COMPETITION: PIPELINE GAS AND LNG IN EUROPE

COMPETITION: PIPELINE GAS AND LNG IN EUROPE Denis Bonhomme Damien Burignat Philippe Miquel Alda Engoian Cédric Aubry GDF SUEZ KEYWORDS: LNG, pipeline, Europe, market, outlook, Russia, demand, supply, natural gas, regulation The sources used in this paper are: IEA, CERA, PFC Energy, PIRA, Poten, Waterborne Energy, GDF SUEZ ABSTRACT While all LNG eyes are focused on the Pacific Basin, this paper intends to demonstrate that Europe will need new LNG volumes in the medium term. This should drive NBP up and should therefore attract flexible and new uncommitted LNG volumes. The slow increase of natural gas need in Europe (CAGR.6% between 28 and 23), combined with a declined of indigenous production (-1% per year), will create a supply gap of more than 1 by 23. After 215, Europe will have to find new volumes of gas and a tough competition between natural gas imported by pipelines and LNG is expected. After 215, significant volumes are available for exports from Russia and Caspian area (from production increases and new pipeline projects) and should fill in some of the supply gap. But only few projects should be implemented and uncertainties remain on these additional production capacities. In 23, at least, 65 of additional regasified LNG volumes are required to fill in the European natural gas gap. Only few liquefaction project will come on stream in the Atlantic basin by 23, living less by 2 of regasified LNG available for Europe (in competition with Latin America). New liquefaction projects for Europe are needed in the medium term. As long as LNG should continues to be cheaper than term oil-linked pipeline gas, LNG imports should grow. 1 INTRODUCTION Europe 1 has made the choice of a low-carbon economy at a time of a challenging economic situation. In this context, the natural gas industry faces three main challenges: To convince stakeholders of the acceptability of natural gas solutions ; To ensure the competitiveness of natural gas within the European energy mix ; Both will, in turn, have a significant impact on long-term perspectives on natural gas demand in Europe. And to ensure a continued access to natural gas resource, with the associated investment requirements for the development of natural gas infrastructures Although natural gas demand is expected to decrease in Europe in the short term, this situation is not expected to last. European utilities and their suppliers must make decisions and investments to ensure longterm supply to the region. Europe faces choices for its supplies: new LNG liquefaction projects in the Atlantic Basin or/and new pipeline imports from the East. But the future of natural gas lies to a large degree also in 1 In this paper, analyses have been made on the following 31 European countries, which will heretofore be referred to as Europe 31: EU 27 (Austria*, Belgium*, Bulgaria, Cyprus, Czech Republic*, Denmark*, Estonia*, Finland*, France*, Germany*, Greece*, Hungary*, Ireland*, Italy*, Latvia, Lithuania, Luxembourg*, Malta, Netherlands*, Poland*, Portugal*, Romania, Slovakia*, Slovenia*, Sweden*, Spain*, United Kingdom*) + Croatia, Norway*, Switzerland*, and Turkey* - * OECD Countries 1

the hand of policymakers and regulators, who must ensure that the industry can rely on long-term visibility for these investments to happen. 2 THE EUROPEAN ENERGY CONTEXT Based on CERA Global Redesign Oct 212, what are the main trends of Europe s long-term energy mix? Global primary energy consumption in Europe remains stable over the 21-23 period. Following Fukushima, the share of nuclear is expected to decrease. In contrast, renewables should see the highest growth. Coal consumption is expected to decrease significantly. Oil consumption should also decrease significantly after 22, yet it remains the main energy vector. Natural gas is the sole fuel whose use will increase (renewables excluded). Its share in the primary energy mix should grow from 25% in 21 to 28% by 23. Table 1: Average Annual Growth of European Primary Energy Consumption (Source: CERA Global Redesign Oct 212) CAGR Total Primary Energy Consumption Oil -.4% -1.% Natural Gas.2% Coal Hydro Nuclear Renewables Other -2.2%.6% -.8% 7.3% 1.1% 2

