THE EU GAS SUPPLY ENVIRONMENT. An Obstacle to Competition? Dick de Jong, CIEP February 2007

Transcription

1 THE EU GAS SUPPLY ENVIRONMENT An Obstacle to Competition? Dick de Jong, CIEP February 2007

2 Today s Market:Some Observations High gas prices should attract new supplies. Sellers market does not help competition Supply deficit from 2012???? what business model????

3 A changed business environment Higher risks across the business.. (and more profit centers) r < < R..looking for higher rewards, so higher gas prices likely to be a permanent feature

4 A changed business environment Lower Security of Supply S > > s e.g. political, new supplies?, short term contracts, less capacity, less storage

5 A changed business environment Lower Security of Supply S > s..and lower Security of Demand e.g. market structure, uncertain demand outlook

6 US Gas Market The Market Is Working! 1997-Big pool with many players.. and plenty gas.

7 2006: The Market Is Working!? Prices well above the marginal costs of supply Henry Hub prices Henry Hub 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 $/MBD

8 The Market Is Working? But for whom???? Henry Hub prices Henry Hub $/MBD 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 not for the consumer

9 The Market Is Working??? 2006-The pool is drying up - who is doing something about it?

10 The Market Is Working? Henry Hub prices Henry Hub 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 $/MBD..but not hard enough!! Competition exists only in the market

11 US Gas Market Possible causes: Information lacking or lagging Time horizon of the players Structure of the market: Sitting Ducks, waiting for supplies (FERC has lowered barriers to entry )

12 Lessons for Europe? Certainly an Impact on Europe!

13 Development of Natural Gas Supplies in billion m³ 456 4% 11% 24% the EU % per annum 6% 11% 10% 21% % 9% 8% supply gap: ~ BCM/yr advanced projects other non-eu imports Algeria 15% 21% 14% 5% 8% 8% 10% 33% 23% 16% % 15% 17% Russia Norway other EU imports Netherlands indigenous production for domestic use LNG share (in imports) Source: IEA World Energy Outlook

14 Supply Capacities for EU: (bcm/a) (3 dominant suppliers) Norway Russia EU Production Central Asia Middle East Algeria 145 Egypt Libya West-Africa Source: IEA, OME 2004

15 New pipeline supplies more complex Main issues for suppliers: separation of transport and supplies harmonisation of supply and capacity transit in Europe aggregation and security of demand For suppliers and buyers orchestration problematic Examples: Nord Stream, Nabucco

16 New Business Models Vertical integration

17 Strategic challenges and pursuits ( and their underlying rationale) Vertical integration for downstream business : secure access to sources for suppliers : security of demand and control over destination and over arbitrage value of production for both : protection (hedge) against price risk and uncertain market liquidity (cycles between sellers and buyers markets) renewed emphasis on vertical hold is trigger for mergers between gas and electricity companies

18 New Business Models Vertical integration From demand driven..to supply driven

19 Demand-driven vs. producer-driven supply decisions demand-driven (traditional) aggregated orders for identified demand viewed as pre-condition for investment decision supply decisions support and trigger investment in mid-stream infrastructures necessary to bring gas to markets long-term contracts with sharing of price and volume risks provide efficient basis for project finance and security of supply and of demand examples: most Asian and continental European supply projects to-date producer-driven (new trend) investment decision without concomitant sale contracting allows for short-term contracts, particularly if already surplus transport capacity to market induces "self-contracting" by producers, i.e. contracting with own marketing affiliates leading to downstream integration (as done for oil) requires capacity for equity or balance sheet financing (which only financially strong producers can afford) assumes confidence in sustained high level of prices and of market liquidity ( supply sink ) examples: Ormen Lange, Qatar LNG, Nord Stream (hybrid)

20 Downstream positions of external suppliers on European Gas Market

21 Size matters: Success of any energy company is directly related to the size of its business. John Rockefeller has proved it when he created the world s first vertically integrated corporation Standard Oil. Gazprom Journal, September 2006, page 12 Suggesting that the Russian gas monopoly considers Standard Oil a model company.

22 LNG the GameChanger?

23 New trends in the LNG industry Traditionally FOB or CIF sales to gas and power utilities under long-term contracts with dedicated ships. Both buyers and sellers now forcing changes to traditional model, by moving upstream and downstream respectively leading to vertical integration in LNG business. Distinction between traditional sellers and buyers fades. Both buyer and seller are motivated by risk mitigation to secure supply and demand resp. ; up-stream suppliers moving downstream furthermore motivated by destination flexibility and control. High prices induce producers to invest before capacity of (larger) liquefaction trains is entirely sold to third-party customers : they opt to sell equity LNG directly in spot market or via affiliates in downstream markets (self-contracting).

24 Producers need to build commercial teams and develop/acquire trading and risk management skills. Potential conflicts of interest may arise between the (private) integrated partners in LNG projects and the partners that are in upstream/liquefaction part only (often local state-controlled companies). A strategic choice may be required in project design between maximum flexibility (smaller liquefaction trains and ships easier to place in market and access to many ports) or minimum costs (hyper trains and very large ships more rigid and dedicated to a specific market and access to very few ports).

25 LNG the GameChanger? Major role for Europe still to be demonstrated Qatar to UK is self-contracted Other major volumes to EU?????

26 Further Outlook EU will remain dependent on three major gas suppliers Gas pricing and hubs: 25% spot prices in hubs, or 100% spot prices Shifting marginal supply costs

27 Zones of Supply Cost Influences Source: Wood MacKenzie

28 Further Outlook EU dependent on three major gas suppliers Gas pricing and hubs: 25% spot prices in hubs, or 100% spot prices Shifting marginal supply costs More uncertainty over market growth.. power is now the main driver

29 Development of Natural Gas Demand in billion m³ 456 4% 11% 24% the EU % + 2% per annum 11% 10% 21% % 9% 8% supply gap: ~ BCM/yr????? advanced projects other non-eu imports Algeria 15% 21% 14% 5% 8% 8% 10% 33% 23% 16% % 15% 17% Russia Norway other EU imports Netherlands indigenous production for domestic use LNG share (in imports) Source: IEA World Energy Outlook

30 Further Outlook EU dependent on three major gas suppliers Gas pricing and hubs: 25% spot prices in hubs, or 100% spot prices Shifting marginal supply costs More uncertainty over market growth Storage issues

31 Further Outlook EU dependent on three major gas suppliers Gas pricing and hubs: 25% spot prices in hubs, or 100% spot prices Shifting marginal supply costs More uncertainty over market growth Storage issues GASPEC?

32 Further Outlook EU dependent on three major gas suppliers Gas pricing and hubs: 25% spot prices in hubs, or 100% spot prices Shifting marginal supply costs More uncertainty over market growth Storage issues GASPEC? Gas is different from Electricity