Natural gas pricing in west europe
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27/09/01
Natural Gas Pricing in West Europe
- IFA Conference 13th Sept. 2001 - Romarin Maillard
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European Gas Pricing - Table of contents
I. Commodities Pricing Theory
II. Gas PricingII.1. Gas Pricing TheoryII.2. An Example : The UK Gas Market
III. The Continental Europe Gas Market
IV. Possible Developments For Continental Europe
V. Conclusion
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I. Commodities Pricing Theory
Characteristics of the supply market
- Capital intensive- Investment decision based on coverage of all costs (capex
and opex)- Long time between decision to invest and start of
production- Production decision based on coverage of variable costs
(variable opex)- Market control via :
• Investments (swing investors)• Production (swing producers)
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I. Commodities Pricing Theory
Characteristics of the demand market
- Usually growing as per Gross Domestic Production (especially for gas)
- Low price elasticity in the short term unless substitutioncommodity exists for use in existing process
- Higher price elasticity in the medium term by selection of an alternative solution (process / commodity)
- Market control via :• short term substitution capability• medium term substitution capability
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I. Commodities Pricing Theory
• Unsuitability between :- Supply- Demand
Prices fluctuation
• Fluctuation limited either via :- the demand market (limits : prices of competitive
commodities)- the supply market (limits : production variable cost and
marginal producer overall cost)
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II.1. Gas Pricing Theory
Characteristics of the gas supply market
- Very capital intensive (4-5 G$ for 10 Bcm/year)- Very long time between decision to invest and start of
production- Low variable cost- No swing investors- No swing producers
No market control
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II.1. Gas Pricing Theory
• Characteristics of the European gas demand market
- Growing at an expected rate of 3% per year- Gas can be substituted :
• short term : dual fuel equipments• medium term : for all its use• US market could attract European gas if price differentials high
- Market control via :• short term substitution (Heavy Fuel Oil, Coal)• long term substitution (HFO, Coal and even Gas Oil or LPG)
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II.1. Gas Pricing Theory
Consequences for European gas pricing
• No market control through supplyPrice may vary between low variable cost and
marginal producer cost
• Market control via fuel substitutionPrice will be set according to the alternatives
fuel it displaces upward and downward along price curb
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II.1. Gas Pricing Theory : Diagram
• Limits of gas price fluctuation
Price
0
Producer
Marginalproducer cost
Variable costs
Consumer
HFO
Coal
GO
GPL
At the end
If demand is not very high
If demand is high
If demand is very high
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II.2. An Example : The UK Gas Market - Introduction
• Two markets :- Spot market : daily exchanges possible- Contracts market
• Volume of the spot market is only 20% of the physical market
Only a small part of the market is traded freely and even this part can be linked to oil products prices.
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II.2. An Example : The UK Gas Market
Prices to industrial customers• Sales to industrial customers represent 50% of the overall
consumption• 50% of industrials customers are on an interruptible basis
Industrials customers are price-makers for the spot market
Observation : Price for interruptible customers stays between coal and HFO prices
Why ?Interruptible customers can switch between fuels :
- stop running coal based plants to go on gas if gas is cheaper- stop running gas based plants to go on HFO if gas is more
expensive than HFO
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II.2. An Example : The UK Gas Market
UK Energy prices for Industry
10.0015.0020.0025.0030.0035.0040.00
Q1 94
Q3 94
Q1 95
Q3 95
Q1 96
Q3 96
Q1 97
Q3 97
Q1 98
Q3 98
Q1 99
Q3 99
Q1 00
Q3 00
p/th
erm
Gas int HFO avg Coal avgEnergy Trend datas
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II.2. An Example : The UK Gas Market
Spot prices
• Winter level :- Price very close to HFO at burner type of dual fuel
(Gas/HFO) industrial customer
• Summer level :Price equal to the maximum of :- coal- winter price - storage costs
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II.2. An Example : The UK Gas Market
P = burner tip HFO equivalence
December 2000 Future
10.00
15.00
20.00
25.00
30.00
35.00
04/0
1/2
000
04/0
2/2
000
04/0
3/2
000
04/0
4/2
000
04/0
5/2
000
04/0
6/2
000
04/0
7/2
000
04/0
8/2
000
04/0
9/2
000
04/1
0/2
000
04/1
1/2
000
p p
er th
erm
P Futures gas priceIPE datas
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II.2. An Example : The UK Gas Market
Crude price = 26 $/Bbl Winter gas price (NBP) = 24-26 p/thExchange rate = 1.5$/GBP Summer gas price (NBP) = 18-20 p/th
Average gas price (NBP) = 21-23 p/th
Gas Prices
12
1619
23
27
1013
16
20
24
810
13
17
21
0
5
10
15
20
25
30
10 15 20 25
Brent $/Bbl
p/t
h
Summer gasprice p/thAverage p/th
Winter gas pricep/th
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II.2. Gas pricing
Conclusion
• In an open market without "Supply price control", gas price set by "Demand price control" itself resulting fromfuel switching capabilities
• With a large capability of switching gas/HFO and gas/coal, gas price will stay between coal price and HFOprice.
