European Gas Markets - Energy Policy Research Group...NCG Baumgarten 0 0.2 0.4 0.6 0.8 1 1.2 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09-09 Jan-10 Mar-10-10 Jul-10 Sep-10

European Gas Markets

Globalisation; Commoditisation; Demand Destruction

www.eprg.group.cam.ac.uk

Globalisation; Commoditisation; Demand Destruction

Pierre Noël

EPRG, University of Cambridge

GDF Suez – Brussels, 8 February 2012

EPRG, University of Cambridge

Supported by the UK Research Councils and:

Economic & social science research in energy markets & policy –

electricity, gas and carbon.


• The gasification of Europe (1965-2005) has been

remarkable – but everything is changing

• LNG is making Europe part of a global gas “system”

• Market forces should create a Eurasian gas market –

price convergence between NWE and Asian spot price

Main messages


• Market forces should then re-integrate North America into

the global market – putting long-term pressure on the

Euro-Asia price

• Gas demand in Europe is declining at an accelerated

pace, thanks to high prices & renewables policy

1. The ‘gasification’ of Europe in perspective

2. Globalisation and security of supply

3. Commoditisation of European gas

Contents


3. Demand destruction

4. A ‘golden age’ for gas?

1960s-2000s – The Gasification of Europe

15%

20%

25%

30%

300

400

500

600

Ga

s a

s %

of

pri

ma

ry e

ne

rgy

Mto

e/y

r

Share of gas in primary energy


0%

5%

10%

0

100

200

19

65

19

67

19

69

19

71

19

73

19

75

19

77

19

79

19

81

19

83

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09

Ga

s a

s %

of

pri

ma

ry e

ne

rgy

Mto

e/y

r

Source: BP Statistical Review (2011)

Primarygas consumption (EU+TR)

Europe caught up with World, OECD, US

30%

40%

50%

60%G

as

sha

re in

pri

ma

ry e

ne

rgy

USSR/FSU

USA

EU27+TR

OECD


0%

10%

20%

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

Ga

s sh

are

in p

rim

ary

en

erg

y

OECD

World

Japan

China


Europe in global gas consumption

30%

40%

50%

60%

Share of global gas demand

EU27 + Turkey


-10%

0%

10%

20%

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

Contribution to world

demand growth (5 yr moving

period)


EU27 Gas Consumption 12.4 Gtoe

EU27 Nuclear Consumption 5.8 Gtoe

EU27 oil consumption 28.3 Gtoe

EU27 hydro consumption 2.8 Gtoe

Cumulative energy, 1970-2010


EU27 hydro consumption 2.8 Gtoe

Saudi oil exports 14 Gtoe

US oil imports 16.2 Gtoe

Europe ‘gasified’ through imports

20%

40%

60%

80%

100%

120%G

as

imp

ort

s a

s %

of

gas

con

sum

pti

on

USA

South Korea

Japan

China

India

EU27

Gulf

Russia

Bubble surface

proportionate to

gas consumption


-80%

-60%

-40%

-20%

0%

0% 20% 40% 60% 80%

Ga

s im

po

rts

as

% o

f ga

s co

nsu

mp

tio

n

Gas as % of primary energy

Source: BP Statistical Review (2011)Figures for 2010

Since 1975, 100% of growth covered by imports

300

400

500

600B

illi

on

cu

bic

me

ters

Others

Qatar

Oman

UAE

Malaysia

Trinidad & T

Nigeria

Libya

Egypt

Algeria

EU

27

IMP

OR

TS

(IE

A d

ata

)

Russian gas


0

100

200

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Bil

lio

n c

ub

ic m

ete

rs

Algeria

Norway

Russia

Other EU

RO

PL

IT

D

DK

UK

NL

EU

27

PR

OD

UC

TIO

N

(BP

da

ta)

Sources: International Energy Agency; BP Statistical Review of World Energy

EU27+TK Gas Imports % of world trade

1970 6.4 Mtoe 29%

1980 67 Mtoe 57%

1990 130 Mtoe 56%

Europe imports half of world traded gas


1990 130 Mtoe 56%

2000 200 Mtoe 46%

2010 321 Mtoe 51%

Excl. intra-FSU & intra-EU trade. Source: BP Statistical Review

A regional gas supply system

150

200

250

300

Bil

lio

n c

ub

ic m

ete

rs

1970-1995

Total: +14.4% p.y

Russia: +14.3% p.y

1995-2006

Total: +7.4% p.y

Russia: +1% p.y

ALGERIA

OTHERS


0

50

100

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

Bil

lio

n c

ub

ic m

ete

rs

Data sources: International Energy Agency; BP Statistical Review of World Energy

RUSSIA

NORWAY


2. Globalisation of European gas


Contents




A wave of (Qatari) LNG hits Europe (via UK)

