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German Institute for Economic Research Add picture on The World Natural Gas Market in 2030 dark green area Calculation of Development Scenarios (see slide 9 for (see slide 9 for Using the World Gas Model an example) Infraday 2008 Berlin, October 11 th 2008 Ruud Egging, Franziska Holz, Christian von Hirschhausen, Daniel Huppmann, Sophia Ruester, Steven A. Gabriel 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 3. Scenarios of natural gas trade development 1. Structural Scenario – „Post Bali Planet“ 2. Regional Scenarios – „Eastern Promises“ 4. Conclusions and Future Directions References - 2 -

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 - 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 - 4 -

The World Gas Model – Countries in the Model Countries included in the WGM (light green: consumption only) - 5 -

The World Gas Model (WGM) – Structure Agents and natural gas flows in the WGM - 6 -

The World Gas Model – Players • Producer • Trader - one trader per producer - in charge of pipeline exports • Liquefier • Regasifier • 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 - 7 -

Base Case – Global Natural Gas Market Development Global natural gas volumes and world average wholesale price, in bcm/y and $/kcm - 8 -

Base Case – Global Natural Gas Flows in 2030 Natural gas flows in 2030 by region, in bcm/y - 9 -

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) 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 - 10 -

„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 Average wholesale prices, Base Case, and backstop technology production costs - 11 -

„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 Backstop technology in energy consumption in natural gas-reliant sectors - 12 -

„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 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 - 13 -

„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 Development in Europe, volumes and average wholesale prices, bcm/y and $/kcm - 14 -

„Eastern Promises“ – Russian Exports Russian Natural Gas Distribution, in bcm/y, (Base Case/ Scenario ) - 15 -

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)... - 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 - 16 -

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 • New scenarios: - effects of a global CO 2 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 - 17 -

References • European Commission (2006): World Energy Technology Outlook – 2050 – WETO-H 2 . • European Commission (2007): European Energy and Transport – Trends to 2030 – Update 2007. • Internation Energy Agency (2008): Natural Gas Market Review. Natural Gas Market Review. - 18 -

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 - 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 - 19 -

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 - 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 - 20 -

Summary – Key Figures in 2030 Global Average Price Share of LNG Consumption 3758 326 $ 15.8 % Base Case In the ground 3387 405 $ 22.4 % Shutting off the ME Shutting off the ME 3573 3573 353 $ 353 $ 14.4 % 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 of consumption - 21 -