• A decrease in fuel switching capability will lead to a more tensed market with higher volatility. Loss of shortterm switching flexibility may lead to very high prices
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III. The Continental Europe Gas Market - Particularities
• Not too many producers• Reserves far from consumption sites
High costs of transportation and development
• TOP Long Term Contracts indexed on oil products prices with important volumes and duration
• Natural monopoly of gas transporters• Share of gas consumption not so important than in UK
and gas power plants not so developed• Markets just at the beginning of deregulation
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III. The Continental Europe Gas Market - Supply
North Sea6.3 Tcm Russia
47.7 Tcm
North Africa6.6 Tcm
LNG Caspian Sea5.8 Tcm
Source : Cedigaz - Proved reserves at 01.01.2000
Reserves and future supply sources
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III. The Continental Europe Gas Market - Gas Directive
• Network Access negotiated or regulated
• Eligible customers : - Power plants- Customers buying more than 25 Mcm/year
• Accounting unbundling, transparent, objective and non discriminatory criteria
• Possible derogations for public service obligations (recognized subsidiarity for distribution)
• Possible derogations for «Take or Pay» contracts
• Exceptions for emerging markets
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A progressiveA progressive openingopening......
III. The Continental Europe Gas Market - Gas Directive
Electricity Directive In force 19th February 19991999 2000 2003
Minimum opening 26% 28% 33%Minimum threshold 40 Gwh/year 20 Gwh/year 9 Gwh/year
Gas Directive In force 10th August 20002000 2003 2008
Minimum opening 20% 28% 33%Minimum threshold 25 Mcm/year 15 Mcm/year 5 Mcm/year
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III. The Continental Europe Gas Market - Gas Directive
Reg TPANeg TPAMixNot yet decided
Third Party Access
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III. The Continental Europe Gas Market - Conclusion
Conclusion
• A market driven by oil products prices and long-term contracts with high costs of transportation
• But pressure from European Commission for deregulation
So, what could be the future ?
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IV. Possible Developments For Continental Europe
• Seasonal prices with more interruptible customers who are price-makers during Winter, and storage capacities regulating offer during Summer
Winter prices linked to HFOSummer prices = Winter prices - Storage
• Criteria to follow :- Pressure of the European Commission- Trading development and share of spot gas- LNG development- Consumption of gas- Offer of interruptible services
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V. Conclusion
• A more and more complicated market with different rulesfor each country
• Level of risks increasing for buying gas
• What are the solutions ?- Customers grouping ??- Relocation ?? - Oil & Gas companies with good knowledge of the market
who are risk-takers - Why not TotalFinaElf ?
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NWE
SWE
CE
Trading - Marketing in Europe
The gas/electricity The gas/electricity marketsharemarketshare“open to competition” in 2005“open to competition” in 2005represents 30represents 30--35% of the total 35% of the total
marketmarket
Strategy = use expertise built in UK and take advantage of European deregulation to develop
trading and marketing throughout Europe
NWE Key Indicators - 2005
◆ Electricity demand : 1035 TWh◆ Electricity open to competition : 385 TWh◆ Gas demand : 238 Bcm◆ Gas open to competition : 104 Bcm
SWE Key Indicators - 2005
◆ Electricity demand : 470 TWh◆ Electricity open to competition : 112 TWh◆ Gas demand : 45 Bcm◆ Gas open to competition : 13 Bcm
CE Key Indicators - 2005
◆ Electricity demand : 871 TWh◆ Electricity open to competition : 244 TWh◆ Gas demand : 195 Bcm◆ Gas open to competition : 57 Bcm
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UKGas
Neth.Gas
NorvegianGas
GSO
South-West
Baumgarten
AlgerianGas
AlgerianGas
RussianGas
South West Hub
Bacton
Zeebrugge
Emden
SouthernSouthern EuropeEurope Hub Hub
Central EuropeCentral Europe Hub Hub
NorthernNorthern EuropeEurope Hub Hub
Possible Hubs
Gaspipes
Existing Hub
Gaspipes in project
LNG
LNG in project
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Norway26%
Netherlands23%
Great-Britain40%
Others11%
Norway43%
Netherlands13%
Great-Britain39%
Others5%
Production : 18.5 Bcm in 2000
Reserves : 210 Bcm at 31.12.00
Onshore transportationStorageMarketingPower Generation
Reserves
Production
TotalFinaElf’s European Gas and Power Portfolio
Offshoretransportation
11 years of production
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GSOGAZ DU SUD OUEST
TotalFinaElf Gas & Power UK 100 % (Sales : 2.8 (Sales : 2.8 BcmBcm, 10 % I&C, 10 % I&C
MarketshareMarketshare))
Humber Power (1260 MW)(1260 MW):
40 % + tolling (510 MW)(510 MW)
Interconnector 10 %((CapacityCapacity : 20: 20 BcmBcm/y)/y)
Cepsa Gas Comercialidazora50 % TFE / 50 % Cepsa
TOTALFINAELF Strategy :Significant Positions in European Gas and Power
GSOGAZ DU SUD OUEST
70 %(Sales : 3.7 (Sales : 3.7 BcmBcm))
Gaz de Strasbourg 25 %
Gaz de Bordeaux 16 %Storages 100 %
(Izaute Lussagnet)
Pipe projectCepsa/Sonatrach
CFM
45 %(Sales : 9.4 (Sales : 9.4 BcmBcm))
TFE G&P North EuropeBruxellesBruxelles
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