80

100

120B

cm p

er

ye

ar

PORTUGAL

UK

0

10

20

30

40

50

60

70

80

90

100

Jan

-98

De

c-9

8

No

v-9

9

Oc

t-0

0

Se

p-0

1

Au

g-0

2

Jul-

03

Jun

-04

Ma

y-0

5

Ap

r-0

6

Ma

r-0

7

Fe

b-0

8

Jan

-09

De

c-0

9

No

v-1

0

bcm

pe

r y

ea

r

QATAR

YEMEN

MALAYSIA

TRINIDAD

OMAN

NORWAY

EGYPT

NIGERIA

ALGERIA


0

20

40

60

Jan

-98

Oct

-98

Jul-

99

Ap

r-0

0

Jan

-01

Oct

-01

Jul-

02

Ap

r-0

3

Jan

-04

Oct

-04

Jul-

05

Ap

r-0

6

Jan

-07

Oct

-07

Jul-

08

Ap

r-0

9

Jan

-10

Oct

-10

Jul-

11

Bcm

pe

r y

ea

r

UK

ITALY

GREECE

FRANCE

BELGIUM

SPAIN

Jan

De

c

No

v

Oc

t

Se

p

Au

g

Jul

Jun

Ma

y

Ap

r

Ma

r

Fe

b

Jan

De

c

No

v

6

8

10

12

14

16

18

US

D/M

MB

TU Japan LNG

(average)

NBP

Henry Hub

De-globalisation?

Towards a Euro-Asia spot price convergence?


0

2

4

6

De

c-0

1

De

c-0

2

De

c-0

3

De

c-0

4

De

c-0

5

De

c-0

6

De

c-0

7

De

c-0

8

De

c-0

9

De

c-1

0

Henry Hub

Source: Bloomberg

Towards North American exports – and re-

globalisation?

Strong demand growth from Asia + Gulf

250

300

350

400

450

5002

00

0 =

10

0

China

China+India

India

Asia

Gulf


50

100

150

200

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

00

= 1

00

Japan

EU+TR

USSR / FSU

EU27

US


Booming Chinese gas imports

15

20

25

30

Bcm

/ye

ar

Turkmenistan

(approx.)


0

5

10

Au

g-0

4

Jan

-05

Jun

-05

No

v-0

5

Ap

r-0

6

Se

p-0

6

Fe

b-0

7

Jul-

07

De

c-0

7

Ma

y-0

8

Oct

-08

Ma

r-0

9

Au

g-0

9

Jan

-10

Jun

-10

No

v-1

0

Ap

r-1

1

Bcm

/ye

ar

(approx.)

LNG

Asian gas imports (gross)

% of world trade

1970 4 Mtoe 17%

1980 25 Mtoe 21%

1990 52 Mtoe 22%

Asian imports rise fast


1990 52 Mtoe 22%

2000 99 Mtoe 23%

2010 183 Mtoe 29%

Excl. intra-FSU & intra-EU trade. Source: BP Statistical Review

Towards Euro-Asia price convergence?

• Asian demand is soaring,

wiping out the LNG glut

• Non contracted LNG (from

Qatar) is dwindling

• UK should pay Asian spot

prices for its cargoes

• Convergence at Asian oil-

indexed levels?0

10

20

30

40

50

60

70

80

Ma

r-0

5

04

-Ju

l-0

5

No

v-0

5

Ma

r-0

6

04

-Ju

l-0

6

No

v-0

6

Ma

r-0

7

04

-Ju

l-0

7

No

v-0

7

Ma

r-0

8

04

-Ju

l-0

8

No

v-0

8

Ma

r-0

9

04

-Ju

l-0

9

No

v-0

9

Ma

r-1

0

04

-Ju

l-1

0

No

v-1

0

EU

R/M

Wh

NBP

TTF

PEG

ZEE

NCG

Baumgarten


0

0.2

0.4

0.6

0.8

1

1.2

Jul-

08

Se

p-0

8

No

v-0

8

Jan

-09

Ma

r-0

9

Ma

y-0

9

Jul-

09

Se

p-0

9

No

v-0

9

Jan

-10

Ma

r-1

0

Ma

y-1

0

Jul-

10

Se

p-1

0

No

v-1

0

Jan

-11

Ma

r-1

1

Ma

y-1

1

Jul-

11

Se

p-1

1

No

v-1

1

Share of Qatar in UK LNG imports

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Mil

lio

ns

Netback to Qatar and Qatari exports to UK

Qatar exports to UK

Netback ratio (UK/Japan)

04

-Ma

r

04

04

-No

v

04

-Ma

r

04

04

-No

v

04

-Ma

r

04

04

-No

v

04

-Ma

r

04

04

-No

v

04

-Ma

r

04

04

-No

v

04

-Ma

r

04

04

-No

v

US gas supply: reversing the peak

350

400

450

500

550

600

Mto

e


300

350

19

85

19

87

19

89

19

91

19

93

19

95

19

97

19

99

20

01

20

03

20

05

20

07

20

09


Towards massive American exports?

