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Sophie MERITETPh D in EconomicsAssistant Professor

CGEMP

Dauphine Universitywww.dauphine.fr/cgemp/

The French Natural Gas Market

in the European Union

UFRJ – NOV 2006

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INTRODUCTION & AGENDA

Organization: Structures Conducts Performances

Goal

Presentation of the French natural gas market with its characteristics

taking into account the European Union context.

=> Situation and perspectives of the French natural gas market

Part 1 – European natural gas marketS

Part 2 – French natural gas market

Part 3 – GDF, the French company

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Natural gas is quite different from other energies and especially electricity:

Natural gas is a substitutable energy => it is in competition with other energies

Contrary to oil, there are several regional natural gas markets and not only one worldwide one.

EU Gas supply is very concentrated (Algeria + Russia + Norway : 95% of European imports in 2006)

EU Natural gas supply is more and more from outside the EU with high transportation costs (vs electricity where you can have generation units close to consumption areas)

Gas suppliers are constrained by physical limits of infrastructures (number of tankers, length of gas pipelines, technologies, high transportation costs).

SPECIFICITIES

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PART 1- EUROPEAN NATURAL GAS MARKETS

1- Supply and Demand in the EU

2- LNG development

3- New constraints

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GLOBAL GAS RESERVES

Source: Cedigaz (2005)

Global Gas Reserves by Region (tcm) in 2004Natural gas reserves in the world are very concentratedRussia (25%), Iran (15%), Qatar (14%).

40% of proved reserves

concentrated in 25 fields all

over the world.

2 in Europe ( Groningue in

the Netherlands and Troll en

the North Sea Norway).

1 field (North Field/South

Pars) represents around

25% of the total gas

reserves

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Key figures (2006)

Deregulation of energy markets in the EU is for 1rst July 2007

Fossils represents 80% of the total energy consumption in the EU (2 / 3 are already imported => 70% in 2020-2030 ?)

Natural gas represents 24% of energy consumed in the EU. The EU represents 19% of the total gas consumed in the world

40% of gas consumed was from Russia (and 90% of gas exported from Russia goes to the EU)

95 % of the gas consumed in the EU in imported from 3 main suppliers:Algeria (Sonatrach, monopoly), Russia (Gazprom, monopoly) Norway (several companies)

103 million customers (450 million of inhabitants in the EU 25)

1 850 000 kms of wires

Patchwork of national markets but progressing toward one market

THE EU GAS SITUATION

Source: EIA (2006)

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PRIMARY ENERGY DEMAND IN THE EU 25

Source : World Energy Outlook 2004 - in Mtoe

The share of natural gas should reach 32 % in 2020 with an annual growth

rate between 1.5 % and 3 %

0

200

400

600

800

1 000

1 200

1 400

1 600

1 800

2 000

1970 2000 2010 2020

Coal Oil Natural Gas Nuclear Hydraulic Others renewables

Past evolution and prospects of primary energy demand in Europe

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Gas in the primary energy balance

in the EU 25

5 countries represent

70% of the total

demand

PRIMARY ENERGY BALANCE

Source: Cedigaz 2006

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Demand increase : 425 to 450 109 m3 /y in 2020 (343 109 m3 in 2004)

% vary among EU countries

DEMAND FORECASTS IN 2020

In Northern Europe, there is still a potential increase (Electricity generation in the UK : 12 new plants - 12000Mwe - to replace old plants)

In Central Europe, the growth is moderate

Source: Cedigaz 2006

A more significant growth in Southern Europe : + 2.8% per year

270 to 280 109 m3 in 2020 (182 109 m3 in 2004)

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0

200

400

600

800

1980 1990 2002 2010 2020 2030

bcm

Production Net imports

Source: World Energy Outlook 2004

GAS SUPPLY BALANCE IN THE EU 25

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SUPPLY - DEMAND 2020

Deficit

LNG

Gazoducs

Production

Source: Cedigaz 2006

HighLow

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LNG in Europe

supply diversification,

security of supply

Growth : + 7.9 %/year

15 to 18 % of European supply in 2020 (7.8 % in 2004)

Significant increase of British imports (national production is declining)

