European Gas Markets

European Gas Markets Globalisation; Commoditisation; Demand Destruction Pierre Noël EPRG, University of Cambridge GDF Suez Brussels, 8 February 212

EPRG, University of Cambridge Economic & social science research in energy markets & policy electricity, gas and carbon. Supported by the UK Research Councils and:

Main messages The gasification of Europe (1965-25) has been remarkable but everything is changing LNG is making Europe part of a global gas system Market forces should create a Eurasian gas market price convergence between NWE and Asian spot price Market forces should then re-integrate North America into the global market putting long-term pressure on the Euro-Asia price Gas demand in Europe is declining at an accelerated pace, thanks to high prices & renewables policy

Contents 1. The gasification of Europe in perspective 2. Globalisation and security of supply 3. Commoditisation of European gas 3. Demand destruction 4. A golden age for gas?

196s-2s The Gasification of Europe 6 3% 5 25% Gas as % of primary energy 4 Shareof gas in primary energy 3 2% 15% Mtoe/yr 2 Primary gas consumption (EU+TR) 1% 1 5% % 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 Source: BP Statistical Review (211)

Europe caught up with World, OECD, US 6% 5% 4% 3% 2% 1% USSR/FSU USA EU27+TR OECD World Japan China Gas share in primary energy % 1965 1968 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 Source: BP Statistical Review (211)

Europe in global gas consumption 6% 5% 4% 3% EU27 + Turkey Share of global gas demand 2% 1% Contribution to world demand growth (5 yr moving period) % -1% 1965 1968 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 Source: BP Statistical Review (211)

Cumulative energy, 197-21 EU27 Gas Consumption EU27 Nuclear Consumption EU27 oil consumption EU27 hydro consumption Saudi oil exports US oil imports 12.4 Gtoe 5.8 Gtoe 28.3 Gtoe 2.8 Gtoe 14 Gtoe 16.2 Gtoe

Europe gasified through imports Gas imports as % of gas consumption 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% Bubblesurface proportionate to gas consumption USA South Korea Japan China India EU27 Gulf Russia % 2% 4% 6% 8% Gas as % of primary energy Figures for 21 Source: BP Statistical Review (211)

Since 1975, 1% of growth covered by imports 6 Others 5 Qatar Oman UAE Malaysia 4 Trinidad & T Nigeria Libya Egypt EU 27 IMPORTS (IEA data) 3 Russian gas Algeria cubic meters Norway Russia 2 Billion Other EU RO PL IT 1 D DK UK EU 27 PRODUCTION (BP data) NL 26 24 22 2 1998 1996 1994 1992 199 1988 1986 1984 1982 198 1978 1976 1974 1972 197 Sources: International Energy Agency; BP Statistical Review of World Energy

Europe imports half of world traded gas EU27+TK Gas Imports % of world trade 197 6.4 Mtoe 29% 198 67 Mtoe 57% 199 13 Mtoe 56% 2 2 Mtoe 46% 21 321 Mtoe 51% Excl. intra-fsu & intra-eu trade. Source: BP Statistical Review

A regional gas supply system 3 25 197-1995 Total: +14.4% p.y Russia: +14.3% p.y 1995-26 Total: +7.4% p.y Russia: +1% p.y OTHERS cubic meters 2 15 ALGERIA Billion 1 NORWAY 5 RUSSIA 197 1972 1974 1976 1978 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 Data sources: International Energy Agency; BP Statistical Review of World Energy

Contents 1. The gasification of Europe in perspective 2. Globalisation of European gas 3. Commoditisation of European gas 3. Demand destruction 4. A golden age for gas?

A wave of (Qatari) LNG hits Europe (via UK) 1 9 8 7 6 5 4 3 2 1 12 1 8 QATAR YEMEN MALAYSIA TRINIDAD OMAN NORWAY EGYPT NIGERIA ALGERIA PORTUGAL UK ITALY GREECE FRANCE BELGIUM SPAIN bcm per year Jan-98 Dec-98 Nov-99 Oct- Sep-1 Bcm per year Aug-2 Jul-3 Jun-4 May-5 Apr-6 Mar-7 Feb-8 Jan-9 Dec-9 Nov-1 6 4 2 Jan-98 Oct-98 Jul-99 Apr- Jan-1 Oct-1 Jul-2 Apr-3 Jan-4 Oct-4 Jul-5 Apr-6 Jan-7 Oct-7 Jul-8 Apr-9 Jan-1 Oct-1 Jul-11

De-globalisation? 18 16 Towards a Euro-Asia spot price convergence? 14 USD/MMBTU 12 1 8 6 Japan LNG (average) NBP Henry Hub 4 2 Dec-1 Dec-2 Dec-3 Source: Bloomberg Dec-4 Dec-5 Dec-6 Dec-7 Dec-8 Dec-9 Dec-1 Towards North American exports and reglobalisation?