CERA Global Redesign Oct 212 Figure 1: Distribution of European Primary Energy Consumption (Source: CERA Global Redesign Oct 212) It is essential for natural gas to show that it can answer the trilemma of economic viability, sustainability and security of supply. A sustainable energy policy must be economically viable, as the price of energy impacts industry competitiveness and household purchasing power. Renewable energy, especially off-shore wind and solar power generation, is not yet mature enough to develop without direct or indirect subsidies in many places. By contrast, natural gas is affordable and a good complement to renewables. The cost advantage of natural gas solutions is clear from many standpoints: residential, industry and transport and, of course, within the power generation sector. Besides its intrinsic advantages, natural gas could bring bring benefits to the competitiveness of our economies. This is most prominent in the United States, where the unconventional gas revolution, and its impact on natural gas prices, has boosted the American economy. According to IHS CERA, the macroeconomic benefits of lower gas prices will lead to a 1.1% increase in US GDP by 213, and will also provide one million more jobs by 214. The second objective for the industry is to convince that natural gas can indeed be a long-term sustainable option in a balanced energy mix. Generally speaking, the industry has to ensure that gas can be produced and delivered to customers in a safe, respectful and environmentally friendly manner. This is even more true for non-conventional resources. Natural gas is a definite solution to meeting the increasingly stringent objectives in reducing greenhouse gas emissions. In power production, combined cycle gas turbines (CCGT) are an ideal complement to intermittent energy sources. Natural gas has already been the basis for a large part of the decarbonization achievements in the sector, enabling significant greenhouse gas emissions reductions. We could even go beyond. Substituting natural gas for coal, and for oil to a lesser degree, could reduce CO 2 emissions by 74 million tons by 235, according to the IEA in its Golden Age for Gas scenario. Natural gas is part of the answer to legitimate concerns over security of energy supply. Natural gas has abundant resources: almost 25 years of natural gas consumption at current production rates, if we include conventional and unconventional resources (785 Tcm worldwide). Following North America s example, unconventional gas can reinforce security and diversity of supply in a number of countries (though perhaps 3

not to the same extent). Non-conventional gas can reveal new production areas and prolong the lifetime of existing ones as well. In parallel, with LNG, the number of natural gas supply sources continues to increase. 3 EUROPEAN NATURAL GAS AND LNG MARKETS CURRENT SITUATION 3.1 European Natural Gas Market European gas consumption decreased in the first 9 months of 212 (M9 212) vs. M9 211 (-9, -3%) mainly in the power generation sector due to increased use of coal-to-power and renewables. Demand grew only in Turkey (+7%) and slightly in France (+1%). 45 4 35 3 25 2 15 1 5 Gas demand in OECD Europe 391 369 358 25-6% -3% 27 25 24 33 31 33 29 48 29 47 45 7 6 55 58 56 54 68 61 58 63 6 6 9M 21 9M 211 9M 212 Spain Turkey France Benelux UK Italy Germany Others Source: IEA Figure 2: Gas Demand in OECD Europe (Source: IEA) In the Western European Big-6 countries (Benelux, France, Germany, Italy, Spain, UK), weather-corrected gas consumption dropped by -8%. In Eastern Europe the drop was also significant: -3%. 45 BIG-6: cumulative weather corrected gas consumption 35 25 2,% -1,6% -8,1% 15 274 27 291 276 267 271 253 249 5 jan.-sep. 29 jan.-sep. 21 jan.-sep. 211 jan.-sep. 212 Consumption Weather corrected consumption Figure 3: BIG-6: Cumulative Weather-Corrected Gas Consumption (Source: GDF SUEZ Based on IEA, DOE-EIA and PFC data) Gas-to-power consumption is still in sharp decline, weakened by cheap coal, low CO 2 prices and low electricity demand. Gas-to-power use recorded a spectacular 18% decrease in the Big-6 countries (totaling 7% of total gas demand in Europe), with the largest drops in the UK, Spain and Italy. In the UK, power demand fell by 23% as coal and nuclear replaced gas as a power generation fuel. Spain saw gas-fired power generation decrease by 26% due to a combination of declining power demand, growing renewables (hydro) 4

