NaturalGasTrends2010

World

• Increasing cost and complexity of upstream projects (from $4bn to $40bn in 20 years)
• Increasing costs supported by high oil price
• Global economic crisis leads to a significant demand decrease
• Conventional LTC prices no longer reflect market prices
• No longer a seller's market
• Project development glut - explosion in costs also due to limited contractor market
• Also increasing project development time

US

• Explosion in shale gas in the United States
• US unconventional gas production reduces need for further imports
• Increased liquidity of spot gas markets

Middle East

• New LNG capacity in Qatar

EU

• LNG diverted to Europe targeting NW European hubs (NBP, ZEE, TTF, NCG)
• Gas glut forced spot price divergence from LTC prices, which were historically based on substitute fuel prices (oil, coal).
• European gas demand growth forecast at a slower rate
• End-user consumption forecast to decline post-2020
• The majority of demand growth comes from the power generation sector
• Europe will require additional volumes of gas at competitive prices in the near future
• Consensus suggests that any global gas surplus ends soon
• Europe's indigenous production continues declining
• Gas supplies needed in second half of decade:

- limited availability from N. Africa (Algeria, Egypt and Libya) - limited contribution from Caspian / Middle East before 2020 - no contribution likely from unconventional gas until beyond 2020

• New global scale LNG (Nigeria, Venezuela, etc) are uncertain (geopolitics, skills/resource constraints, or project cost/complexity)
• Europe will compete in a global market for new gas supplies:-
• Atlantic basin-oriented LNG supplies (e.g. Qatar)
• additional Russian supplies

EU Policy

• Implementation of Third Package is now underway – but the devil is in the detail
• Forced bundling of all capacity products cross-borders is unnecessary - shippers should be allowed to trade gas where they wish
• Risk that shippers who have existing firm capacity rights (which they have paid for) will lose those firm capacity rights as new network rules (e.g. entry - exit models) are introduced
• Proposals to limit re-nominations undermines the inherent flexibility of gas to respond to short term changes in demand (compared to electricity)
• Work on an EU Gas Target Model can be useful
• But a 'copy and paste' from electricity models is too simplistic
• Gas and electricity markets have inherently different characteristics (e.g. line-pack in gas vs. no flexibility in electricity)
• For Europe’s traded gas markets to continue to develop and grow Europe must remain attractive to suppliers and customers alike
• market intervention and substantial subsidies are distorting the market for gas and power
• market uncertainty for capacity allocation and reliability is expensive – undermines cost competitive solutions and destroys value
• can Europe remain competitive and continue to subsidise renewables and nuclear power ?
• Trading markets cannot bear increasing financial regulation and cost growth the need for action is not proven efficiency and competition will be reduced
• Europe’s competitiveness in global markets is under-pinned by well working, efficient energy markets. Will nascent hubs thrive or disappear ?

EU Gas vs Renewables

• Europe's ambitious plans for renewables and nuclear
• Renewables viable only with substantial public subsidy
• Added costs to link to network
• Intermittency and system balancing costs
• Nuclear is equally un-competitive, with delays, overspend and liabilities stretching centuries
• Gas is clean, secure and affordable:
• Half the carbon emissions of coal
• Efficient proven and reliable technologies
• Ample gas import capacity from pipeline and LNG, growing storage capacity
• Saves £ 700bn versus Nuclear by 2050 in UK alone (UK Energy Networks Association)

Buyer's market

• Buyers build up supply portfolios geared towards hub price levels (not LTC)
• Buyers use tenders or request offers from multiple suppliers
• Buyers set the main conditions of contracts