GU 2006 The Supply, Demand and Pricing Outlook in Western European Gas Markets George H.B. Verberg President International Gas Union British Energy Association Seminar Where are Energy Prices Going? London, 8 November 2005
INTERNATIONAL GAS UNION Covers >95 % of World Gas Sales Spokesman of the Gas Industry Non Members www.igu.org Membership from 67 countries and 22 Associated Members
Themes for Today The World needs Energy,so does Europe LNG changes Global Gas Scene Issues Influencing Pricing Energy At What Prices?
Energy Consumption in Perspective % 100 90 80 70 60 50 40 30 20 10 0 primary energy consumption per capita relative to USA 1/3 ofworld population World USA FSR EU (25) Japan China India Africa Latin America IEA data year 2002
Global Energy Demand Forecast IEA Mtoe 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Growth relative to consumption in 2002 159 TOTAL PRIMARY ENERGY 139 118 100 54 41 GAS 157 187 123 1971 2002 2010 2020 2030
Total Energy Demand by Region 2002 and 2030 3500 3000 2500 Mtoe 2000 1500 2002 2030 1000 500 0 Noord-Amerika EU-25 Japan/Korea India China Rusland Zuid Amerika Afrika Midden-Oosten
China hydrocarbon demand 1600 Chinese gas demand of limited impact globally? 1400 Coal 1200 Oil Mtoe 1000 800 Gas Oil imports (74%) 600 400 200 0 Source: IEA WEO 2004 34% 2002 2030 Gas import (27%)
EU Energy demand Forecast IEA EU (25) Mtoe 2500 2000 1500 1000 500 0 Growth relative to consumption in 2002 TOTAL PRIMARY ENERGY 121 117 109 100 72 24 GAS 167 120 145 1971 2002 2010 2020 2030
Energy demand Forecast IEA EU (25) 2500 Demand rise relative to 1971/2002 2000 140 100 109 117 121 nuclear Mtoe 1500 100 other oil 1000 coal 500 gas 0 1971 2002 2010 2020 2030
Gas Imports EU25 (2004) Russian Federation 107 BCM Norway 75 Algeria LNG+pipelines 55 Nigeria LNG 15 LNG several sources 6 258 Consumption 467
World Gas Reserves Proven 180 Trillion m3 R/P ratio ~66 years 1000 bcm 48 73 5 7 Europe Russia North America 14 Middle East 14 Asia Pacific Region 7 Africa South and Central America Data: BP Statistical Review 2005 17/11/2005 BEA Seminar, London, 8 November 2005 11 IGU 2006
Themes for Today The World needs Energy, so does Europe LNG changes Global Gas Scene Issues Influencing Pricing Energy At What Prices?
Major Natural Gas Trade Movements at the Start of the 21 st Century Source: BP Statistical Review 2004
Source: presentation by GdF at 19th WEC, sept. 2004
LNG Trade History and Perspectives 22 Bcm short-term trade 700 Bcm 15 18 14 10 600 500 LNG trade as % of total gas market 11 6 2 400-2 1999 2000 2001 2002 2003 2004 History (CEDIGAZ) 300 200 100 0 6 2004 2006 8 Forecast (IEA weo 2004) 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Middle East LNG Setting a New Global Cost Benchmark ($ per MMBtu) Source: Cambridge Energy Research Associates. 31001-10 < 2.5 < 3 < 4 < 4 < 3
International LNG Trade: Connecting Markets
From Regional Gas Markets to Global Competition Price levels of natural gas in the different gasregions are so high that LNG is competitive wherever it originates from. Traditional gas supply patterns (Russian gas to Europe, Mid Eastern gas to Pacific Rim, North America autarctic) will give way. The big gas import regions (Europe, US, Pacific Rim, China, India) will compete with each other for supplies.
Europe s security of supply and LNG (1) Not only Europe likes to diversify its supplies, a cost-effective way to cope with the security of supply issue Also the suppliers like to diversify their sales portfolios LNG will increasingly connect today s separated gas markets Long term contracts will remain Europe s backbone for pipeline gas and LNG
Europe s security of supply and LNG (2) Growing LNG trade will enable price arbitration, so over time prices in the demand regions become more and more inter-linked. The growing LNG spot market enhances flexibility and competition, at the same time it is an essential tool for the big gas suppliers to push gas prices in the desired direction (a reliable supplier cannot close the valve for a LT-gas contract, but he can for spot supplies).
Themes for Today The World needs Energy, so does Europe LNG changes Global Gas Scene Issues Influencing Pricing Energy At What Prices?