share, and competitive coal prices. In Italy, hydropower peaked in 212 while in Germany, gas use for power generation decreased by 18%. 3 25 2 Gas consumption in power generation sector in European Big-6 Total Big-6: 9M 212: 66 (-18%) 9M 211: 8 (-3%) 9M 21: 82 15 1 5 France Germany Italy Spain UK Nether. 9M 21 9M 211 9M 212 Source: PIRA Figure 4: Gas Consumption In Power Generation Sector In European Big-6 (Source: PIRA) Except in Germany, where gas use in industry increased by +36% (+7 ), the demand for natural gas in the industry has dropped. 25 2 15 1 5 Gas consumption in industry sector in European Big-6 Total Big-6: 9M 212: 64 (+4%) 9M 211: 61 (-7%) 9M 21: 66 France Germany Italy Spain UK Nether. 9M 21 9M 211 9M 212 Source: PIRA Figure 5: Gas Consumption In Industry Sector In European Big-6 (Source: PIRA) The natural gas demand in the residential & commercial sectors increased by 4% in Big-6 countries, except in Germany. Germany was the only country to experience a lower consumption in January-September 212 compared to the previous year. 5

4 35 3 25 Gas consumption in R&C sector in European Big-6 Total Big-6: 9M 212: 12 (+4%) 9M 211: 115 (-16%) 9M 21: 137 2 15 1 5 France Germany Italy Spain UK Nether. 9M 21 9M 211 9M 212 Source: PIRA Figure 6: Gas consumption in R&C Sector in European Big-6 (Source: PIRA). Decreasing pipe imports (-4, -3%) while at the same time domestic output are increasing (+3, +1% thanks to Norway s growing output). Norway s production recorded a significant increase (+14%), offsetting a slight decline in Dutch output (-2%) and the UK s continuing abnormally steep down trend (-14%). Russian gas exports to Europe declined (-6%) because of an overall gas demand decrease on the continent. At the same time Libyan volumes came back on stream (+3.4 ). Algerian (-4%) and Azeri exports (- 14%) also decreased. Russian gas transit via Ukraine decreased by 21%, as natural gas flow through the Nord Stream pipeline rose. 25 2 15 1 5 Gas production in OECD Europe 21 196-7% 32 3 29 45 35 3 57 57 +1% 199 56 77 74 84 9M 21 9M 211 9M 212 Others UK Netherlands Norway Source: IEA 16 14 12 1 8 6 4 2 Pipe gas imports into Europe 138 146 +6% -3% 25 25 24 142 97 111 14 Source: IEA 9M 21 from Russia 9M 211 9M 212 from Algeria from Libya from Azerbaijan (to Turkey) from Iran (to Turkey) Figure 7: Gas Production in OECD Europe and Pipe Gas Imports into Europe (Source: IEA) Due to low natural gas demand in Europe, and increasing LNG needs in Asia Pacific, European LNG imports dropped by 14.1 mt (-27%) during the period January-September 212 compared to the same period the previous year. Diversions of flexible volumes (i.e., volumes from liquefaction projects that haven t been locked under long-term point-to-point contracts) from Europe to Asia Pacific occurred and the Asia Pacific region increased its LNG imports by 13.9 mt from January to September 212 compared to the same period in 211. As in 21, Spain is again the first European LNG importer during the aforementioned 212 period, ahead of the UK (although importing less than in 211). 6