• 90bcm+ projects

• 22bcm contracted (Sabine)

• Kitimat FID imminent

• Long-term pressure on Euro-

Asian price?





Contents




Single North-West European spot price

30

40

50

60

70

80E

UR

/MW

h

NBP

TTF

PEG

ZEE

NCG

Baumgarten


0

10

20

30

04

-Ma

r-0

5

04

-Ju

l-0

5

04

-No

v-0

5

04

-Ma

r-0

6

04

-Ju

l-0

6

04

-No

v-0

6

04

-Ma

r-0

7

04

-Ju

l-0

7

04

-No

v-0

7

04

-Ma

r-0

8

04

-Ju

l-0

8

04

-No

v-0

8

04

-Ma

r-0

9

04

-Ju

l-0

9

04

-No

v-0

9

04

-Ma

r-1

0

04

-Ju

l-1

0

04

-No

v-1

0

EU

R/M

Wh

North West Europe = one large market

• Efficient arbitrages between

NBP and ZEE

• More effective TPA in

continental markets (NL; BE;

FR; DE)

• Less “contractual congestion”

(DG COMP action)

• UK now Europe’s Western

Gas Corridor


-600

-400

-200

0

200

400

600

800

01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Jan-10 01-Jan-11

Interconnector Flow (GWh)

Gas Corridor

0

10

20

30

40

50

60

70

80

04

-Ma

r-0

5

04

-Ju

l-0

5

04

-No

v-0

5

04

-Ma

r-0

6

04

-Ju

l-0

6

04

-No

v-0

6

04

-Ma

r-0

7

04

-Ju

l-0

7

04

-No

v-0

7

04

-Ma

r-0

8

04

-Ju

l-0

8

04

-No

v-0

8

04

-Ma

r-0

9

04

-Ju

l-0

9

04

-No

v-0

9

04

-Ma

r-1

0

04

-Ju

l-1

0

04

-No

v-1

0

EU

R/M

Wh

NBP

TTF

PEG

ZEE

NCG

Baumgarten

Commoditisation vs. LT contracts

0

5

10

15

20

25

De

c-0

1

Au

g-0

2

Ap

r-0

3

De

c-0

3

Au

g-0

4

Ap

r-0

5

De

c-0

5

Au

g-0

6

Ap

r-0

7

De

c-0

7

Au

g-0

8

Ap

r-0

9

De

c-0

9

Au

g-1

0

Ap

r-1

1

US

D/M

MB

TU

BRENT

German

oil-indexed

formula

NBP

Source: Bloomberg AGIP Proxy formula from H. Rogers (OIES)

• Spot-priced gas available to

consumers in NW Europe

• Oil-indexation gradually

vanishing

• Investment in NWE (Gate;

Dunkirk; storage) made with

NWE market in mind –


-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

De

c-0

1

Jun

-02

De

c-0

2

Jun

-03

De

c-0

3

Jun

-04

De

c-0

4

Jun

-05

De

c-0

5

Jun

-06

De

c-0

6

Jun

-07

De

c-0

7

Jun

-08

De

c-0

8

Jun

-09

De

c-0

9

Jun

-10

De

c-1

0

Jun

-11

US

D /

Mb

tu

Average German Import Price

below oil-indexed formula

Average German Import Price

above oil-indexed formula

Source: Bloomberg AGIP Proxy formula from H. Rogers (OIES)

NWE market in mind –

including NBP

• Overcapacity and premium to

flexibility -- ‘option to serve’




Contents




EU: gas demand peaked in 2005

300

400

500

600M

toe EU27+TR

EU15

IT+FR+GER+UK


0

100

200

19

65

19

68

19

71

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

IT+FR+GER+UK

NMS10

TR


…even with gas still displacing other fuels

0%

2%

4%

6%

8%

10%

12%

Gas consumption growth

average gas (+2.25%)

EU27 + Turkey


-8%

-6%

-4%

-2%

0%

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

Energy cons. growth

average energy (+0.42%)


