Gas Storage in Europe, recent developments and outlook to 2035 Geoffroy Hureau Secretary General CEDIGAZ

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1 Gas Storage in Europe, recent developments and outlook to 2035 Geoffroy Hureau Secretary General CEDIGAZ

2 Outline European storage market in 2014 Review of 2014 trends Current challenges Role of storage Outlook to 2035 Supply/Demand factors Estimated Storage needs Project backlog Conclusion: recovery post 2025?

3 CEDIGAZ More than 50 years of gas market intelligence CEDIGAZ International association Around 90 members in 40 countries Reports and Databases Annual report on gas in the world, thematic reports Gas Statistical Database: world reserves, supply, demand, trade Gas and LNG contracts database UGS: annual world database New LNG Service Fortnight News Reports on worldwide gas development and unconventional gas WORLD UGS STUDY (June 2013)

4 European* Gas Storage 2014 Review and Challenges * Europe 35

5 European Storage Capacity Jan Maximum Working Gas Capacity (bcm) Germany Italy France Austria Hungary Netherlands United Kingdom Spain Czech Republic Romania Slovakia Turkey Latvia Poland Denmark Others Source: CEDIGAZ, Underground Gas Storage Database, 2014 Total working capacity: 101 bcm 19 new UGS commissioned in the past 4 years (mainly salt cavern) + Extension of existing sites 15 bcm added (40% in salt cavern, essentially in Germany)

6 UGS (bcm) Gas demand (bcm) Storage Glut Annual average SBU price and operating profits Centrica Storage Ltd, % Underground Gas Storage Gas demand Source: Centrica Storage Ltd, Annual Reports, CEDIGAZ Increased competition between storages Excess gas supply leads to decreasing gas price spreads and volatility Today, the market does not value storage assets

7 New capacities are still being commissioned 2.5 bcm of new capacity added in % 7% 4%4%3%2%2% 67% Germany Spain Hungary Romania Netherlands 25% 75% Salt caverns Depleted Fields Portugal Poland United Kingdom In 2014: Bergermeer 4.1 Bcm, 7Fields expansion 0.7 bcm, additional salt cavers in Germany, At the beginning of 2014 more than 20 bcm of additional capacity was under construction with completion dates to 2025

8 Low Utilization of Storage Facilities Evolution of European inventories (EU 28) vs. Working gas capacity 94,3% 92.6% 93.8% 90.9% 84.3% 36.5% 38.6% 41.9% 20.9% 44,8% Source: GSE, Aggregated Gas Storage Inventory Economic and operational consequences/security of supply Financial: investment in new seasonal storage?

9 Competition from other sources of flexibility? LNG Imports (bcm) LNG Seasonal Variations (bcm) X summer / T2-T3 winter / T4-T1 (n+1) Growth of LNG imports Greater market integration (interconnectors)

10 Seasonal flexibility in Europe Seasonal variations in demand/supply (summer 2012 / winter ) Sources: IEA, ENTSOG, CEDIGAZ

11 Security of supply European winter supply profile 2012/ /2014 UGS is the most reactive to sudden demand variations during cold spells Source: ENTSOG

12 Case study winter 2012/2013 in the UK Total Supply Well functioning European market LNG supply is highly unpredictable and linked to global markets Main contribution of UK and continental storage UGS IUK LNG Oct Nov Dec Jan Feb Mar UGS level Source: National Grid Winter Consultation 2013/2014 Winter Outlook 2013/2014

13 European Gas Storage Outlook to 2035

14 Future European Gas Demand and Supply Bcm %/yr +0.6%/yr External dependence Without Norway 21% 34% 23% 22% 16% 13% % 71% 68% 87% LNG Pipeline others Pipeline Russia Norway Domestic production (excl.norway) Gas demand + 14% Domestic production -37% (-54% excl. Norway) Imports +73% (+46% excl. Norway)