Table 2: European LNG imports (Source: PFC) Importer Jan-Sep 211 mt Jan-Sep 212 mt Delta mt Delta % UK 15.2 8.6-6.6-44% Spain 13.2 1.6-2.6-2% France 8.4 5.6-2.8-34% Italy 4.9 4. -.9-19% Belgium 3.5 1.7-1.8-51% Turkey 3.2 4..9 27% Portugal 1.7 1.3 -.3-2% Greece.8.9.1 15% Netherlands.4.4. 1% Total 51.4 37.3-14.1-27% Table 3: LNG exports to Europe (Source: PFC) Exporter Jan-Sep 211 mt Jan-Sep 212 mt Delta mt Delta % Qatar 25.1 18.1-7.1-28% Algeria 9.1 7.6-1.5-17% Nigeria 9. 6.7-2.3-26% Egypt 2.6 1.6-1. -38% Trinidad 2.4 1.6 -.8-32% Norway 1.5 1.7.2 16% Yemen.8 -.8-1% Peru.8 1.3.5 7% US (Reexport).3 -.3-1% Belgium (Reexport).2.4.2 121% Spain (Reexport).1.3.2 23% Libya.1 -.1-1% Equatorial Guinea.1.1 The global economic context remains unstable and uncertain, and current market conditions have an impact on European natural gas prices. Since 211, crude oil prices remain close to $1/bbl, with a mechanical impact on European long-term contract prices. Prices have been pushed up partly because of international tensions with Iran along with Arab Spring events. In Europe, a wide spread continues between market and oil-indexed gas prices. This is the result of low gas demand and high oil prices. Urgent solutions are now needed to restore the competitiveness of gas under long-term contracts. If appropriate measures are not taken, the ability to conclude new long-term contracts in Europe will be questioned. 7

The spreads between the 3 regions are historically large, leading to arbitrage opportunities and LNG volumes reexported from Europe to more profitable markets. Figure 8: Natural gas prices (Source: CERA) Let s now focus on the UK, which are the 2 nd -largest European LNG importers and a typical example of LNG vs pipeline gas competition. 3.2 The UK LNG and Natural Gas Markets In the past few years, the UK has been considered as profitable market of last resort for LNG volumes. However, increasing LNG needs in Asia Pacific notably due to the closure of nuclear power plants in Japan following the Fukushima disaster, contributed to strong diversions out of Europe and especially a 44% drop in LNG imports (6.6 mt) to the UK in the first nine months of 212 compared with the previous year. 8

Figure 1: LNG Imports in the UK (Source: Poten) Almost all other suppliers have redirected their UK volumes to the Far East, leaving Qatar as the main supplier shipping LNG into the UK. Approximately 97% of the UK s LNG imports during the period of January-September 212 came from Qatar. Qatar is pushing its Q-size cargo ships in the UK (8.3 mt during the period of January-September 212, compared to 12.8 mt during the period of January-September 211), albeit at a declining rate. Qatar has signed new Sales and Purchase Agreements with Asian customers for the delivery of LNG volumes. This demonstrates that LNG flows into the UK are very dependent on the international LNG market and not only on the country s natural gas demand. UK production has continued to decline at an annual rate of 4.8% since 1996. To compensate for the declining LNG imports during the period of January-September 212, pipeline gas imports from Norway and the Netherlands were up by 27% and 17% respectively compared with the same period in 211, while exports to Belgium were down by 3% compared to January-September 211. Pipelines from Norway were full, forcing the UK to import volumes from Continental Europe. The flow through the Interconnector reversed in October (at an early time of the year) and the UK imported pipeline gas from Belgium in Q4 212. Natural gas is in competition with coal for power production, and its share in the power production mix decreased from 42% during the period of January-September 211 to 28% during the period of January-September 212, due to low coal prices. In the pipeline gas vs LNG competition in the UK, LNG volumes and imports from the Interconnector swing when the natural gas demand is low. 4 EUROPEAN GAS AND LNG MARKETS LONG-TERM OUTLOOK 4.1 Acceptability of Natural Gas in Europe The view that natural gas is indeed a long-term sustainable option within a balanced energy mix is much more recognized than it was a few years ago, even in Europe, which has opted for low-carbon growth. Natural gas offers other very positive perspectives, particularly in transportation, with: The development of biogas, Small scale LNG (LNG in trucking and ground transportation, LNG as bunkering fuel niche LNG markets). 9

