ECN Seminar Prague, June 12th, 2003 Gas Supply Security in an Enlarged Europe Developments in gas pipelines and LNG infrastructure for closing EU-30 gas supply demand gap Presentation by: Patrick Cayrade Director Energy Department
Developments in gas pipelines and LNG infrastructure 1- Europe : the largest world market for natural gas import over the period to 2020 2- The gas supply demand gap in EU-30 3- The magnitude of required gas infrastructure investment 4- Development of LNG markets: opportunities to improve security of supply? 5- Constraints to realisation of infrastructure investment: gas price, financing, regulation 6- Conclusions
Developments in gas pipelines and LNG infrastructure 1- Europe : the largest world market for natural gas import over the period to 2020
1- Europe: the largest gas import market should enter an exceptional growth period Gas: growth from 500 Bcm in 2000 to 820 Bcm in 2020 Mtoe 2500 2000 1500 1000 500 0 1876 6.4% 14.4% 19.6% 23.3% 36.2% + 1.1 % / year 2076 6.3% 12.5% 17.5% 28.1% 35.6% 2358 7% 11% 15% 32% 35% 2000 2010 2020 Hydro/Renew. Nuclear Coal Gas Oil Source : Projections Becip Franlab -TotalFinaElf Including Western Europe + Eastern Europe exc. FSU + Turkey = EU27 Average growth rate 2000/2020 + 0.8 % - 0.4 % +0.2 % + 2.8 % + 1.0 %
European gas import needs could reach 600 Bcm in 2020 (from which around 400 Bcm not yet contracted) 1 000 800 600 400 200-379 Gas demand projections EU 15 and EU 30 -Bcm/year BF scenario 468 537 429 Total import d 481 621 799 709 Accession Countries 535 586 EU 15 Countries 2000 2005 2010 2015 2020
2- Gas Sources for supplying Europe-30 6000 km Reserves in Tcm U.S.A. 4.8 MEXICO 0.8 VENEZUELA 4.2 4000 km 2000 km NORWAY 4.0 UK 1.2 NETHER. 1.7 ALGERIA 4.3 NIGERIA 3.6 QATAR 14.4 IRAN 25.8 CEI 46.6 ABU DHABI 5.6
Developments in gas pipelines and LNG infrastructure 2- The gas supply demand gap in EU-30
Potential supply from outside Europe-30 Gas exports by EU 30 suppliers in year 2020 Billion m3 EU 30 Far East USA Other Total South Asia Export Russia 220 20 60 Ukraine/Belarus 300 Norway 100-5 - 105 Algeria 100-5 5 Maroc /Tunisia 110 Libya 15 - - - 15 Iran LNG + pipe Turkey 20 35 5-60 Azerbaidjan Pipe Turkey 10 - - - 10 Turkmenistan Pipe Turkey 5 - - 55 Russia 60 Egypt 12 - - 3 Jordan /Syria 15 Irak Pipe Syria + Turke 5 - - 5 Syria 10 Nigeria 20-15 5 40 Qatar 10 35 5 20 UAE Dolphin/Kuw/B 70 UAE LNG Adgas 1 12-13 Other Middle Ea LNG Yemen /Oman 5 25-30 Angola 5-5 10 Trinidad 15-15 30 Venezuela 5-10 15 Total 548 127 65 153 893
Gas exports forecast from Russia Billion m3 2000 2010 2020 Production 585 630 690 Import 13 50 100 Total Gas Supply 598 680 790 Internal consumption 396 445 490 Other uses (cycling, reserves) 8 Exports 194 235 300 To Europe EU 15 80 90 100 To Europe EU 30 130 170 220 To ex CIS excl. EU 30 64 60 60 To Asia 5 20
Supply /demand balance in EU 15 and EU 30 incremental/ 2000 Gas export potential versus required import in EU 15 - BF scenario -BCm/year Gas export potential versus required imports in EU 30 BF scenario BCm/year 450 400 350 300 250 200 150 100 50-114 Potential supply Import needs Gap 7 121 Gap 85 191 276 2000-2010 2000-2020 450 400 350 300 250 200 150 100 50 - Gap 21 154 Potential supply Import needs Gap 116 175 284 400 2000-2010 2000-2020
Closing gas demand /supply gap in EU-30 in 2020 Unit: BCM /year Import in 2020 Supply Likely Required Cost Us$/MMBtu Norway Pipe & LNG 100 100 2.0 /2.2 Russia Pipe & LNG 220 250 1.6 /2.7 MEDA area Pipeline 152 145 1.1 /1.7 & West Africa & LNG 3.0 Caspian & Pipeline 40 70 1.1 /1.3 Middle East LNG Middle East LNG 16 15 2.8 /3.0 LNG Atlantic LNG 20 45 3.0 Total 548 625