82 109 m3 /year (60 Mt/year) of LNG bought for 2010,with 25 109 m3 /year by Spain

LIQUIFED NATURAL GAS (LNG)

Source: Cedigaz 2006

L LHighHigh

+ 7.9 %/year

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LNG CAPACITIES

Capacity

Existing: 46Mt year

Imports (2004): 30 Mt Existing capacity (Mt year)

Capacity in construction or projected (Mt year)

Source: Cedigaz 2006

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EUROPEAN GAS NETWORK 2005

A mature system :• Developed from

the 1960’s on a national basis

• Interconnected through cooperation frameworks between national gas companies

Source: Cedigaz 2006

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EUROPEAN HUBS

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M. Boiteux ‘s parabole (Chevalier, 2004)

The planet is represented by a spaceship where everything is rareand essential...Mutual aid and solidarity are necessary...

This is the situation of the earth !

It would be a scandal …

What would happen if only 1 of the 5 occupants absorbed 80% of the resources and made itself responsible for ¾ of pollution?

... and at the same time, 1 would have nothing to eat and 2 hardly enough to survive ?

� REALITY

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In this « mosaic » of markets in Europe, problems arising from the opening to competition are still being debated:

Main strategies at the EU level : climate change management -diversification – energy efficiency

Main national and European preoccupation : Security of supply Separate gas markets that should become one thanks to EU integration

process and LNG development Can new strategies make it possible to limit the competitive game?

The need for regulation ?

The multiplication of the actors complicates the management of the system. Security of the system ? Security of supply ?

Are the public services compatible with competition?

New environmental constraints

TRANSFORMATION OF GAS INDUSTRIES

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The market challenge

A single European free market in gas and electricity

Or ...

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Including ...EU-25….

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PART 2 – FRENCH GAS MARKET

1- Key figures

2- Industry organization in France

3- Regulation of the industry

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FRENCH GAS MARKET

Key figures (2005)

Consumption :529,6 TWh (+2%)Consumption : 47% industrial, 36% residential, 17% commercial

Small amount of gas for power generation (+8%)

Imports : 537,9 TWh (+4%) Supply : Norway 31 %, Russia 25 %, Algeria 26 %, Netherlands 12 %, United Kingdom 5 %Exports : 11,8 TWhDomestic production : -25.3%In France, we do not produce (or not a lot) of gas (vs electricity)Stocks :+7,1 TWh 9,000 localities connected (more than 75% of the French population)

Source : DGEMP (2006)

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Eligible Consumers : 676 000 sites for around 377 TWh

Openness of the market : 70% => 100% 01/07/07

+ 10 million gas customers 01/07/07

30 suppliers already authorized (GDF, GSO, Total, Statoil ,ENI, Gaselys , Rhodia, local distributors, …)

5th market open to competition in the EU (in volume)

FRENCH GAS MARKET

Key figures (2006)

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OPENING UP PROCESS

Launched by the European Commission in the early 90’s

Objective : To develop the competition in the gas supply in order to improve

the economic conditions for access to gas Means :

Third Party Access : to ensure an access to the networks on a transparent and non discriminatory basis.

Unbundling of regulated functions and trading An independent regulator

These 2 directives adopted in 2003 represent a major step towardsthe completion of the internal market for electricity and gas in the EU.

3 European Directives :Unbundling : accounting => managerial => legal,Independent authority for regulation,Competition on generation and supply,Market opening : 2004 for professionals and 2007 for all consumers.

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Source : CEER (2004)

EU DIRECTIVES

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25

Customers>25 Mm3

August 2000 « opening » by

GDF

(January 2000)

Customers> 237 GWh/y

cogeneration

Customers> 83 GWh/ y

All customers (530 000 sites) except

households

January 2003 1st directive

=> France (August 2003)

August 2003

2nd level of the 1st directive

Application of the 2nd directive

1 st July 2004

2nd directive

=> France (August 2004)