4.2 European Natural Gas Demand Outlook European gas demand will be driven by European policy and the expansion of renewable capacities for power production. It is expected to grow slightly between 21 and 23 at an average annual rate of.15% according to CERA s Global Redesign scenario (October 212). Growth in consumption (+17 Bcm) is anticipated in power generation, industry and transportation. Transportation, both in relative growth rate and in volumes, is one of the drivers for gas demand in the long term, due to new maritime regulation in Northern Europe and the development of natural gas uses for vehicles. CERA Global Redesign Oct 212 Figure 11: Gas Demand Forecast in Europe over the 21-23 period (Source CERA) Several factors are drivers of a low natural gas demand: Policy to foster energy efficiency Renewables increasing share in the energy mix Economic slowdown While others are drivers of an increase demand: Political decision on nuclear post -Fukushima Reduction of GHG emissions favoring low carbon fuel. Development of natural gas for transportation. And uncertainties remain on the share of natural gas in power production and the competition with coal on the MT. One of the most striking evolutions of the European energy mix is the sudden increase in coal to power production. 1

Source: CERA Figure 12: Gas-to-Power vs Coal-to-Power Competition (Source CERA, January 213) Low gas prices in the US are displacing coal and the US are using natural gas instead of coal for power production. Coal volumes no longer imported by the US are impacting global trade volumes, putting downward pressure on global coal prices. From 21 to 212, coal has displaced natural gas in the European power production mix. Due to retirements of coal power plants the situation is expected to reverse in the medium term, with a declining share of coal in power production. 4.3 European Natural Gas Production Outlook According to CERA Global Redesign 212, domestic production is expected to decline by 1.7% per year between 21 and 23. Current production levels in Norway should remain steady thanks to discoveries of new fields and investments extending production in existing fields. In the UK, natural gas production is expected to decline by 5.5% a year between 21 and 23. Unconventional gas resources are estimated at 18 tcm of technically recoverable resources for shale gas, and less than 5 tcm for tight gas and CBM. As unconventional gas production develops, the decline of European gas production should be limited to 45 by 23. Shale gas in Europe (notably in Poland) is in its very early stages of resources appraisal. Its impact on national gas markets is yet to be assessed. Its development is not expected to be as significant as in the US, because of different geological, regulatory, social and environmental issues. France and Bulgaria have ban hydraulic fracturing activities. Other countries have expressed concerns. For example, Germany is currently assessing the impacts of hydraulic fracturing. Poland and Ukraine, which are reported to hold significant resources, are pushing hard to stimulate the shale gas industry. Consequently no significant production is expected in Europe before 22. 11

35 3 25 2 15 1 5 Unconventional Netherlands (conventional) United Kingdom (conventional) Norway (conventional) Other countries (conventional) 28 21 212 214 216 218 22 222 224 226 228 23 Figure 13: European Natural Gas Domestic Production (Source CERA Global Redesign and LT scenarios, 212) Two main options therefore emerge to supply Europe in a declining domestic supply context: pipeline gas and LNG imports. 4.4 European Pipeline Natural Gas Supply Outlook Today the existing pipeline import capacity into Europe is on the order of 35 /year (including the Nord Stream expansion). The average utilization rate in 211 of the pipelines was around 6% from Russia (excluding Nord Stream), from Caspian and from North Africa. There is still some spare capacity for pipeline gas imports. Table 5: Existing Pipeline to Europe (Source: GDF SUEZ) Gas pipeline Origin Nominal Capacity () Onstream (official date) Blue Stream Russia 16 23 GME (Maghrib-Europe) Algeria 12 27 Green Stream Libya 8 24 Medgaz Algeria 8 211 Nord Stream Russia 55 End-212 SCP (South Caucasus Pipeline) Azerbaijan 9 27 Tabriz-Ankara Iran 11 21 Transmed (also called Enrico Mattei Pipeline) Algeria 3 27 Urengoi-Ujgorod Russia 144 198s Yamal-Europe Russia 53 1999 Total capacity 35 12

