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German Institute for Economic Research

The World Natural Gas Market in 2030

Calculation of Development Scenarios Using the World Gas Model

Add picture on dark green area (see slide 9 for Ruud Egging, Franziska Holz, Christian von Hirschhausen, Daniel Huppmann, Sophia Ruester, Steven A. Gabriel (see slide 9 for an example)

Infraday 2008

Berlin, October 11th 2008

Picture: Roar Lindefjeld, StatoilHydro – Arctic Discoverer docked at Cove Point – commons.wikimedia.org

Agenda

• 1. The global natural gas trade
• 2. The World Gas Model (WGM)

1. Model & Data 2. Base Case

• 3. Scenarios of natural gas trade development
• 2 -
• 3. Scenarios of natural gas trade development

1. Structural Scenario – „Post Bali Planet“ 2. Regional Scenarios – „Eastern Promises“

• 4. Conclusions and Future Directions

References

Introduction – Global Natural Gas Trade

• 3 -

The World Gas Model (WGM)

• WGM is a simulation model of the global natural gas market
• Market Equilibrium Model with Optimization Problems for Individual Players
• Mixed complementarity problem
• Features:
• more than 80 countries, 95% of world natural gas production and consumption
• time horizon until 2030 in 5-year intervals
• 4 -
• time horizon until 2030 in 5-year intervals
• market power for trader and regasifiers
• endogenous investment in pipeline, storage and LNG capacity
• LNG contract database, not just spot market
• Calibration to projections of energy markets (PRIMES, POLES)
• Worldwide increase in natural gas production and consumption by 70% until 2030
• followed by stagnation in demand

The World Gas Model – Countries in the Model

• 5 -

Countries included in the WGM (light green: consumption only)

The World Gas Model (WGM) – Structure

• 6 -

Agents and natural gas flows in the WGM

The World Gas Model – Players

• Producer
• Trader
• one trader per producer
• in charge of pipeline exports
• Liquefier
• Regasifier
• 7 -
• Storage Operator
• arbitrageur between low, high and peak demand seasons
• (Pipeline Operator)
• to allocate pipeline capacity to traders
• „Third Party Access“
• (Marketer)
• represented by inverse demand function of final consumer
• players in brackets are modelled implicitely

Base Case – Global Natural Gas Market Development

• 8 -

Global natural gas volumes and world average wholesale price, in bcm/y and $/kcm

Base Case – Global Natural Gas Flows in 2030

• 9 -

Natural gas flows in 2030 by region, in bcm/y

Scenarios

• Structural Scenarios
• „In the ground“

Constrained Reserve Horizons

• „Shutting off the Middle East“

Supply Disruption in the Middle East

• „Post Bali Planet“

Introduction of an Alternative Energy Source (Backstop Technology)

• 10 -

Introduction of an Alternative Energy Source (Backstop Technology)

• Regional Scenarios
• „Eastern Promises“

Supply Disruption from Russia to Europe

• „Tiger & Dragon“

Demand Growth in India & China

• „Pretty Coast California“

Ban on new LNG Terminals on the US Pacific Coast

„Post Bali Planet“ – Assumptions

• Introduce an alternative energy source (backstop technology)
• Backstop technology is too expensive to be used now,

but relative cost declines over time

• Competitive price and no transport cost for backstop technology
• 11 -

Average wholesale prices, Base Case, and backstop technology production costs

„Post Bali Planet“ – Usage of Backstop Technology

• Quick introduction of backstop technology in Asia and North America
• High dependency on imports, high transport costs due to long distance deliveries
• Only late introduction in Europe
• Europe can take advantage of lower prices in neighbouring countries
• 2030: 15% of total global consumption subsituted by backstop technology
• 12 -

Backstop technology in energy consumption in natural gas-reliant sectors

„Post Bali Planet“ – Development in Asia

• The development in Asia is given as an example
• „backstop“ refers to the volume of natural gas substituted by backstop

technology

• 13 -

D e v e lo p m e n t in A s ia , c o n s u m p tio n a n d a v e r a g e w h o le s a le p r ic e s , b c m /y a n d $ /k c m

„Eastern Promises“ – Assumptions

• Set all exports from Russia to Europe to zero after 2010 (pipeline and LNG)
• No deliveries from the Caspian Region to Europe via Russia
• 14 -

Development in Europe, volumes and average wholesale prices, bcm/y and $/kcm

„Eastern Promises“ – Russian Exports

• 15 -

Russian Natural Gas Distribution, in bcm/y, (Base Case/Scenario)

Results

• Following „business-as-usual“ assumptions about the natural gas trade...
• shows a high increase in natural gas consumption worldwide
• indicates that long-term supply security is not a major concern
• The introduction of an alternative energy source (backstop technology)...
• 16 -
• leads to higher consumer surplus worldwide
• stimulates North America and Asia to adapt the new technology quickly
• while Europe waits rather long before using the new technology
• A supply disruption from Russia to Europe...
• raises prices by 25% in Europe and reduces consumption by 10%
• while Russia ships more LNG to North America

Conclusions & Future Directions

• Integration of all world regions allows to investigate interdependencies

and regional substitution effects

• Regional production or delivery shocks can, in general, be compensated
• Cost of climate-friendly backstop technology will strongly influence its

introduction and substitution of natural gas

• 17 -
• New scenarios:
• effects of a global CO2 emission trading scheme
• impact of Carbon Capture and Sequestratin (CCS) on the natural gas market
• ...
• Investigation into the formation of a Gas cartel similar to OPEC
• Stochasticity in the demand and production projections

References

• European Commission (2006):

World Energy Technology Outlook – 2050 – WETO-H2.

• European Commission (2007):

European Energy and Transport – Trends to 2030 – Update 2007.

• Internation Energy Agency (2008):

Natural Gas Market Review.

• 18 -

Natural Gas Market Review.

Summary – Structural Scenarios

• Assuming limited reserves of natural gas
• has higher impact on the price in North America than Europe or Asia
• puts Europe in a bad situation in terms of supply security
• A supply shock in the Middle East
• leads to a worldwide price increase
• 19 -
• leads to a worldwide price increase
• results in lower profits and reduced consumer surplus for Middle East
• and is therefore not a good policy for a cartel
• The introduction of an alternative energy source (backstop technology)
• leads to higher consumer surplus worldwide
• stimulates North America and Asia to adapt the new technology quickly
• while Europe waits rather long before using the new technology

Summary – Regional Scenarios

• A supply disruption from Russia to Europe
• raises prices by 25% in Europe and reduces consumption by 10%
• while Russia ships more LNG to North America
• Strong demand growth in China and India
• leads to worldwide price increases
• 20 -
• leads to worldwide price increases
• and induces the Middle East and Australia to divert their exports to Asia
• A ban on constructing LNG terminals on the US West Coast
• may lead to lower prices in the short run
• but unambiguously reduces supply and drives prices up in the long run

Summary – Key Figures in 2030

Global Consumption Average Price Share of LNG Base Case 3758 326 $ 15.8 % In the ground 3387 405 $ 22.4 % Shutting off the ME 3573 353 $ 14.4 %

• 21 -

Shutting off the ME 3573 353 $ 14.4 % Post Bali Planet 3509 292 $ 9.7 % Eastern Promises 3688 374 $ 17.8 % Tiger & Dragon 3878 344 $ 17.7 % Pretty Coast California 3756 326 $ 15.6 %

bcm/y $/kcm

• f consumption