Gas supply routes to Europe in 2020 Europe gas production (except Norway): 194 Gm3 Exports from Norway: 100 Gm3 Demand 819 Gm3 Atlantic LNG: 45 LNG Pipelines Billion M3 Imports: 525 Gm3 Norway 100 Mediter. area Pipe 80 - LNG 65 Russia 250 Middle East / Caspian gas pipelines 70 Middle East LNG 15
Developments in gas pipelines and LNG infrastructure 3- The magnitude of required gas infrastructure investment
Gas transport routes and facilities -Europe 2020 Network investment to 2020 ENGAGED 20 Capacity Bcm/year Upgraded networks Projects NadymNadym-PurPur-Taz 200 Billion $ 450 10 20 Existing networks LNG Terminal in operation 72 20 LNG Terminal projected 20? 66 8 125 28 Kazhakstan 28 10? ECN Workshop : Yamal Shtockman 110 38 56 16 Turkmenistan 15 8 19 8 10? 30 10 Irak Azerbaidjan Iran 10 0 500 km 1.3(1)
Examples of infrastructure investments Pipeline Algeria to Spain «Medgaz» LNG project Egypt to Spain and France Capacity: 8 Bcm Length: 747 km Investment: 1.17 Billion US$ Delivered cost: 1.17 US$/MMBtu Production cost in Algeria: 0.45 US$/MMBtu Capacity: 4.8 Bcm Distance: 1,700 miles Investment: 1.58 Billion US$ Delivered cost: 2.56 US$/MMBtu Liquef. Plant: 900 Million US$ Tankers: 360 Terminal: 320 Production cost in Egypt: 0.65 US$/MMBtu
Developments in gas pipelines and LNG infrastructure 4- Development of LNG markets: opportunities to improve security of supply? Different roles played by LNG in 3 markets: Europe, Asia, USA The 3 marlkets were practically separated but become increasingly interconnected USA will become a major LNG importer, with obvious consequences on European supply For European market, LNG links could be preferred to improve security of supply
Specific aspects of LNG markets: a very different role on each market Natural Gas LNG LNG LNG 1% 8% USA 7 Europe 39 Asia 104 World LNG consumption in 2002 (Gm3) Source : TOTALFINAELF LNG 97%
LNG markets: Initial scheme was simple... 100 Asia Pacific (Gm3) 50 Asia Pacific 100 Atlantic - Med (Gm3) 50 1980 1990 2001 1980 1990 2001 Source : TOTALFINAELF /Beicip
But LNG trade is becoming more complex Existing flows New flows Future flows Asia Pacific Atlantic - Med Asia Pacific Source : TOTALFINAELF
LNG markets: development of LNG infrastructure Existing liquefaction plants Liquefaction plants - projects Existing regasification terminals Regasification terminals - projects Import capacity 2000 : 27 Gm3/y 2010 : 60 Gm3/y LNG Import capacity 2000 : 42 Gm3/y 2010 : 65 Gm3/y Source : TOTALFINAELF
5- Constraints to realisation of infrastructure investment 1- Impact of gas price: decoupling gas and oil prices? 2- Spot markets against Long Term Contracts 3- Gas exporting countries reactions to European gas sector structural changes 4- The danger of over-regulation
5- Constraints to realisation of infrastructure investments 5.1- Impact of decoupling gas and oil prices The average value of gas in Europe is a netback value for its different uses and substitutes (half way between USA and Japan). In Europe the average gas import price has been at 80% of Brent parity over more than 15 years The decoupling has not occurred and will be more optical (price seasonnality) than real More probably the coupling will improve (shift to 100% parity) at EU border, due to increase in gas value The impact would be an improvement of financeability of large infrastructure projects, but a basic higher price of gas to customers
5.1- Impact of decoupling gas and oil price UK: an image of what will happen in Europe Jan 1996 - Dec 2001 $/mmbtu 5.00 $/bbl 45.00 4.50 40.00 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan 1996 May Sep Jan 1997 May Sep Jan 1998 May Sep Jan 1999 May Sep Jan 2000 May Sep Jan 2001 Average Border Price (EGM) UK NBP Day Ahead Dated Brent (Right axis) May Sep 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00