2007Total

opening

OPENING PROCESS IN FRANCE

5% of the market (25 TWh) opened 04/03

37% of the market (170 TWh) opened 10/03

70% of the market (350 TWh) opened 07/04

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A single regulator for both gas and electricity, the « Commission de Régulation de l’Énergie » which:

is a independent authority

approves the rules for the unbundling of accounts

proposes tariffs for transmission, distribution and access to LNG terminals

is a dispute settlement authority

can impose sanctions

REGULATOR

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FRANCE : RESEAU ET ZONES TARIFAIRES

- REFERENCE - EMETTEUR 322/10/2006

Gaz de FranceGaz de France

CFMCFM

GSOGSO

UndergroundUndergroundStorageStorage

Lussagnet

Izaute

Soings

Etrez

Tersanne

Manosque

CervilleBeynes

St-ClairGermigny

NetherlandsNorway

UK(16 Bcm)

Taisnières

Russia(8 Bcm)

Obergailbach

Algéria(6 Bcm)

Fos

Lacq

Chemery

Céré-la-Ronde

St-Illiers

AlgériaNigeria(8 Bcm)Montoir

Gournay

Larrau(2 Bcm)

Norway(12 Bcm)

Dunkerque

Oltingue(5 Bcm)

FRANCE : GAS INSFRASTRUCTURES

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FRENCH ENERGY LAW

« Loi d’Orientation sur l’énergie »

The energy law has 4 goals :

• Energy independence and the security of supply;

• Protection of the environment;

• Energy at low cost for households and industries;

• Social and territorial cohesion.

4 means to achieve these goals:

• To control the demand;• To diversify the French energy mix ;• To oversee the development of the grid & storage capacities

of sufficient gases and oil;• To develop research on energies.

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=>Main objective of the French energy policy

Gas suppliers wishing to supply customers have to prove that they have a sufficient and diversified portfolio of gas (Obligation of « Service Public »). � Suppliers must hold “sufficient” gas stocks to satisfy their contractual obligations

Development of the gas infrastructures

Development of the storage sites (Right to storage: suppliers have a right of access to the storage capacities )

the operators of storage, GDF and Total, must offer an access under transparent and nondiscriminatory conditions

SECURITY OF SUPPLY & GAS

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SUM UP

Main national preoccupation : Security of supply

Geographic situation => Strategic position

Opening up to competition process…

French law - EU integration

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PART 3 – GDF, GAZ DE FRANCE

1- Key figures

2- European Concentration

3- GDF - SUEZ

GDF Suez

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1st LNG importer 1st in transmission (French network 31 000 km) 1st in distribution in Europe (180,700 km in France) 1st in terms of number of customers (11million in France 14 million in the

world)

N°2 in Storage Facilities in 2005 (14 sites – 9.8 bn m3 of working capacity) N°2 in Regasification in 2005 (17 bcm of capacity)

KEY FIGURES 2005

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3rd European sellers of natural gas in volume

4 th natural gas purchaser

No longer state owned firm since nov. 2004 (value of 29 G€)

Total revenue 2005 : 22,4 G€ 35% of revenue not in France Employees : 53 000 Operating income: 1,907 M € EBITDA : 2,520 M €

KEY FIGURES

Sales (Gm3) in 2005

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• Long term contracts portfolio the most diversified in the EU

• Buy Short term through GAZELYS to optimize its portfolio

• Development of its own production : capacity 4,6 bn m3 with its won reserves 80 bn m3

SECURITY OF SUPPLY

gas supply (2005)

Algéria21%

UK4%

Norway26%

Netherlands15%

Short term market11%

Russia22%

Nigéria1%

GDF PORTFOLIO

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DOMINANT POSITION

National firm in its domestic market2005

Country (Firm)

Gas imports Gas production

Belgium(Distrigaz)

90-100% -

Danemark (Dong)

- 80-90%

France (GDF)

90-100% -

UK 20-30% 40-50%

Germany(Rurhgas)

90-100% 80-90%

Italy (ENI) 60-70% 80-90%

Netherlands (Gasunie)

50-60% 90-100%

National firm in its domestic market2005

Country (Firm)

Gas imports Gas production

Belgium(Distrigaz)

90-100% -

Danemark (Dong)

- 80-90%

France (GDF)

90-100% -

UK 20-30% 40-50%

Germany(Rurhgas)