Source: presentation LNG Access, California Energy Commission Access Workshop June 1-2, 2005
LNG Transport Marginal costs: Arbitrage Potential? Gulf to US instead of Spain 0.18 $/mmbtu to US instead of Japan 0.21 Nigeria to US instead of Spain 0.26 $/mmbtu Algeria to US instead of France 0.53 $/mmbtu
Impacts on price: Sellers or Buyers Market? Overall the gas markets will turn out to be a sellers market: Strong demand growth Investments are delayed, difficult and expensive in important producing areas Natural events in important producing regions (Katrina, melting permafrost in Siberia) Bottlenecks in LNG-chains till 2008-2010 Access to promising acreage is difficult
Impact on price: infrastructure Expanding infrastructure (pipelines, LNG-regassification terminals) is not a guarantee for ample supplies, it is only a prerequisite; It is better to have some over-capacity in the infrastructure than bottlenecks. The low price elasticity of short term demand will cause high price peaks.
Impact on price: LNG - arbitration With a price in the US ca 0,5-1,0$/mmbtu higher as in UK/Europe it pays to divert LNG-cargos to the US (even if one has invested in a LNGterminal in the UK).
Gas Prices USA - UK 40,00 Price is monthly average 35,00 Henry Hub 30,00 NBP 25,00 euro ct/m3 20,00 15,00 10,00 5,00 0,00 jan-93 jan-94 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06
Impact on Price: Contracts?? There are no (more) destination clauses, what about origin clauses? Even if they still exist they are no longer really relevant in a time of swaps etc. with the expanded infra structure; L T Contracts nowadays often do have NBP-related price(s)(formulas); With a liquid NBP, gas suppliers with a NBP related price in their LT contract, will presumably have therefore volume flexibility (Gasunie, Statoil);
Impact on Price: linked to oil price? Gas and Oil remain substitutes in major parts of the energy market; There are important parts of industry dualfired, they will by their role in the energy market link the prices; Large users who like to hedge their energy contracts prefer oil-related gas prices The Upstream shackles of the gas and oil chains are very much similar: So Gas Prices will remain linked / correlated to oil(product) prices, but they will have their own volatility
Prices: UK (spot) versus Fuel Oil 35,00 Price is monthly average 30,00 Fuel oil 25,00 eu ct/m3 20,00 15,00 NBP 10,00 5,00 0,00 jan-93 jan-94 jan-95 jan-96 jan-97 jan-98 jan-99 jan-00 jan-01 jan-02 jan-03 jan-04 jan-05 jan-06
Impact on Price: Price Volatility of several Commodities % 60 50 40 30 20 10 0 GOLD SILVER STEEL COPPER ALUMINUM BRENT OIL COAL COFFEE AEX SHARES UK GAS HERREN INDEX USA GAS HENRY HUB
Themes for Today The World needs Energy, so does Europe LNG changes Global Gas Scene Issues Influencing Pricing Energy At What Prices?
Oil Prices: How High is High? Oil prices in US$ of 2004: 1864: 92 $/b, but at that time no oil dependent economy 1980: 81 $/b, economic difficulties 2004: 55 $/b 2005: 60+ $/b Expected: restraints in refinery capacity lifted by 2008
How Much Oil is Left? at EIA Midterm ennrgy Outlook Conference, april 12 2005
Chevron: so is this something you should be worried about?
Replacement of Reserves the industry has replaced only half the reserves it has produced and needs to spend $ 40 bn a year, rather than the current $ 14 bn, to ensure it found a new barrel of oil for every barrel consumed. (Wood Mackenzie in Financial Times, 4 Oct 2005)
Transparency: Corruption and Bribery versus Oil and Gas Reserves Corruption index (by Transparency International) ranks countries degree of corruption among public officials and politicians. 0 = highly corrupt 10 = clean BUT PROGRESS IS IN THE AIR % of proven oil/gas reserves (BP) 60 50 40 30 20 10 0 oil gas almost clean 4 to 6 3 to 4 2 to 3 very corrupt
Who Owns the Gas (and Oil) Reserves? CONTROL OVER PRODUCTION OF REMAINING COMMERCIAL RESERVES NATURAL GAS Private companies 36% OIL: ~ 50/50 State controlled companies 64%
At what height is the Ceiling or do we have Open Skies?
US Wellhead Gas Price
What about Demand Destruction? Power Generation will take less Gas, but Coal is not an easy alternative due to the emissions; A revival of nuclear seems to be in the carts, but that takes time; Closing Chemical Industry and Energy Intensive Industry lowers demand mainly to the extent it is not a relocation of that industry to regions with lower energy/gas prices.
Sustainability: As a Responsible Industry We Acknowledge: The best supply is the saved m3
GU 2006 Thank you for your attention See you in Amsterdam! 23 rd World Gas Conference and Exhibition June 5 9 2006