THE DYNAMICS of LNG INDUSTRY. Prof. Valeria Termini AEEGSI Commissioner - MEDREG Vice President

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2 THE DYNAMICS of LNG INDUSTRY Prof. Valeria Termini AEEGSI Commissioner - MEDREG Vice President

3 INDEX I. NEW GLOBAL TRENDS II. LNG INDUSTRY: the game changers III. IN EUROPE IV. THE MEDITERRANEAN CONTEXT 3

4 I. GLOBAL TREND: new elements In the energy transition gas will remain a crucial resource for a long time Technology (volumes and costs) Shipping (versus pipelines) Importing - Exporting Regions New uses of LNG (eg small scale ) 4

5 Gas supply: the top 5 + Australia 5

6 Global Liquefaction Plants (as of January 2017) 6

7 Global gas trade shipping vs pipeline Fonte: BP Statistics

8 LNG trade volumes (2016) Source: IGU

9 Changes: incremental LNG exports (2015) Source: IGU

10 Changes: incremental LNG imports (2015) Source: IGU

11 GLOBAL TREND: new elements Technology Shipping Vs Pipeline Importing Exporting Regions 11

12 II. LNG GAME CHANGERS FLEXIBILITY OF SUPPLY (shipping): portfolio traders (following prices) flexibility of destination (ships) shorter terms EVOLUTION of PRICE FORMATION 12

13 Non long term trade,

14 Types of Price Formation Mechanisms (PFM) Oil Price Escalation (OPE) Gas-on-Gas Competition (GOG) Bilateral Monopoly (BIM) Netback from Final Product (NET) Regulation: Cost of Service (RCS) Regulation: Social and Political (RSP) Regulation: Below Cost (RBC) 14

15 Wholesale Price Levels 2005 to 2015 by Price Formation Mechanism 15

16 Wholesale Price Levels 2005 to 2015 by Region 16

17 Average Regional Gas Prices 17

18 World Price Formation 2015 LNG Imports Source: IGU

19 Europe Price Formation 2005 to

20 Europe Price Formation

21 III. LNG in EUROPE : «market of last resort» EUROPE & THE MEDITERRANEAN REGION: EU policy EU Regulation - Medreg 21

22 Existing & Planned LNG Terminals in Europe 22

23 EU Energy Union Policy Levant Basin 10 tcm 23

24 EU Energy Union Regulation Reverse flow projects along existing pipelines New infrastructure projects for North-South corridors EU strategy for liquefied natural gas and gas storage o Competition o Increased security of supply 24

25 Southern corridor: main projects TAP-TANAP TURKISH STREAM IGI-EASTMED 25

26 IV. Mediterranean Energy Context European Union Energy Demand Growth 1 % RES Integration Energy Market Integration Turkey Energy Demand Growth 5,4%/y ( ) RES objectives 30% (al 2023) Relevant Infrastructural Projects North Africa Energy Demand Growth 5,4%/y up to 2030 RES Objectives 30-50% Huge Oil & Gas Resources Source: BP Statistical Review Israel Limited Growth Huge Gas reserves (1Tmc) 26

27 Gas Context : Discoveries 27

28 Barriers and challenges to energy investments Political Influence Legal Framework Diversity Information Subsidization Independence Access Regulation Source: MEDREG 28

29 Regulatory contributions to integrate Mediterranean gas markets In respect of the different gas segments of the value chain, the regulatory function is substantial: 1. It has to secure an independent management of the regulated systems; 2. It has to organize regulated or negotiated access to the networks (Third Party Access), including a system of access conditions and tariffs; 3. It has to develop procedures to evaluate the need for capacity expansions in the regulated market segments. To an increasing extent, gas systems stretch out over different countries and world regions, which display different traditions in terms of their institutional and structural characteristics. This begs for some degree of coordination between bodies regulating the gas industry, to arrive at a coherent combinations of regulatory approaches along the value chain. 29

30 The role of regulators How regulation can incentivize investments Quality Standards Competition Tariffs Licensing and permitting Cost Reflective Data Collection 30