On top of the spare import capacity, several European pipeline supply projects emanating from Russia, Azerbaijan and Turkmenistan (through the Caspian Sea) are envisioned, but only a few projects are likely to be implemented. Ample pipeline gas infrastructures would be in place to supply Europe. Additional volumes to Europe would come from Azerbaijan (Shah-Deniz II) and Russia (South Stream project). In 211, Ukrainian transit capacity represented 43% of total European capacity. There are also potential supply sources from the East Mediterranean area (Cyprus) but volumes are expected to be limited. Gas pipeline Table 6: Pipeline Projects to Europe (Source: GDF SUEZ) Origin Nominal Capacity () Onstream (official date) Arab Gas Pipeline extension (to Turkey) Egypt 4 211 Blue Stream-2 (extension) Russia 16 215 GALSI Algeria 8 214 Green Stream-2 (extension) Libya 3 212 ITGI (Interconnector Turkey- Greece-Italy) Azerbaijan (Shah- Deniz-2) 1 Probably cancelled Nabucco West Caspian and/or Iraq 16 and more 218/19 Next (Nord Stream-3 & 4) Russie 55 216 Persian Pipeline Iran 37-4 214 SEEP (South-East Europe Pipeline) Azerbaijan 1 Cancelled South Stream Russia (West Siberia) 2 x 15,5 (or 4 x 15,5 ) 216-218 SCP extension (South Caucasus Pipeline) TANAP (Trans-Anatolian Pipeline) Azerbaijan (Shah Deniz-2) Azerbaijan (Shah- Deniz -2) 12 217 16 (then 24 ) among which 1 for TAP, or Nabucco West 218 TAP (Trans-Adriatic Pipeline) Azerbaijan 1 (or 2 ) 218 TCGP Trans-Caspian Pipeline) Turkmenistan 3 / Total potential capacity Between 258 and 31 So there would be ample new pipeline resources to supply Europe. 4.5 European LNG Market Outlook Concerning European LNG demand, we expect a limited LNG demand to 214 (compared to 212 levels) but strong increase afterwards with a doubling of 215 imported volumes i.e., +47.1 mtpa by 225. Significant growth in LNG imports is expected in Turkey, France, the Netherlands, Italy and new importing countries. 13

mt CAGR : 5.1% CERA Global Redesign Oct 212 Figure 14: European LNG demand outlook to 225 (Source CERA Global Redesign, October 212) On the import infrastructure side, European LNG receiving capacity is not limiting. The utilization rate was around 5% in 211. Regasification capacities would be built up in new importing countries (Poland, Lithuania, etc.) diversification of supply purposes, and in current importing locations (ex: Dunkirk in France). Figure 15: European LNG Regasification Capacities vs. Demand Outlook to 22 (Source CERA, PFC) 14