15 Supply and Demand Factors A Surge in Gas Imports & dependence Decrease in domestic production (even with shale gas) % 70% Decrease in production swings (Groningen) % 60% A significant increase in gas imports + 73% (+46% without Norway) in 2035 Security of supply issues % 50% 45% New long-distance pipelines built Import Production Dependence More seasonal UGS needed for operational and strategic purposes

16 European natural gas demand prospects Growth Growth The expected growth in the residential-commercial and industrial sectors will mainly come from Turkey and Southern Europe. Turkey is expected to become the third largest gas market in Potential for significant development of highly-flexible gas-fired power plants after 2020 to back-up renewable power Unit: Bcm

17 bcm EU Gas demand in the Power sector Germany Netherlands United Kingdom Spain Italy France Belgium Others Gas demand by the power sector has decreased by 51 bcm between 2010&2013 The equivalent of the total French gas market

18 Closure of aging coal power capacity Date of commissioning of EU coal power capacity Lignite (64 GW) Hard coal (128 GW) Source: Enerdata 40% of capacity is more than 40 years old 2013 GW

19 Air emissions regulation (LCPD/IED) Large Combustion Plants Directive limits SOx and NOx emissions Opt in (FGD investment) or Opt out and close by end GW of old coal plants closed by end 2015 at the latest, mainly in UK and France (some already closed) Industrial Emissions Directive replaces LCPD on 1 January 2016 Further tightens limits on SOx and NOx emissions Opt in (SCR investment) or Opt out and closure by 2023 Some flexibity (Transitional National Plans) Additional closure of old coal-fired plants: 50 to 55 GW, mainly in the United Kingdom, Germany, Spain, Poland These closures amount to almost a third of current EU coal capacity

20 EU-ETS reform Can the phoenix rise from the ashes? Different possible futures Source: Climate Economics Chaire, January 2014 Structural reform of the EU ETS 2030 Climate and Energy Framework Emissions reduction by 40% by 2030 Fast-track EUAs backloading (Feb 2014) Market stability reserve

21 Market Liberalization Reinforced commercial role of UGS Market hubs/gas trading need UGS (cf. US development) Flexible UGS close to market hubs Market-based pricing Less flexibility in gas export contracts More flexibility/ugs needed More network balancing needs Greater interconnectivity of the European network Less UGS and reliance on neighbouring flexibility/ugs? But limited to short-distance neighbouring countries More cross-border UGS built (ex: Epe) A «European» storage market

22 Market Liberalization New entrants in UGS European Gas Storage Players Working Gas Capacity, 2013 Takes into account recent acquisitions and direct shares owned in foreign storage/utility companies. Source: CEDIGAZ, Underground Gas Storage in the World, 2013 A changing landscape: new players are entering the storage business for operational and strategic reasons

23 Estimates of European UGS Needs by bcm Under Construction Yet to be FIDed Under construction Operational 54 bcm at various stages of planning 60 WGC Source: CEDIGAZ, November 2014 An additional need of around 45 bcm by 2035 But overcapacity is likely to last until 2025

24 Europe: Planned Working Gas Capacities United Kingdom Germany Italy Turkey Latvia Netherlands Austria Serbia Croatia Portugal Poland Spain Bulgaria France Slovakia Albania Czech Republic Ireland Denmark Romania Bosnia & Herz. Under construction Planned 0 2,000 4,000 6,000 8,000 10,000 12,000 mmcm Source: CEDIGAZ, Underground Gas Storage Database Total identified projects (at beg. of 2014): 77 bcm (highly competitive market) Under construction: 22 bcm (with a completion date up to 2025)

25 Conclusion: possible recovery post 2025 Over capacity expected until 2025 Supply & demand evolution, market liberalization and environmental constraints on coal will drive a new period of growth for UGS Cedigaz estimates that European UGS capacity will increase by around 45 bcm by bcm of UGS projects Of which 22 bcm under construction A majority of salt-cavern projects (market liberalization) Not so much new seasonal storage (security of supply?) Not all planned storage will be built Projects under competition for the same (regional) market The situation is quite contrasted between NW Europe and South-Southeast Europe (and UK) Challenges: investment and security of supply

26 Thank you for your attention