31 MEDREG - National Reforms Initiatives Structured plan with a tailor-made approach to support national reforms and individual regulatory priorities to support and strengthen energy regulators in Southern and Eastern Shore Countries Methodology Tools Need collection: Questionnaires and Interviews to seek input and information on national situations and main regulatory issues Planning: joint development of individual plan for each member, including timelines, budget and tools; Delivery: deployment of MEDREG expertise (or if appropriate external experts) Peer-review activities and support in the drafting of secondary legislation Training and capacity building Institutional partnerships Ad hoc studies and benchmarking Support to EC twinning projects and TAIEX missions between member regulators 31

32 MEDREG contribution on regulation Main Output Guidelines on Third Party Access Interconnection Infrastructure Report Guidelines on Transparency Ongoing work Competition and Market Price indicators Gas Infrastructure report Guidelines on Capacity Allocation Support to establish an Independent Gas Regulator in Egypt 32

33 UfM Energy Platforms In November 2014, during the Italian Presidency of the Council of the EU in Rome the strategic importance of Euromed gas and electricity networks in the context of energy security was launched three thematic platforms to provide a permanent high level forum for discussing energy policy objectives and measures, with a view to identify specific and concrete actions Gas: to reinforce the security of gas supply and the regional gas exchanges. Electricity: to promote gradual establishment of regional and sub-regional inter-connected electricity markets. Renewable Energy and Energy Efficiency: to assist in the deployment of renewable energy and energy efficiency technologies and projects. 33

34 WORLD: Conclusions LNG will be a main actor in the next 20 years: major changes EUROPE: Policy & Regulation => towards Med-south shore & LNG to diversify gas resources & security of supply MEDITERRANEAN Potentially, a new gas hub => rules and institution building to pave the way to investment 34

35 Thank you for your attention!

36 background 36

37 LNG exports by region Source: IGU

38 World wholesale Prices in 2015 by Price Formation Mechanism 38

39 World wholesale Prices in 2015 by Region 39

40 Wholesale prices in 2015 The highest wholesale prices at 8$/mmBTU were found in the largely LNG dependent countries in Asia Pacific South Korea, Japan and Taiwan China domestic prices now largely OPE did not fully reflecting declining oil prices until November. Prices in India were also around $8.00 reflecting the pricing reforms and the high price of the Qatar LNG contract before it was renegotiated. In Northwest Europe countries, where GOG dominates, prices are somewhat lower than the rest of Europe, but still a lot higher than in the USA, Canada and Mexico Prices in Russia have fallen well below other countries, as a consequence of the large rouble depreciation. At the bottom of the chart are generally countries where wholesale prices were subject to some form of regulation and often below the cost of production and transportation Turkmenistan, Algeria and Venezuela. 40

41 Regional Price Formation 2015 Total Consumption 41

42 Changes in Market Prices 2014 To Date 42

43 Northwest Europe Price Formation 2005 to

44 Wholesale price formation in Europe GOG remains the largest share in Europe, standing at 64%, totalling around 315 bcm, of which 73 bcm is domestic production, mainly Netherlands and UK, and 224 bcm is pipeline imports, of northwest European countries plus Italy, but also increasingly the central European countries LNG imports account for 19 bcm, over half of which are into the UK, with the remaining quantities being largely spot cargoes into the more traditional LNG importing countries. OPE is now down to 30%, totalling around 146 bcm, it is predominantly pipeline imports (114 bcm) into almost every European country, apart from the UK, Netherlands, Denmark, Croatia, Sweden and Ireland, followed by LNG imports (28 bcm) into Spain, France, Italy, Turkey, Portugal and Greece, with domestic production (4 bcm) in a variety of countries. BIM is some 8 bcm and is almost all pipeline imports into Turkey. RCS accounts for some 11 bcm and is domestic production in Romania, RSP also accounts for some 8 bcm and is also domestic production in Poland, Hungary and Croatia. 44

45 LNG exports and market share by Country, 2016 Source: IGU

46 LNG imports and market share by Country, 2016 Source: IGU