Maximum security = 137% of peak

14 Gas security indicator Results Baltics

15 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

16 Gas security infrastructure Strategic national LNG terminals Including one week peak consumption stored at terminal Strategic underground storage facilities (UGS) Only credible for Latvia -- for EE and LT the facility would have to be in LV not national Pipeline to Poland; gas would be sourced from Planned Polish LNG terminal Planned additional storage capacity Possible ability to ship from Western Europe through Yamal-Europe All three are speculative Pan-Baltic infrastructure LNG terminal + pipeline to Lithuania (LV-EE existing) UGS in Latvia + pipeline to Lithuania (LV-EE existing)

17 Financial Variables Security only investment like buying insurance No revenues from infrastructure 100% debt financed; guaranteed by government Amortisation period: 20 years Lifetime of infrastructure: 30 years Cost of capital / rate of return / discount rate Gvt 10yr bond rate + risk premium Average of 3 countries for pan Baltic infrastructure

18 Size of storage tanks 7 days of peak demand permanently stored waiting for 1 st cargo Formulas for economies of scale and scope Total Capex = 3 times storage tanks Capex Cost of Capital LNG as a gas security measure Cost of money on Capex Opportunity cost of capital on gas in storage tanks Annual Opex = 4% of total Capex During a disruption Price of gas = spot Zeebrugge + $1/Mbtu + shipping

19 Pipelines as a gas security measure Capital expenditure Length (in km) times / km (range obtained from industry) Compressor stations (cost obtained from industry) Cost of capital Operational expenditure Maintenance of pipe and compressors (obtained from industry) During a crisis Price of gas assumed equal to Russian contract price debatable Not included Cost of booking storage / LNG capacity in Poland

20 Strategic Underground Storage Working volume Country gas consumption during peak period 15 peak days; peak month; peak period of Capital expenditure 0.7 /m3 of working volume (for aquifers -- includes buying the gas) Cost of capital Interest rate on Capex Opportunity cost of capital on stored gas Operational expenditure 3% of capex (industry figure)

21 Pan Baltic Security Infrastructure Risk correlation Risks to EE & LV correlated, but risks to LT not correlated with EE + LV Baltic LNG and UGS can be of smaller size than EE+LV+LT Baltic LNG: dimensioned for LT peak 24 mcm/d larger than 14+8 Baltic strategic storage: dimensioned for LV+EE demand peak supply to EE+LV larger than peak for LT Baltic LNG and UGS located in LV, with 150km pipe to LT Pipeline LV-EE already in place (and available in case of disruption)

22 Monte Carlo Simulations / Gas Security Levy 6 Estonia -- Cost of gas security infrastructure 80% Estonia -- Gas Security Levy billion over 30 years LNG terminal Strategic storage average 80%conf. interval Pipe to Poland Tax on natural gas (increase on current price) 70% 60% 50% 40% 30% 20% 10% 0 0% 1 mo onth 3 mon nths 6 mon nths 1 mo onth 3 mon nths 6 mon nths 1 mo onth Cumulative / maximum disruption length over 30 years 3 mon nths 6 mon nths 1 mo onth 3 mon nths 6 mon nths 1 mo onth 3 mon nths 6 mon nths Maximum / Cumulative disruption length 1 mo onth 3 mon nths 6 mon nths Dealing with uncertainty Monte Carlo simulations with all key variables Average value and 80% confidence interval Gas Security Levy Total cost divided by 30, divided by annual value of gas sales Levy used to compare options across countries; pan-baltic

23 EE cost of gas security infrastructure 6 Estonia -- Cost of gas security infrastructure bill lion over 30 years % 70% 60% 50% 40% 30% 20% 10% 0% Estonia -- Implied gas security levy LNG terminal Strategic storage Pipe to Poland 0 Disruption length over 30 years

24 LV cost of gas security infrastructure 7 Latvia -- Cost of gas security infrastructure billi ion over 30 years % 70% 60% 50% 40% 30% 20% 10% 0% LNG terminal Implied gas security levy Strategic storage 1 Pipe to Poland 0 Disruption length over 30 years

25 LT cost of gas security infrastructure 7 Lithuania -- Cost of gas security infrastructure 50% 6 40% 30% lion over 30 years LNG terminal Strategic storage 20% 10% 0% Implied gas security levy bill 2 Pipe to Poland 1 0 Disruption length over 30 years