90-100% 80-90%

Italy (ENI) 60-70% 80-90%

Netherlands (Gasunie)

50-60% 90-100%

National firm in its domestic market2005

National firm in its domestic market2005

Country (Firm)

Country (Firm)

Gas importsGas imports Gas productionGas production

Belgium(Distrigaz)Belgium

(Distrigaz)90-100%90-100% --

Danemark (Dong)

Danemark (Dong)

-- 80-90%80-90%

France (GDF)France (GDF)

90-100%90-100% --

UKUK 20-30%20-30% 40-50%40-50%

Germany(Rurhgas)Germany(Rurhgas)

90-100%90-100% 80-90%80-90%

Italy (ENI)Italy (ENI) 60-70%60-70% 80-90%80-90%

Netherlands (Gasunie)Netherlands (Gasunie)

50-60%50-60% 90-100%90-100%

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1996 2006 1 BG 16.8 EON 61.3 2 Veba 13.6 EDF 61.3 3 Endesa 10.6 Enel 41.3 4 RWE 9.1 Suez 34.9 5 Vivendi 8.7 RWE 32.5 6 Electrabel 8.0 GDF 25.3 7 National power 7.5 Endesa 23.0 8 Iberdrola 6.3 National grid 22.0 9 Powergen 4.9 Iberdrola 20.6 10 Viag 4.8 Veolia

Environnement 15.7

11 Suez 4.3 Fortum 15.0 12 Scottish Power 4.2 Scottish Power 14.8 13 United Utilities 3.6 Centrica 13.2 14 VEW 2.9 Scottish& Southern 12.8 15 Tractebel 2.8 Gas Natural 10.5

EUROPEAN OLIGOPOLY

Source : Datastream (2006)

Billion of euros

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C E N T R IC A1 6

R E P S O L4 4

G D F11

S U E ZLY O N N A IS E

3 5 T R A C T E B E L1 9

R U H R G A S1 0

C o n tro l

IB E R D R O L A 7

N O R S K H Y D R O

B A S F

M O N T E D IS O N

C E P S A1 2

E le c tra b e l8

D is tr ig a z

W IN T E R S H A L L

E N IS n a m

Ita lg a s4 8

E X X O NM O B IL

2 2 6

O il & G a s G a s P o w e r M u lti-e n e rg ie s C h e m ic a ls

1 0

E N D E S A1 6

S H E L L1 6 3

B PA M O C O

1 6 2

TO TA LF IN AE L F11 4

E D F3 4

E N E L2 5

E .O N93

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R W E6 3

S a le s in B illio n

G A S U N IE9

MAIN ACTORS IN THE ENERGY INDUSTRY

Source: Cambridge Energy Research Associates.

2002

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KEY FIGURES 2004

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GDF - SUEZ

Total revenues 2005 Gas Sales 2004 (TWh)

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COMPETITIVE PRODUCTION MIX

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GLOBAL PRESENCE

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CONCLUSION

Between a short term logic and a long term logic

For the States (and EU ?)

For actors (shareholders, customers, politicians….

For Firms

Challenges : To manage the transition and be caught between these two logics

At the EU level :

•Competition / concentration ?

•Towards a European Energy Policy thanks to External European Energy Policy (international negotiations, Russia, OPEC…) ?

New risks appear in this uncertain and complex environment ….

Market risks

Regulation risks

Environmental constraints

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CGEMP

Thanks for your attention

www.dauphine.fr/cgemp/

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Source: EIA, 2005.

Table 2: Energy Consumption and Carbon Emissions in EU Countries, 2002 Energy Consumption

Percentage of Total

Total* Oil Natural

Gas Coal Nuclear Hydro Other Net

Imports

Carbon Dioxide Emissions ( Million Metric Tons)

Austria 1.4 39.6 21.5 11.2 0.0 25.8 1.8 0.2 70.5 Belgium 2.7 46.9 21.1 13.3 17.1 0.1 0.6 1.0 146.3 Cyprus 0.1 98.7 0.0 1.3 0.0 0.0 0.0 0.0 8.31 Czech Republic

