on European gas markets Dr Thierry Bros Senior Research Fellow 19th - - PowerPoint PPT Presentation

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

The global effect of LNG growth

• n European gas markets

Dr Thierry Bros

19th European Gas Conference – Oslo – 29/30 May 2018

Senior Research Fellow

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Gas markets work

Date Event Market Results State intervention

2011 Fukushima: 7% of global LNG rerouted to Japan Higher prices in Asia and Europe with demand destruction No 2014 US Polar Vortex Short-lived higher HH prices with fuel substitution in power generation No 2015 Groningen cap: loss of 9% of European supply Lower prices No Winter 2016/2017 Cold weather & nuclear shortages in France Short-lived higher prices in Southern Europe Greece and Italy declare alert 12 Dec. 2017 Baumgarten blast Very short-lived spike mainly in Italy Italy declares emergency Jan 2018 US cold bomb cyclone Short-lived spike in New York

(First Yamal LNG cargo to Boston)

No Feb 2018 Siberian weather in EU Short-lived spike in EU No

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OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

EU sentiment changes vis-à-vis gas…

• Gas demand growing since 2014
• Gas infrastructure is the batteries of the new energy system
• Complete electrification will not work
• Gas is not just a bridge fuel for renewables, but it has its own future in

Europe

• EU hasn’t stopped already all public funding for new interconnections

3 Source: Florence School of Regulation

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

… But Europe’s schizophrenia remains

Policy makers Energy managers

On a foreign policy side, Russia is not an EU friend… …but on the energy side Gazprom is the cheapest gas supplier than can, on top, provide any additional gas we may need. EU Commission focus on consumers benefits (unbundling

• r roaming charges in telecoms)

Traditional energy managers focus

• n today’s P&L (integration, etc.)

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With increased interdependency, how is Europe’s schizophrenia going to evolve?

Who’s going to decide?

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

#FactCheck

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Facts Fake News

If global gas markets were to tighten, Russia could quickly ramp up pipeline gas exports to Europe and displace some LNG there that could then be re-routed to alleviate shortages elsewhere. Thanks to several comparative advantages, primarily the size of its reserves, the proximity

• f its current markets, its spare capacity (…)

Gazprom is in a position to deploy strategy designed to create uncertainty about the price

• f gas.

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Gazprom doesn’t flood EU

6 Source: Gazprom, Entsog, thierrybros.com

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

3 options for Russia to manage prices

• Tightening supply - Increasing producers’ rent
• Demand destruction but no impact on exports
• 2012-2013
• Prompted new FIDs

High

7.5$/Mbtu min

• Swinging supply
• Since 2014
• Most profitable in the long term

Med.

c.6$/Mbtu

• Use of spare capacity
• Price war to shut in US LNG
• Lower revenues
• Can be done sporadically

Low

4.5$/Mbtu max

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OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Month-Ahead Gas Prices

8 Source: Argus Media, thierrybros.com 2 4 6 8 10 12 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 $/Mbtu

All contracts roll on 16th - month 1 (1-15) month 2 (16-31)

LNG tightness (USGC FOB - HH) Anea TTF HH

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Preservation of competition

• US Sherman Antitrust Act 1890



“An act to protect trade and commerce against unlawful restraints and monopolies”

• ACER 2017 Report on the Results of

Monitoring the Internal Markets



“Markets in NWE tend to score better on metrics related to diversity of supply and upstream concentration. This results in better performing hubs”



2016 gross welfare losses: €3.5bn

• EU DG Competition



“Competition policy in Europe is a vital part of the internal market. Its aim is to provide everyone in Europe with better quality goods and services at lower prices. Competition policy is about applying rules to make sure companies compete fairly with each other. These are the reasons why the EU fights anticompetitive behaviour and encourages liberalisation.”

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Source: ACER 2017 Report on the Results of Monitoring the Internal Markets

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

LNG supply growth

• 32% of trade and

growing

• Impacts also

storage

• More buyers &

sellers

• Increases global

liquidity

• Even if more

expensive than pipe, a low cost LNG project can thrive

• Customers are

always better off

• Suppliers have to

select low cost projects to be profitable

Competition Optionality Security of Supply Diversification

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OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Major projects to come on-line

(on a FID basis)

11 Source: thierrybros.com

LNG only for North America & Australia No upstream project in Trinidad and Tobago & Peru (LNG producers)

Russia 25% US 21% Egypt 15% Australia 9% Iran 6% Azerbaijan 5% Israel 4% Others 15% US 52% Australia 23% Russia 18% Others 7%

LNG capacity

Russia 30% Egypt 24% Iran 10% Azerbaijan 9% Israel 6% Oman 5% Others 16%

Pipe gas capacity

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Gas spare capacity

12 Source: thierrybros.com Assuming transit via Ukraine unaffected, Groningen cap at 12 bcm/y & no major unconventional gas production in China 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 20 40 60 80 100 120 140 160 2016 2017 2021e (1.6% CAGR) 2021e (2% CAGR) % of annual demand bcm

Spare capacity (bcm) Spare capacity in % of wolrd consumption

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Quo Vadis

Quo Vadis

• Is the EU gas sector framework

the most effective in order to maximize overall EU welfare?

• Following Naftogaz-Gazprom

arbitration, same price in Ukraine and Germany

• Following EU Gazprom

antitrust settlement, companies have the ability to switch Gazprom delivery point

Konoplyanik design

• Proposal to establish a new

Ljubljana-based Soviet-style GOSPLAN… with an anti- Russian flavor

• Move delivery points of

Russian gas to EU external border with higher entry tariffs to create entry barriers

• Great idea to be looked into!

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Solution: one enlarged EU single zone with a single wholesale price, an entry fee and 2 exit fees to differentiate customers needing SoS and others

Validity of regulated transport tariffs (Norwegian Court of Appeal, June 2017)

OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme

Thank you

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thierry.bros@oxfordenergy.org Twitter: @thierry_bros