Structural changes in the European gas market
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Structural changes in the European gas marketand recent dynamics in gas pricing
Nicosia, Cyprus 7/8 June 2012
Bain & Company presentation at Cyprus Natural Gas Conference
Objective of the document
Give a brief overview of the European Gas Market, taking into account the recent dynamic in supply and demand
Illustrate how the drivers of gas demand have been affected by recent regulatory evolution, with particular focus on renewable energy
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focus on renewable energy
Share some insights on the future development of the market and the role of Take-or-Pay contracts
Agenda
International gas market overview
Recent evolution of European gas market dynamics
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Key issues for future market evolution
International gas market overviewInternational natural gas flows in 2010
92.4
20.9
9.4
5.4
6.2
44.1
20.1
4.15.5
12.1
17.3
36.5
55.9
16.6
6.5
32.0 21.0
18.8
14.9
6.3
5.2
17.7
8.2
LNG Gas
Pipeline Gas
Import350 Bcm
Import200 Bcm
16.0
113.9
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Source: BP Statistical Review of World Energy June 2011 www.bp.com/statisticalreview
5.4
10.9 8.8
7.0
5.8
9.8
Continental Europe (mainly by pipe) and Far East (LNG)heavily rely on natural gas imports
23
4
5
6
7
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L
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International gas market overview US increased production of unconventional gas
Shale gas production in the US EIA LNG import forecasts
This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 5
0
1
2
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Forecast 2005 Forecast 2007 Forecast 2010
Sources: EIAs Shale Gas and the Outlook for U.S. Natural Gas Markets and Global Gas Resources for Shale gas production in the US; EIAs Annual Energy Outlook 2005, 2007, 2010 for EIA LNG import forecasts
Significant downward revision of LNG import forecast in the USA, mainly as a consequence unconventional gas production
International gas market overview Pricing polarization
40
60
Oil
equivalent
APAC
Ger (BAFA)
Large scale exploitationof unconventional gas
Price gap APAC RoWfurther increased in 2011
for Fukushimas aftermath
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0
20
2004
2005
2006
2007
2008
2009
2010
2011
USA (HH)
Source: BP Statistical Review of World Energy June 2011 www.bp.com/statisticalreview;
The three main gas consumption areas (US, EU, APAC) have experienced divergent price evolution, with US price independent from oil price trends
International gas market overview Continental reach of the different gas supplies ILLUSTRATIVE
Russia220 Bcm
North sea250 Bcm
Continental production70 Bcm
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Increased presence in the market of a diversified range of gas producers
North Africa80 Bcm
Atlantic basin10 Bcm
Middle-East40 Bcm
Agenda
International gas market overview
Recent evolution of European gas market dynamics
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Key issues for future market evolution
910
13
18
17
CAGR ~22%
Recent evolution of European gas market dynamics Gas demand in Europe and increase in import spot volumes
Gas demand in the main European countries Spot LNG imports to Europe
Appearance of the WW gas glut related to the US unconventional gas
Availability of new Qatari LNG trains
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'00
2
'01
4
'02
5
'03
4
'04
7
'05
9
'06 '07
7
'08
6
'09 '10 '11
With stagnating demand and impressive increase of spot LNG imports, gas importer struggled to fulfill their minimum Take obligations
Sources: Eurostat for Gas demand in the main European countries; GIIGNL for Spot LNG import to Europe
TTF
UK: NBP (National Balancing Point)
Netherlands: TTF (Title Transfer Facility)
Austria: CEGH (Central European Gas Hub)
Germany: NCG (Net Connect Germany)
France: PEG (Points d'Echange de Gaz)
Italy: PSV (Virtual Trading Point)
Belgium: ZEE (Zeebrugge)
Recent evolution of European gas market dynamics The development of European hubs and the increase in trading activity
A Gas Hub is a platform that can be either physical or virtual (or both the things) where gas marketers
exchange gas volumes
Main European hubs Volumes traded in main hubs
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NBP
PEG
ZEE
PSV
CEGH
NCG
TTF
Main European gas markets Main European hubs NCGGASPOOLCEGHPEGPSVTTF ZEE
As a result of the oversupply situation and the increased liberalization, traded volumes in the European gas hubs experienced a rapid growth
Source: IEA
Recent evolution of European gas market dynamics Decoupling of oil and hub-indexed gas prices
Typical oil-indexed price formula(not accounting for any price reduction)
Year-ahead gas traded price at TTF Hub(continental Europe reference hub price)
Decoupling begins
Low TTF prices as an effect of new pipelines and releases from storage
facilities
TTF prices stop follow oil trends as oversupply
develops
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European spot prices have become increasingly decoupledfrom the upward moving oil price dynamics
All European utilities have a supply portfolio mostly related to LT oil-indexed contracts...
...while end-user market is instead influences by lower spot prices...