4.6 European Natural Gas Demand / Supply Gap Outlook To understand how pipeline gas vs. LNG competition would play out in a European context, several cases were made on supply scenarios to fulfill a forecasted natural gas demand (i.e., CERA, Global Redesign 212) between 212 and 23. The analysis is made on pure volume basis, including possible contract renewals, with no impact of price dynamics of the underlying contracts. 4.6.1 Initial case: Long-term LNG contracts are not renewed, and there is no additional pipeline imports from Russia In our starting case, we assume that the long-term LNG contracts supplying Europe are not renewed. Since the indigenous production is declining over the time span, the supply/demand equilibrium is showing (Figure 16) a significant import need in Europe after 215. Europe (EU-31) - Natural Gas Balance 7 6 CAGR 28-23 =+.2% 5 Import needs 4 LNG supply fixed contracted * 3 Pipeline imports (CERA) 2 Domestic production (CERA) Local Demand (CERA) 1 28 21 212 214 216 218 22 222 224 226 228 23 Figure 16: Starting case - European Natural Gas Balance to 23 (Source CERA, Global Redesign 212, GDF SUEZ) In this initial case, Europe s imports needs amount to 75 Bcm in 22. If we assume that no additional volume from Russia are accessible, these import needs have to be fulfilled by flexible or spot LNG volumes from existing liquefaction plants, by LNG volumes from new projects and by pipeline gas from regions other than Russia. The flexible LNG volumes would be not in sufficient quantities to fill the whole gap, and new volumes from pipeline and LNG projects will be needed. 4.6.2 Alternative case: Long-term LNG contracts are not renewed, and additional pipeline imports are supplied from Russia Compared to the starting case, the alternative case is assuming that additional pipeline imports are supplied from Russia. Like in the starting case, the long-term LNG contracts are assumed not to be renewed beyond that expiration date.. Pipeline export capacities from Russia increased in 211/212 with Nord Stream, and will increase from 218 with South Stream. Figure 17 shows the import scenario from Russia in the alternative case (compared to the starting case): it corresponds to 85% of the nominal pipeline import capacity from Russia to Europe over the time span analyzed in this study, and no constraints are assumed on the natural gas production. 15

Russian pipe gas export potential 3 25 2 15 1 5 Additional pipe gas potential from Russia Russian pipe imports scenario (Cera Long Term scenario) Russian pipeline nominal capacity 28 21 212 214 216 218 22 222 224 226 228 23 Figure 17: Russian Pipeline Gas Export Potential (Source: CERA LT Scenario, GDF SUEZ) Europe (EU31) - Natural Gas Balance 7 6 5 4 3 2 Import needs LNG supply contracted (Cera data) * Additional pipe gas potential from Russia and Caspian Pipeline imports (Cera scenario) Domestic production (Cera scenario) Local Demand (Cera scenario) 1 28 21 212 214 216 218 22 222 224 226 228 23 Figure 18: Case 1 - European Natural Gas Balance to 23 (Source CERA, Global Redesign 212, Eurasian gas export outlook, GDF SUEZ). In this case, the additional pipeline imports from Russia would be directly competing with LNG. Long term LNG contracts are not renewed due to a strong pipeline competition. As a consequence, additional LNG imports are not required in Europe before 222. 4.6.3 Base case: Long-term LNG contracts are renewed, and there is no additional pipeline imports from Russia In our last scenario, our Base Case, we assume that long-term LNG contracts supplying Europe are renewed beyond their expiring dates. We also assume that supplies from Russia are limited to the starting case scenario. 16

In this case, the supply/demand equilibrium shows that contracted LNG should cover most needs until 215. Beyond 215, Europe needs to import additional volumes: around 4 in 22, and up to 6 in 23 (cf. Figure 19). To fulfill the demand gap beyond 215, additional resources need to be developed to supply Europe by pipeline and would require significant financial investments and would be technically challenging. Flexible volumes from the Atlantic Basin and the Middle East that were initially targeting the Asia Pacific basin would be available to fill part of the supply/demand gap. Europe (EU31) - Natural Gas Balance 7 6 5 Import needs 4 LNG supply contracted * 3 Pipeline imports (Cera scenario) 2 Domestic production (Cera scenario) Local Demand (Cera scenario) 1 28 21 212 214 216 218 22 222 224 226 228 23 Figure 19: Base Case - Europe Natural Gas Balance over the 21-23 Period (Source CERA 212, GDF SUEZ). In this case, Europe remains a significant market for Russian exports while maintaining a highly diversified portfolio of gas sources including LNG. 4.6.4 Addressing the European supply / demand gap in the base case scenario To fill the supply gap after 215 (4 in 22, 6 in 23), additional supply options have to be considered: Caspian: By 218, gas from Shah Deniz 2 is expected to supply Europe (6 for Turkey and 1 for the rest of Europe). Further Azeri supply is possible after 22 (Absheron, Umid...) Middle East / North Africa: Exports may be limited for the long term because of growing domestic demand and reinjection needs. European Unconventional: High potential, but early days. Cost are likely to be higher than alternatives. Development may be limited by a lack of public acceptance and concerns about the potential environmental impact. 17