26 Pan-Baltic terminal is cheaper Cost of gas security infrastructure -- Pan-Baltic v. National 16% 14% LT LV EE PAN BALTIC 12% 10% 8% 6% 4% 2% 0% National Gas Security Levy BALTIC -- LNG LV --LNG 3m EE --LNG 3m LT --LNG 1m BALTIC -- UGS

27 Cheaper, but Beyond cost, political feasibility issues: Serious credibility issue for LT and EE (if terminal in LV) Supposes a single transmission system operator at least a high level or co-operation between TSOs, regulators and governments The three Baltic gas companies are (de-facto) controlled by Gazprom Would need radical reforms, hugely contentious, and politically very risky especially (though not only) for Latvia Hard to see Latvia co-operating, at least until 2017

28 Asymmetric dependence Russian gas is strategic for the Baltic States but Baltics are negligible for Gazprom

29 Baltics shielded by Gazprom s control 100% Others 75% State Fortum 50% Gazprom and key partners Itera E.ON Ruhrgas Gazprom 25% 0% Eesti Gaas (EE) Lietuvos Dujos (LT) Latvijas Gaze (LV) Gasum (FI) PGNiG (PL) Unsettling the status quo would break the shield polonization of the gas Source: relationship Company data

30 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

31 Widening the policy menu Do not have to insure the full peak gas consumption Depending on risk-averseness/willingness to pay of society (or politicians), Baltics may go for partial gas security Insuring heat generation is the obvious candidate (see chart on next slide) Can be implemented gradually Can be dismantled quickly How much does it cost? How does it compare to strategic LNG terminals?

32 Heat generation ( pure, or in CHPs) is gasdependent, and accounts for a large share of gas demand Transport 1% Construction 1% Industry 10% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Source: National statistics LV LT EE Lithuania Estonia Latvia Structure of gas consumption Agriculture 1% Comercial and public services 3% Non - energy use 38% CHP, heat & other plants 41% Households 5% Commercial & public services 3% Industry 7% Energy sector own use 1% Structure of gas consumption Non-energy consumptio n 21% Households 6% Heat Generation 57% Sources: 2007 data, national statistics websites; company information; BP statistical world review Electricity Generation 5% Autoproduc er heat plants 3% Energy sector own use 1% Share of gas in heat generation Structure of gas consumption Household s 7% Autoproduc er CHP 1% Industry 18% Other 8% Public heat plants 14% Losses 1% Public CHP 47%

33 Heat back-up vs. LNG -- Estonia Anything cheaper than LNG makes 1,300 economic sense 1,100 3 day's storage Estonia -- Heat back-up versus LNG 7 day's storage 15 day's storage 30 day's storage Light fuel oil million over 30 years 100 Heavy fuel oil LNG -100 Disruption length over 30 years

34 1,500 1,300 1, Heat back-up vs. LNG -- Latvia Latvia -- Heat back-up versus LNG terminal 3 day's storage 7 day's storage 15 day's storage 30 day's storage LNG million over 30 years Disruption length over 30 years

35 Heat back-up vs. LNG -- Lithuania 6 Lithuania s current 5 back-up policy costs 4 more than a full security LNG 3 terminal 2 Lithuania -- Heat back-up versus LNG terminal 3 day's storage 7 day's storage 15 day's storage 30 day's storage billion over 30 years 1 LNG 0 Disruption length over 30 years

36 Contents 1. Baltic gas situation 2. Baltic gas security situation 3. What can be done? How much it costs? a. Gas security infrastructure b. National or pan-baltic? 4. Widening the choice: backing up heat generation 5. Conclusions

37 Conclusions 1. Gas security can be measured 2. The cost of providing security can be calculated Baltic countries can make informed policy choices 3. LNG is the only credible option for full gas security Pan-Baltic LNG is somewhat cheaper but politically tricky National LNG is definitely possible financially & techically 4. Backing up heat generation (mostly in CHPs) allows to buy partial gas security for cheap or even very cheap 5. Regional gas security co-operation Should not just be about regional infrastructure (BEMIP) Policy exchange on national choices and implementation