Dry and Liquefied Gas to European Markets Competing or Complementary? Graham Bennett
Outline Introduction Supply/Demand changes affecting the gas market Innovations impacting gas import/export options Conclusions 2
DNV History and Background Founded in 1864 11,000 staff in 300 offices in 100 countries Independent foundation, 6% of revenues invested in R&D DNV has been involved with the Oil & Gas industry since the early 1970 s. DNV s first LNG tanker was classified in 1973 (Norman Lady) First set of rules for submarine pipelines launched in 1976. First set of rules for gas fuelled ships issued in 2001 First set of verification guidelines for onshore liquefaction/regas facilities issued in 2005 Classification rules for FLNG units first issued in 2008 Acquired KEMA in 2012 Issued new recommended practices for onshore gas pipelines and shale gas developments in 2012 Slide 3
The Gas Market A Changing Environment Historically, the oil price was what dominated the news, and gas prices were index linked to the oil price, but this is slowly changing, and the price has become more volatile Environmental concerns, access to new sources of supply, political decisions, and developments in transportation have all resulted in increased demand for gas. Gas is increasingly traded globally as well as locally, and the use of LNG is helping in the development of a global market, whilst challenging the need for new pipeline infrastructure solutions In Europe, we are likely to see a greater proportion of contracts made on a gas on gas competition basis rather than an oil indexed format in the coming years, but many pricing mechanisms will continue to co-exist Gas is increasingly seen as a destination fuel, not a transition fuel Many projects are competing to supply gas to Europe 4
What is Driving Change in Europe? The arrival of new import routes via the South Western and South Eastern gas corridors The development of significant new gas resources in the Eastern Mediterranean (Tamar 8.3 TCF, Leviathan 16TCF) The development of shale gas resources (up to 5 TCF in Europe) The potential for huge LNG exports from the USA Political uncertainty regarding security of supply requiring redundancy and diversity of sources Technology developments reducing the cost of pipelines, and increasing demand for LNG as a transportation fuel. 5
Pipelines vs LNG vs Shale Gas Currently, approximately 60 % of the gas used in Europe is imported. The IEA estimated this to be a net amount of 320 BCM in 2011. Gas consumption in the EU is forecast to increase to 640 BCM by 2035, with dependence upon imports to increase to 85%, a net amount of 540 BCM 85% of the imports are currently via pipeline, and 15% via LNG The largest LNG imports come from Qatar and Algeria, and the the largest pipeline gas import volumes come from Russia, Norway and Algeria Since 2005, LNG imports to Europe have more than doubled, with the UK requiring the most significant increase in the past 2 years. An additional 50 BCM of regas capacity is planned in Europe in the next few years. The USA could potentially bring 265 BCM of LNG to the market in the next few years Significant reserves of unconventional gas exist in Europe, but political opposition is likely to prevent their extensive development. Regional differences do however exist. 7
Shale Gas? Several European countries have considered shale gas. Germany, France and Italy have however decided to ban exploration UK Cuadrilla Resources have announced a 5.6 TCF shale gas discovery. Early small seismic events have slowed down development however. Poland exploring and developing shale gas. Several North African Countries evaluating unconventional gas potential Thus there are significant shale gas reserves but its future is still uncertain. In order to assist companies and regulators to better understand the key issues, DNV has released a Recommended Practice to aid in the development of shale gas reserves. 8
LNG The list of European countries importing LNG is steadily growing Significant liquefaction capacity is being built, around the world, notably in the Middle East, North Africa and Australia Although much of this capacity is tied into long term supply contracts, and as such, is similar in its lack of flexibility to piped gas, around 35% of this capacity is sold via the trading arms of the major IOC s involved in the projects New field developments, and new technologies will change the LNG market in the Mediterranean basin by increasing both supply and demand. 9