IEA & BP (and others) – growth will resume

2010-2030

• Consumption up by 100bcm

− Idem IEA ‘Golden Age’

• Conv. prod. down by 100bcm

− IEA‘Golden Age’: -70bcm

• About 40bcm shale+CBM


• About 40bcm shale+CBM

• Imports up by 160bcm

− IEA‘Golden Age’: 140bcm

• Pipeline imports grow nearly

as quickly as LNG imports

• Power is key to demand

growth – mainly through fuel

substitution

Czech Republic

Germany

Greece

Ireland

Poland

United KingdomBulgaria

Cyprus

Malta

Romania

Estonia

500

600

700

800

900

1000

Ca

rbo

n in

ten

sity

of

he

at

& e

lec

The case for fuel substitution

Carbon

Carbon pricing is supposed to incentivise coal-to-gas substitution

Big prizes are in PL, CZ, DE, UK


Austria

Belgium

Denmark

Finland

France

Germany

HungaryItaly

Luxembourg

NetherlandsPortugal

Slovak Republic

Spain

Sweden

Romania

Slovenia

Latvia

Lithuania

0

100

200

300

400

0 100000 200000 300000 400000 500000 600000 700000 800000 900000

Ca

rbo

n in

ten

sity

of

he

at

& e

lec

Heat & Elec Generation (GWh)

IEA data

Carbon intensity of Gas

• Questioning the gas-for-CO2-reduction story

• Inter-fuel competition is heavily “managed” in Europe

• EU has effectively abandoned its climate policy in favour of

a renewables policy – not the same at all

• Coal is protected by low carbon price & subsidies

But policy works against gas


• Coal is protected by low carbon price & subsidies

• Gas may be the big loser -- Cf Spain

Spain: wind and coal displace gas

6

8

10

12

TW

h

Gas

“It is nice how gas complements wind in the Spanish market”

-- EC official

Investors in stranded CCGTs will appreciate…


0

2

4

Jan

-06

Ma

y-0

6

Se

p-0

6

Jan

-07

Ma

y-0

7

Se

p-0

7

Jan

-08

Ma

y-0

8

Se

p-0

8

Jan

-09

Ma

y-0

9

Se

p-0

9

Jan

-10

Ma

y-1

0

Se

p-1

0

Jan

-11

Ma

y-1

1

Se

p-1

1

TW

h

Gas

Wind

Coal

Source: ENTSOe

• Decline in residential (efficiency) & industrial

• Long-term subsidy contracts to renewables + nuclear

• Gas demand slowly declining, at best

Even in the UK

1000

1200

Gone Green Annual Gas Demand

1000

1200

Slow Progression Annual Gas Demand


0

200

400

600

800

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Dem

an

d (

TW

h)

Domestic Industrial and Commercial

Power Generation Exports

0

200

400

600

800

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Dem

an

d (

TW

h)

Domestic Industrial and Commercial

Power Generation Exports

Source: National Grid, Ten Year Statement 2011

Demand destruction – beyond weather


7 largest mktsweather-adjusted gas demand

Industrial & power gen consumption

Source: Deutsche Bank, “Commodities Outlook 2012”, January 2012

Demand destruction – beyond GDP


Gas demand v. GDP (7 largest EU markets

2011 decline (7 largest countries)

Source: Deutsche Bank, “Commodities Outlook 2012”, January 2012




Contents




For EU gas demand to grow…

At least some of the following would have to happen

• Some economic growth

• A return to a carbon (not renewables) policy -- fuel mix

determined by relative costs including carbon price

• An efficient pan-European gas market, reducing the ‘gas

insecurity syndrome’ in Central & Eastern Europe


insecurity syndrome’ in Central & Eastern Europe

• Fully commoditised Russian gas – sold at hub price;

disconnected from Russia’s foreign policy; some level of

competition upstream

• A European unconventional supply boom

New golden age of gas – likely for the world; unlikely for Europe

• The gasification of Europe (1965-2005) has been

remarkable – but everything is changing

• LNG is making Europe part of a global gas “system”

• Market forces should create a Eurasian gas market –

price convergence between NWE and Asian spot price

Main messages


• Market forces should then re-integrate North America into

the global market – putting long-term pressure on the

Euro-Asia price

• Gas demand in Europe is declining at an accelerated

pace, thanks to high prices & renewables policy

European Gas Markets - Energy Policy Research Group...NCG Baumgarten 0 0.2 0.4 0.6 0.8 1 1.2 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09-09 Jan-10 Mar-10-10 Jul-10 Sep-10

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