In our base case, the whole supply/demand gap would be satisfied by LNG. New liquefaction projects are expected in the Atlantic region, Mediterranean basin or Arctic areas, while most of imports infrastructures are in place, but new investments in liquefaction are needed. US projects in the Gulf of Mexico are expected. Other Atlantic Basin and Middle East projects are expected to come on stream over the long term, and these could eventually send partial- or full-production loads to Europe: Angola LNG, Yamal LNG in Russia, LNG projects in Israel and in Cameroon. These projects have a high probability to take Financial Investment Decision (FID) in the coming years. Different sources of LNG are considered and they represent a significant diversification supply sources potential: By 22 the 4 import needs (or ~3 mtpa) would be filled by: o o About 2 mtpa of flexible LNG volumes from Atlantic Basin and Middle East in priority. These flexible volumes would be absorbed first by more profitable markets in Asia and in Latin America. The rest would be available for Europe. About 1 mtpa of volumes from new projects in West Africa, from the US (as European players have committed volumes from US liquefaction projects) and possibly from East Africa. By 23, the 6 import needs (or ~45 mtpa) would be filled by: o o o o o Limited LNG flexible volumes as most of these volumes are expected to be absorbed by Latin America. Significant LNG volumes from Arctic Projects (from Russia first, and later potentially from Greenland). Volumes from West African projects. Volumes from US as European players will have US volumes in their supply portfolio. Volumes from East Africa. According to CERA (cf. Figure 2), LNG projects in Middle East and in West Africa would compete on cost with new Russian pipeline developments. But marginal supply cost is not the sole driver of European gas prices: Additional Russian/Caspian volumes would depend on their proposed long term prices and willingness to adapt to a strong competition environment. Diversification and security of supply are key for Europe. 18

LNG Costs To Europe 12 1 Shipping Upstream Liquefaction $/MMBtu 8 6 4 European Gas Price (UK NBP 216-235) New Russian Supply 2 Source: IHS CERA. Notes: Calculated Break-even Cost of Supply Delivered to Europe, including Liquids Credits, excluding regas. Russia cost represents the cost of gas from Bovanenkovo to European border Figure 2: LNG Costs to Europe (Source CERA, 212) Major uncertainties remain concerning future European policies, and data providers suggest a 5 span of uncertainties on European demand in 23. But even in the low-demand scenario, the supply gap is expected to increase. 5 CONCLUSION Natural gas demand is expected to experience a limited growth in Europe (.1 -.2% per year between 21 and 23). The present economic slowdown, the competition with coal and development of renewables in the power generation sector, currently limit the prospect for natural gas demand. However, the national nuclear policies, an expected sustainable switch from coal to gas driven by ever more stringent environmental policies, and the use of natural gas for transportation should have a positive impact on demand in the medium term. In our base case scenario, Europe will need to import additional volumes of gas by the end of the decade due to a decreasing indigenous production (1.7% per year between 21 and 23) and a limited development of unconventional gas over the time horizon. Doubts remain on Europe s willingness to be subjected to a high dependency on one region, favoring the need for additional LNG sources by the end of the decade. New sources of LNG from West Africa, East Africa and Arctic regions would be then economic to supply Europe. 19