5.1- Impact of decoupling gas and oil prices Continental Europe gas market: the new reality Zeebrugge Hub Gas prices PENCE/THERM 34 32 30 28 26 24 22 20 18 16 14 12 10 2000 2001 2002 2003 2004 2005 Priix Zeebrugge Hub Day-ahead
5-2 Spot markets against LT contracts Main concerns Due to the development of spot markets, Prices in the spot market could become increasingly based on gas to gas competition and long-term pricing would come under pressure Existing long-term contracts come under pressure in both price and volume Companies that have signed take-or-pay contracts would fail to comply the take-or-pay clauses. Higher costs would fully or partially be passed to the customers Long-term gas purchase contracts might be discouraged Higher risk (thus cost) for the large investments needed for major pipelines
5-3 The main worries of gas exporting countries related to the European Gas structural changes Worries related to volumes: Worries related to weakening or progresssive end of «Take or Pay clauses» and «destination restriction clauses» Global gas competitivity linked to political decisions on buyers side (taxation, carbon emissions restriction rules, etc..) Security of suppliers for buyers to be balanced by security of outlets for sellers Worries related to prices The loss of previsibility linked to possible new price formulas The risks related to a fully «spot market» gas pricing system The new risks (and opportunities) linked to pricing seasonnality
5-3 The main worries of gas exporting countries related to the European Gas structural changes Worries related to projects financing Volume uncertainties and prices volatility could deteriorate «projects bankability» Potential risks and complexity if joint sales by projects partners no more legal for sales to UE buyers The unbundling between upstream facilities and transmission systems could deteriorate financiability of certain projects
5-4 The danger of over-regulation *A) Limits to market liberalisation *Full liberalisation is not able to secure market balance and security (ex: California) *Necessity of Long Term Contracts *B) Paradox of administrative investment obligation proposed by European Commission *The only incentive to investment should be adequate return *C) Separation of ownership (between trade, transmission, distribution): *May be dangerous. Accounting and juridicial separation is sufficient.
5.4- The danger of over-regulation *D) Generalised Open Access to storage and LNG terminals is detrimental to investment in required infrastructure *Draft Directive on speeding up EU gas liberalisation (March 2001)- Discussion of Danish clause : * Exemption from regulatory approval of tariff and access terms in case of new infrastructure (terminals, pipes) which contribute to enhancing competition and security of supply *Spain LNG access code: 25% of capacity reserved for short term entry rights terminals built twice as large as needed - hinder new development *Same question in US: FERC adopts a case by case approach to regulation of future terminals, open access should not be mandatory at all terminals.
6- Conclusions *Enlargement to EU 30 leads to an increase of external dependence (import gap from 85 to 116 Bcm in 2020, dependence 70% to 75%) * Enlarged Europe is faced with a major challenge over next 20 years: secure investment to import up to 500 Bcm of gas * Development of LNG markets may ease diversification and security of supply How to bridge the supply /demand gap in 2020: draw on Caspian gas directly or through Russia? Or draw on other sources (Middle East and Atlantic LNG) *Uncertainty about future gas price is not resolved and may hinder financing of required investment *Excess of regulation may hinder a timely development of required infrastructure facilities.