European ECAs - a Challenge For Shipping ECA (Emission Control Area) requirements: Maximum level of sulphur in fuel, all ships: - 1,0% by 1st July 2010-0,1% by 1st January 2015 New ECA? Nitrogen emission for newbuildings: - 80% reduction in NOx emission from 2016 0,1% sulphur in ports and inland waterways North American coasts designated as ECA - Starting Aug 2011 - SOx/NOx-control from 2015/2016 Baltic 2006, North Sea 2007, Mediterranean? ECA ECA New ECA? 10
ECA in the Mediterranean? Over 200,000 merchant vessels of over 100 grt cross the Mediterranean Sea each year. More than 2,000 ferries, 1,500 cargo ships and 2,000 local commercial craft, including 300 tankers operate permanently in the Mediterranean, and about a third of the world s total merchant shipping traffic either trades to seaports or passes through the Mediterranean. Ships take fuel from bunkers in many ports around the Mediterranean but the majority of supplies are delivered in a small number of hubs: Istanbul, Malta, Piraeus, Port Said and the ports around the Strait of Gibraltar/Algeciras. ECA status for the Mediterranean is unlikely in the short term, however, ships transiting to/from Northern Europe and North America will be compliant with the ECA rules. LNG bunkering will therefore be required in the Mediterranean area. As a result of the above, we are likely to see an increase in demand in the region for LNG bunkering & storage facilities. 11
SHARE OF SHIPS BUILT 2012-2020 Shipping 2020 Findings With current LNG prices, 1,000 newbuildings could be fuelled by LNG within the next 9 years. 1,000 ships equal 10-15% of the expected newbuildings (average before 2020) Includes ships with either pure LNG or a dual-fuel engines In 2018-2020, about 30% of newbuildings will have LNG engines This will equate to a demand in Europe of 2-3 million tonnes of LNG p.a by 2020 which corresponds to 8% of European LNG Imports in 2012 25% 20% 15% 10% 5% CUMULATIVE UPTAKE OF LNG ENGINES 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 12
Global LNG bunker demand by 2020 Europe North America 2.2 3.8 million 0.07 0.09 million 0.3 0.8 million China 0.3 0.5 million Japan & Korea 0.9 1.4 million Middle East & India 0.3 0.7 million 0.4 0.7 million SEA 0.3 0.4 million South America 0.1 0.2 million Australia & NZ LNG Bunkering demand 2012 LNG Bunkering demand 2020 Equivalent to 4-7 million tons of LNG 13
Pipeline Innovations Many of the pipelines proposed for Europe have to traverse deepwater basins. This presents many challenges including:- - Extreme conditions - Deep waters - Seismic activity - Landslides and sediment flow - Difficult topography, very steep slopes, and abrupt gradient changes - Tight schedules - Development of repair systems - Very thick pipe wall - external overpressure - Limited number of pipe-mill and pipe-lay vessels with an increased demand of these vessels The requirement for technological innovation is a constant theme in pipeline design, both to achieve difficult solutions and cost reductions. New ideas for onshore and offshore pipelines are now being issued by DNV. 14
Recent Innovations in Pipelines DNV have produced the X-Stream concept for deepwater pipelines Using the X-Stream concept, pipeline wall thicknesses can be reduced by up to 30% by combining several different solutions to ensure that internal pipeline pressure does not drop below a predetermined value, avoiding pipeline collapse due to external pressures. The X-Stream concept brings a number of benefits to development projects:- - Reduced steel quantity - More pipe mills can deliver the linepipe, more cost competition - Reduced weight of linepipe, more vessels can install it - Reduced welding times, with thinner pipe and improved weld quality - Increased lay rates Slide 15
Conclusions Although the forecasts for gas demand in Europe show only slow growth, import requirements increase substantially. An increase in demand for gas in Germany, alternative demands for LNG, lack of a viable CCS option, and increasing industrialisation in South Eastern Europe could increase these estimates Shale gas will impact European gas markets, but it is uncertain where and when its potential will be fully realised. There is amply supply both via pipelines and LNG to meet Europe's current demands, before we consider unconventional gas resources LNG does add swing capacity to gas markets, and thus provides price stability and security of supply for gas consumers. Technology developments such as LNG fuel for ships will increase LNG demand, whilst developments such as X-Stream will reduce the cost of pipeline projects Pipelines and LNG are competing supply options, but they provide a complementary solution which adds to redundancy and diversity of supply from North Africa whilst serving new emerging markets. The opportunity exists for growth in gas export to Europe, but the early movers will secure the advantage 16
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