...this is causing significant losses to European utilities which increasingly ask for a oil/hub indexation mix price to their suppliers
Source: Bain elaboration
Recent evolution of European gas market dynamics Renegotiations triggered over the last years
The likes of E.ON, GdF Suez, ENI, Econgas and BOTAS have renegotiated their LTCs with the major exporters to Europe, e.g. Russias Gazprom, Norways Statoil and Dutch GasTerra using standard price review clauses
[...]
some level of indexation to cheaper spot gas prices was introduced into mainly oil-indexed LTCs
Oxford Energy Forum, August 2010
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Price renegotiations triggered by the Buyers have grantedthe introduction of a hub-indexation into the purchasing formulae
Gazprom said in its report that as a result of talks in 2010, price agreements were reached with E.ON Ruhrgas, GDF Suez, Eni, GasTerra and others. In some cases, Gazprom has agreed to alter contracts for a three-year period to include a ratio of up to 15% spot prices and 85% oil-indexed prices
Platts, 16 August 2011
Agenda
International gas market overview
Recent evolution of European gas market dynamics
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Key issues for future market evolution
1) Transient or structural oversupply?
Demand evolution
Supplyevolution
Displacement of gas power plants by renewables
Delocalization of energy-intensive industrial cycles
Increase in households heating efficiency
Fossil and (in the long run) nuclear capacity substitution by CCGT
Enduring impact of unconventional gas / new gas discoveries
Gas thirst by Asia Pacific Countries
Infrastructural development (e.g. US liquefaction capacity)
Weak demand in the short term, potential recovery with power
replacement
International supply dynamics impacted by APAC evolution
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Very unlikely in the mid-term a return in a tight market; in the short term oversupply will persist
evolution
European Policy Directives
Infrastructural development (e.g. US liquefaction capacity)
European network integration
Security of supply through increased diversification
Promotion of gas competition
by APAC evolution
Promotion of a long market to boost competition
1) Transient or structural oversupply?Impact of renewables example of Italy
30
40
50
2427
3
2
30
7
13
3
41
Fuel cost adjusted - Power price (/MWh)Gross Capacity (GW)
Biomass
Geothermal
PV 80
100
120
140
160
2009
2012
average hourly power price in April
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Source: GSE Data
The growth of renewables (Photovoltaic) with priority of dispatch has displaced volumes from CCGTs and depressed peak power price
0
10
20
2008
4
18
2009
5
18
2010
6
18
2011
7
18
Wind
Hydro
0
20
40
60
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23
Note:adjusted with 2012 fuel costs
End-user
Supplier
Importer/Wholesaler
End-user
Retailer
Gas hub
LT contracts
Spot contractsSupplier/Importer
Wholesaler/Retailer
Gas hub
Spot contracts
Continental EuropeUS/UK
2) There will be a recoupling to oil-indexed prices?Hub-based supply difficult to implement in a low-production market
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Captivemarket
End-usermarket
End-usermarket
Captivemarket
Transparent gas market
Prices determined by demand/supply balance
Large share of internal production and a large number of players
Prices historically linked to LT oil-indexed contracts
Currently showing a coexistence of LT and spot contracts with oil/hub-indexed prices
Large share of imported volumes and few national players
European market has a inherently different structure than US: long term ToP contracts will continue to be the staple of supply portfolios...
2) There will be a recoupling to oil-indexed prices?Pricing depends on complex interactions
PRICE
Demand
Supply
European and
National Policies
Gas oil substitution for domestic demand Process industry delocalization Renewable source Fossil/nuclear plants replacement CO2 emission concerns ...
Diversification needsSecurity of supply...
Infrastructure development WW demand/supply imbalances LNG arbitrage opportunities Technological breakthroughs in
E&P ...
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..however, how ToP contracts will be priced would depend by several contrasting factors
PRICE FORMATION MECHANISM
Strategy of main players
Regulatory framework
Policies
Antitrust measuresRegulations on end-user prices
Hub liquidityDegree of liberalization...
Long vs short portfolio Commercial strategy (mkt share
defence vs margin defence) Downstream/upstream integration ...
Conclusions
The European gas market will be in oversupply for few years to come, but in the mid-long term gas is required to replace declining internal production and aging fossil/nuclear generation fleet
The extent of this long term demand recovery will depend on renewable energy sources integration in the electricity grid
Long-term, ToP gas contracts will still maintain a strategic
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Long-term, ToP gas contracts will still maintain a strategic relevance in terms of security of supply and volatility mitigation, especially in Countries with low level of domestic production
Worldwide gas offer, boosted by new discoveries and enhanced infrastructures may imply increase in competition among suppliers and a review of old pricing models; however, the extent of this will depend on the relative gas thirst of US, European and Asian markets
Bain & Company Italy contacts for gas business
Alessandro CadeiPartner
Luigi CorletoPrincipal
Roberto PrioreschiDirector
Position
Strategy, cost efficiencies and re-
Head of the Energy & Utilities Practice in Italy
17- year consulting experience
Strategy and business development
Member of the European Practice Energy & Utilities
12- year consulting experience
Member of the Practice Energy & Utilities
7 - year consulting experience
Strategy and business development
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