Strong demand growth from Asia + Gulf 5 45 2 = 1 4 35 3 25 2 15 1 5 China China+India India Asia Gulf Japan EU+TR USSR / FSU EU27 US 2 21 22 23 24 25 26 27 28 29 21 Source: BP Statistical Review (211)

3 25 2 15 1 5 Booming Chinese gas imports Turkmenistan (approx.) LNG Bcm/year Aug-4 Jan-5 Jun-5 Nov-5 Apr-6 Sep-6 Feb-7 Jul-7 Dec-7 May-8 Oct-8 Mar-9 Aug-9 Jan-1 Jun-1 Nov-1 Apr-11

Asian imports rise fast Asian gas imports (gross) 197 4 Mtoe 17% 198 25 Mtoe 21% 199 52 Mtoe 22% 2 99 Mtoe 23% % of world trade 21 183 Mtoe 29% Excl. intra-fsu & intra-eu trade. Source: BP Statistical Review

Towards Euro-Asia price convergence? 8 7 6 5 4 3 2 1 NBP TTF PEG ZEE NCG Baumgarten Asian demand is soaring, wiping out the LNG glut Non contracted LNG (from Qatar) is dwindling UK should pay Asian spot prices for its cargoes Convergence at Asian oilindexed levels? EUR/MWh Jul-8 Sep-8 Nov-8 Jan-9 Mar-9 May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 4-Mar-5 4-Jul-5 4-Nov-5 4-Mar-6 4-Jul-6 4-Nov-6 4-Mar-7 4-Jul-7 4-Nov-7 4-Mar-8 4-Jul-8 4-Nov-8 4-Mar-9 4-Jul-9 4-Nov-9 4-Mar-1 4-Jul-1 4-Nov-1 1.2 1.8.6.4.2 Share of Qatar in UK LNG imports Netback to Qatar and Qatari exports to UK.8 Millions1.8 1.6.7 1.4 1.2 1.8.6.4.6.5.4.3.2 Qatar exports to UK Netback ratio (UK/Japan).2.1

US gas supply: reversing the peak 6 55 5 Mtoe 45 4 35 3 1985 1987 1989 1991 1993 1995 1997 1999 21 23 25 27 29 Source: BP Statistical Review (211)

Towards massive American exports? 9bcm+ projects 22bcm contracted (Sabine) Kitimat FID imminent Long-term pressure on Euro- Asian price?

Contents 1. The gasification of Europe in perspective 2. Globalisation of European gas 3. Commoditisation of European gas 3. Demand destruction 4. A golden age for gas?

Single North-West European spot price 8 7 NBP TTF 6 PEG 5 4 3 ZEE NCG Baumgarten EUR/MWh 2 1 4-Mar-5 4-Jul-5 4-Nov-5 4-Mar-6 4-Jul-6 4-Nov-6 4-Mar-7 4-Jul-7 4-Nov-7 4-Mar-8 4-Jul-8 4-Nov-8 4-Mar-9 4-Jul-9 4-Nov-9 4-Mar-1 4-Jul-1 4-Nov-1

North West Europe = one large market 8 6 Interconnector Flow (GWh) 8 7 6 Efficient arbitrages between NBP and ZEE More effective TPA in continental markets (NL; BE; FR; DE) Less contractual congestion (DG COMP action) UK now Europe s Western Gas Corridor NBP TTF PEG 4 2 EUR/MWh 5 4 3 ZEE NCG Baumgarten 1-Jan-6 1-Jan-7 1-Jan-8 1-Jan-9 1-Jan-1 1-Jan-11 2-2 1-4 -6 4-Mar-5 4-Jul-5 4-Nov-5 4-Mar-6 4-Jul-6 4-Nov-6 4-Mar-7 4-Jul-7 4-Nov-7 4-Mar-8 4-Jul-8 4-Nov-8 4-Mar-9 4-Jul-9 4-Nov-9 4-Mar-1 4-Jul-1 4-Nov-1

Commoditisation vs. LT contracts 25 2 BRENT Spot-priced gas available to consumers in NW Europe USD/MMBTU 15 1 5 German oil-indexed formula NBP Oil-indexation gradually vanishing Dec-1 Aug-2 Apr-3 Dec-3 Aug-4 Apr-5 Dec-5 Aug-6 Apr-7 Dec-7 Aug-8 Apr-9 Dec-9 Aug-1 Apr-11 Source: Bloomberg AGIP Proxy formula from H. Rogers (OIES) 3.5 3. 2.5 2. Investment in NWE (Gate; Dunkirk; storage) made with NWE market in mind including NBP Overcapacity and premium to flexibility -- option to serve 1.5 1..5. -.5-1. -1.5 Dec-1 Jun-2 Dec-2 Jun-3 Dec-3 Jun-4 Dec-4 Jun-5 Dec-5 Jun-6 Dec-6 Jun-7 Dec-7 Jun-8 Dec-8 Jun-9 Dec-9 Jun-1 Dec-1 Jun-11 USD / Mbtu Average German ImportPrice below oil-indexed formula Average German ImportPrice above oil-indexed formula

Contents 1. The gasification of Europe in perspective 2. Globalisation of European gas 3. Commoditisation of European gas 3. Demand destruction 4. A golden age for gas?