1.6 22.6 21.6 43.4 12.8 1.6 0.4 -2.1 103.6

Denmark 0.8 49.4 24.5 18.4 0.0 0.0 8.6 -0.9 54.9 Estonia 1.6 68.8 27.4 6.5 0.0 0.0 0.1 -2.7 12.1 Finland 1.2 35.9 13.2 13.0 17.6 8.8 8.2 3.3 54.3 France 11.0 37.4 15.2 4.9 39.0 5.6 0.4 -2.4 407.3 Germany 14.3 39.8 22.1 23.4 11.1 1.6 1.9 0.1 838.3 Greece 1.4 62.2 5.7 28.6 0.0 2.0 0.7 0.9 104.4 Hungary 1.1 28.1 45.0 12.6 12.7 0.2 0.1 1.4 56.1 Ireland 0.6 60.0 25.5 12.1 0.0 1.5 0.7 0.3 45.1 Italy 7.6 50.4 33.3 6.9 0.0 5.3 1.9 2.3 448.7 Latvia 0.2 48.8 31.4 0.8 0.0 16.2 0.0 2.9 9.8 Lithuania 0.4 46.1 22.8 0.7 33.5 2.0 0.0 -4.9 20.2 Luxembourg 0.2 62.5 27.4 2.2 0.0 0.6 0.5 6.8 10.33 Malta 0.04 100 0.0 0.0 0.0 0.0 0.0 0.0 2.77 Netherlands 3.9 48.1 40.1 9.1 0.9 0.1 1.2 1.4 256.2 Poland 3.3 23.0 13.3 63.5 0.0 0.6 0.3 -0.7 268.4 Portugal 1.1 65.5 11.1 13.6 0.0 7.2 1.9 0.6 67.0 Slovakia 0.8 19.2 32.5 19.7 24.2 6.3 0.0 -1.8 38.8 Slovenia 0.3 33.5 12.1 27.9 17.6 11.2 0.2 -2.5 16.7 Spain 5.9 53.8 14.1 15.5 10.4 3.9 2.0 0.3 341.5 Sweden 2.2 31.6 1.5 4.1 29.6 30.0 2.4 0.8 54.8 United Kingdom

9.6 35.6 37.0 15.0 10.9 0.5 0.7 0.3 552.8

Total/Average 73.3 40.2 22.4 15.6 13.0 3.9 1.3 3.5 3,989.2 United States 97.6 39.3 23.7 22.8 8.3 2.6 3.1 0.1 5,749.4 * Total Quadrillion Btu Source: Energy Information Administration Note: Percentages may not add up to 100% due to independent rounding.

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Imports : 75 % for the North East => Gas pipelines

25 % through LNG (Montoir de Bretagne & Fos sur Mer)

Stocks : Total capacity of 12 Gm3

16 underground storage facilities -Participation GDF (GDF DGI) and TOTAL (Total Infrastructures Gaz France (TIGF)) 75% and 25% respectively

LNG :2 LNG terminals : Fos & Montoir, but a lot of projects…

Transport / Distribution

• Distribution Networks of 180 700 km (2nd largest network in the EU)

• Transmission : 2 operators Gaz de France Reseau Transport and TotalInfrastructures Gaz France (TIGF)

•Distribution : Gaz de France Distribution , 20 LDCs

INFRASTRUCTURES

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EUROPEAN UNION

EU in 2005

Population in 2005

UE (15) = 380 M citizensUE (25) = 450 M citizens

US = 289 M citizensChina = 1.283 bn citizens

GDP per capita in PPS in 2005

UE (15) = 23 400UE (25) = 19 500

US = 30 148

Source : European Commission (2006)

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80% of Russian gas production from 3 fields (Urengoi, Yamburg and Medvezhye)

The Yamal-Nenets corridor transports 90% of Russian gas

Ukraine transits 80% of Russian gas exports to central and western Europe

Transmed (Algeria/Italy) transports 33% of Italian consumption

GME (Algeria/Spain) transports 30% of Spanish consumption

More than half of Norwegian production and exports from Troll and associated pipelines (Norway).

TRANSIT - FACILITY : CONCENTRATION

Source: IEA (2005)