OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme The global effect of LNG growth on European gas markets Dr Thierry Bros Senior Research Fellow 19th European Gas Conference – Oslo – 29/30 May 2018
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Gas markets work State Date Event Market Results intervention Higher prices in Asia and Fukushima: 7% of global 2011 Europe with demand No LNG rerouted to Japan destruction Short-lived higher HH prices 2014 US Polar Vortex with fuel substitution in No power generation Groningen cap: loss of 2015 Lower prices No 9% of European supply Greece and Winter Cold weather & nuclear Short-lived higher prices in Italy declare 2016/2017 shortages in France Southern Europe alert Very short-lived spike mainly Italy declares 12 Dec. 2017 Baumgarten blast in Italy emergency Short-lived spike in New York Jan 2018 US cold bomb cyclone No (First Yamal LNG cargo to Boston) Feb 2018 Siberian weather in EU Short-lived spike in EU No 2
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 Source: Florence School of Regulation 3
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 … but on the energy side Gazprom not an EU friend… is the cheapest gas supplier than can, on top, provide any additional gas we may need. EU Commission focus on Traditional energy managers focus consumers benefits (unbundling on today’s P&L (integration, etc.) or roaming charges in telecoms) With increased interdependency, how is Europe’s schizophrenia going to evolve? Who’s going to decide? 4
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme #FactCheck 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 of its current markets, its spare capacity (…) Gazprom is in a position to deploy strategy designed to create uncertainty about the price of gas. 5
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Gazprom doesn’t flood EU Source: Gazprom, Entsog, thierrybros.com 6
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme 3 options for Russia to manage prices High • Tightening supply - Increasing producers’ rent • Demand destruction but no impact on exports • 2012-2013 7.5$/Mbtu min • Prompted new FIDs Med. • Swinging supply • Since 2014 • Most profitable in the long term c.6$/Mbtu Low • Use of spare capacity • Price war to shut in US LNG • Lower revenues 4.5$/Mbtu max • Can be done sporadically 7
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Month-Ahead Gas Prices 12 LNG tightness (USGC FOB - HH) Anea TTF HH 10 8 $/Mbtu 6 4 2 0 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 All contracts roll on 16th - month 1 (1-15) month 2 (16-31) Source: Argus Media, thierrybros.com 8
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Preservation of competition • • US Sherman Antitrust Act 1890 EU DG Competition “An act to protect trade and commerce “Competition policy in Europe is a vital against unlawful restraints and part of the internal market. Its aim is to monopolies” provide everyone in Europe with better • quality goods and services at lower prices. ACER 2017 Report on the Results of Competition policy is about applying rules Monitoring the Internal Markets to make sure companies compete fairly “Markets in NWE tend to score better on with each other. These are the reasons metrics related to diversity of supply and why the EU fights anticompetitive upstream concentration. This results in behaviour and encourages liberalisation .” better performing hubs” 2016 gross welfare losses: € 3.5bn Source: ACER 2017 Report on the Results of Monitoring the Internal Markets 9
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme LNG supply growth • Even if more • Customers are expensive than always better off pipe, a low cost • Suppliers have to LNG project can select low cost thrive projects to be profitable Competition Optionality Security of Diversification Supply • More buyers & • 32% of trade and sellers growing • Increases global • Impacts also liquidity storage 10
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Major projects to come on-line (on a FID basis) Others Israel 15% 4% Russia Azerbaijan 25% 5% Iran US 6% 21% Australia Egypt 9% 15% Pipe gas capacity LNG capacity Others Others 7% 16% Russia Oman 18% 5% Russia Israel 30% US 6% 52% Azerbaijan Australia Iran Egypt 9% 23% 10% 24% Source: thierrybros.com LNG only for North America & Australia 11 No upstream project in Trinidad and Tobago & Peru (LNG producers)
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Gas spare capacity 160 4.0% 140 3.5% 120 3.0% % of annual demand 100 2.5% bcm 80 2.0% 60 1.5% 40 1.0% 20 0.5% 0 0.0% 2016 2017 2021e (1.6% CAGR) 2021e (2% CAGR) Spare capacity (bcm) Spare capacity in % of wolrd consumption Source: thierrybros.com Assuming transit via Ukraine unaffected, Groningen cap at 12 bcm/y & no major unconventional gas production in China 12
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Quo Vadis Konoplyanik design Quo Vadis • • Proposal to establish a new Is the EU gas sector framework Ljubljana-based Soviet-style the most effective in order to GOSPLAN… with an anti - maximize overall EU welfare? • Russian flavor Following Naftogaz-Gazprom • Move delivery points of arbitration, same price in Russian gas to EU external Ukraine and Germany • border with higher entry tariffs Following EU Gazprom to create entry barriers antitrust settlement, companies have the ability to • switch Gazprom delivery point Great idea to be looked into! 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) 13
OXFORD INSTITUTE FOR ENERGY STUDIES Natural Gas Research Programme Thank you thierry.bros@oxfordenergy.org Twitter: @thierry_bros 14
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