EU: gas demand peaked in 25 6 5 4 Mtoe 3 2 1 EU27+TR EU15 IT+FR+GER+UK NMS1 TR 1965 1968 1971 1974 1977 198 1983 1986 1989 1992 1995 1998 21 24 27 21 Source: BP Statistical Review (211)

even with gas still displacing other fuels 12% 1% 8% 6% 4% 2% % -2% -4% EU27 + Turkey Gas consumption growth average gas (+2.25%) Energy cons. growth average energy (+.42%) -6% -8% 198 1982 1984 1986 1988 199 1992 1994 1996 1998 2 22 24 26 28 21 Source: BP Statistical Review (211)

IEA & BP (and others) growth will resume 21-23 Consumption up by 1bcm Idem IEA Golden Age Conv. prod. down by 1bcm IEA Golden Age : -7bcm About 4bcm shale+cbm Imports up by 16bcm IEA Golden Age : 14bcm Pipeline imports grow nearly as quickly as LNG imports Power is key to demand growth mainly through fuel substitution

The case for fuel substitution Carbon inten nsity of heat & elec 1 9 8 7 6 5 4 3 2 1 Malta Cyprus Greece Estonia Czech Republic Ireland Bulgaria Romania Netherlands Slovenia Portugal Hungary Denmark Luxembourg Belgium Slovak Republic Finland Austria Latvia Lithuania Sweden Poland Spain Italy United Kingdom Carbon pricing is supposed to incentivise coal-to-gas substitution Big prizes are in PL, CZ, DE, UK France Germany 1 2 3 4 5 6 7 8 9 Heat & Elec Generation (GWh) Carbon intensity of Gas IEA data

But policy works against gas Questioning the gas-for-co2-reduction story Inter-fuel competition is heavily managed in Europe EU has effectively abandoned its climate policy in favour of a renewables policy not the same at all Coal is protected by low carbon price & subsidies Gas may be the big loser -- Cf Spain

Spain: wind and coal displace gas 12 1 8 It is nice how gas complements wind in the Spanish market -- EC official Investors in stranded CCGTs will appreciate 6 4 Gas Wind Coal TWh 2 Jan-6 May-6 Sep-6 Jan-7 May-7 Sep-7 Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 May-11 Sep-11 Source: ENTSOe

Even in the UK Decline in residential (efficiency) & industrial Long-term subsidy contracts to renewables + nuclear Gas demand slowly declining, at best 12 Gone Green Annual Gas Demand 12 Slow Progression Annual Gas Demand 1 1 8 8 Demand (TWh) 6 4 2 Demand (TWh) 6 4 2 1996 1998 2 22 24 26 28 21 212 214 216 218 22 222 224 226 228 23 1996 1998 2 22 24 26 28 21 212 214 216 218 22 222 224 226 228 23 Domestic Industrial and Commercial Domestic Industrial and Commercial Power Generation Exports Power Generation Exports Source: National Grid, Ten Year Statement 211

Demand destruction beyond weather 7 largest mkts weather-adjusted gas demand Industrial & power gen consumption Source: Deutsche Bank, Commodities Outlook 212, January 212

Demand destruction beyond GDP Gas demand v. GDP (7 largest EU markets 211 decline (7 largest countries) Source: Deutsche Bank, Commodities Outlook 212, January 212

Contents 1. The gasification of Europe in perspective 2. Globalisation of European gas 3. Commoditisation of European gas 3. Demand destruction 4. A golden age for gas?

For EU gas demand to grow At least some of the following would have to happen Some economic growth A return to a carbon (not renewables) policy -- fuel mix determined by relative costs including carbon price An efficient pan-european gas market, reducing the gas insecurity syndrome in Central & Eastern Europe Fully commoditised Russian gas sold at hub price; disconnected from Russia s foreign policy; some level of competition upstream A European unconventional supply boom New golden age of gas likely for the world; unlikely for Europe

Main messages The gasification of Europe (1965-25) has been remarkable but everything is changing LNG is making Europe part of a global gas system Market forces should create a Eurasian gas market price convergence between NWE and Asian spot price Market forces should then re-integrate North America into the global market putting long-term pressure on the Euro-Asia price Gas demand in Europe is declining at an accelerated pace, thanks to high prices & renewables policy