lEM: Natural Gas Market V Filip Černoch černoch @,mail.muni.cz CENTER FOR ENERGY STUDIES First comments Since 2014 raising demand (after a decade of decreasing consumption). Falling domestic production. Import requirements projected to expand from approximately 200 bcm in 2016 to 290 bcm in 2022 (OECD Europe) - flat demand, decreasing production. Increasing role of the USA Geopolitics included. Easier to store in comparison with electricity. Unsuccessful call for diversification from Russia. Market opening and liberalisation, increased hub trading and short-term flexibility, lowering the link between oil and gas prices. CENTER FOR ENERGY STUDIES Figure 1: Gas production and consumption in OECD Europe billion cubic metres 600 - 500 400 300 200 100 0 2000 2002 2004 2006 2008 2010 2012 2014 2016 Netherlands production United Kingdom production Total consumption Source: BP Statistical Review of World Energy Norway production Other Europe production SoSl - Al: net import dependency - Natural Gas ibvtult thing* 2005 20141 op| ■ Ö « ■ 5 " 3 5 J ^ * s § * ■■ 150' r 100 50% E028 BE K C2 1| K EE IE EL ES FR HR IT CY LV LT LU HU MT fM AT PL PT RO SI SK Fl SE 150' , 2005 B2014 CENTER FOR ENERGY STUDIES EU 28 imports of natural gas (2015) TotaL non-EU = 12624717 TJ-GCV Russia Norway Algeria Qatar Not specified Libya Nigeria 37.0% 32.5% 11.1% Trinidad & Tobago 10.6% 7.7% 6.3% 2.1% 2.1% Other I n coa non-EU suppliers ly^ /0 CENTER FOR ENERGY STUDIES Fionovtn P. Mo^»B^^rc£Jj;. Norway *suvor" Scni«r>o//ioo Finland He Oslo,' Sweden JQ arts, jr 1 !_Slavonc Stockh< 'S» rW*bs Unit« Kli Ireland fob* I an r W ft 'i ^ / f 1 1 /, ill tfm 1 i ** V J jr*nl Ii Esti Russia Pipelines Integrated In the European system Einbogen Lithkjania v r vGerm« insk 'Belarus Ukraine ion Dunker Äfían>/c Ocean got rch í aval Ifahefavt Jova Exot m g rlorwied/undef construction Proposed Other pipelines - Exntmg Under construction ------- flc France 'Lyon j Portugal Lisbon Snesl 7f\ r. ■ ^ Madrid >ain ros tut Me f§t'"" 1 'l-ivi. N A \fWencio . Ok rCortooeno Algiers^ A nenn luni ^T-iraařtai I" Belg ratio Bosnia &- Serbia* J ■/florl^ «Montenegi Natural gas fields LNG receiving term i noli 0 Ejustmg ^ Planned/under construction LNG export terminals H Eju itmg ßioetc Sea TAP. O o/ Turkey _7J0 Morocco Tunis Mediterranean Seo •Syna Lobar LNG • 22 LNG terminals. Klaipedos in Lithuania, Swinoujscie in Poland and Dunkerque in France opened only recently. • Utilisation of 23,5%. • Higher prices in Asia and Latin America (Brazil and Argentina). • LNG terminals used for re-export to reduce the costs and losses. CENTER FOR ENERGY STUDIES Infrastructures Existing and planned LNG terminals in Europe WS /nashamnLNG Tecmlnal ( I tl I■ I Ml , f \ MvugaL Riga INC. Terminal Existing terminal New terminal (under ( ) construction or planned) Huelva Extension Annual regasifkation capacity In billion of m1 ^^PO'to Trieste. Fos P*nig«gU* Tonklrw^r^ Tov offshore CioiaT* 1.1 AlMO ß Huelv.i rcelone >nte Porto Empedoc irthagene Delim .ran* ( ^xr^J khore^^X^ \ yVwhoyv * AlexandroKolls Source : CIICNL (2017), CLE (2016) CENTER FOR IERGY STUDIES Regulation The same structure as in the electricity sector. Based on the third internal market package, an effort to increase market effectiveness, liquidity and cross-border trade. Strengthening of the independency and powers of NRAs and their EU co-operation (ACER). Active role of TSOs and their EU wide co-operation. Common rules for the gas market — Framework Guidelines, Network codes. Move from P2P to EE systems. CENTER FOR ENERGY STUDIES Organization of wholesale market • Shift from TOP LTCs to hub trading. CENTER FOR ENERGY STUDIES Traditional gas market model • LTC + ToP. • Pricing formula linked to gas replacement values (oil indexation). • Net back replacement value gas pricing. • Territorial restrictions. • In the EU physical fragmentation of the market. CENTER FOR ENERGY STUDIES Traditional gas market mode Competition is limited. Suppliers have significant market power. Price arbitrage (convergence) is limited, resulting in different prices over the EU. CENTER FOR ENERGY STUDIES +0 £ 35 30 25 20 15 10 s J e ,i E r = H a & c + UK ♦ Turkey + Italy ♦ France + *ufl§Iffia ♦slQvakia ♦ Finland ♦ Netherlands + Romania Fc-and ♦ Czech Republic 4 Greece* Bulgaria + Serbia £300.00 $350.00 £ 400.00 £ 450.00 £500.00 Price in First Half of 2012 (£ PerThouwnd Cubic Meters) £55C.CC I EM • Competition (TPA, unbundling). • Common regulatory framework with independent regulatory bodies. • LTCs and destination clauses etc. under pressure (foreclosure potential), shift to hub-trading. • P2P replaced by EE in transportation. • Interconnectors. CENTER FOR ENERGY STUDIES LTCs • Anti-competitive foreclosure effects —> questioned by the EU's antitrust policy • Gas Natural, Distrigaz, E.ON Ruhrgas, Repson, Synergen, etc. • Not forbiden per se, but volumes locked-in under the contract, duration, cummulative effect and efficiencies are evaluated. CENTER FOR ENERGY STUDIES Territorial restrictions/market sharing • In 2004 EC confirmed they restrict competition (GDF-ENI and GDF-ENEL contract from 1997). •2009 EC fined GDF Suez and E.ON for the 1975-2005 behavior, EUR553 million each (partitioning the markets regarding MEGAL pipeline). • Intervention to the Gazprom-ENI, Gazprom-OMV, Gazprom-E.ON or Gazprom-PGNiG agreements. • Territorial restrictions no longer acceptable on the EU market. CENTER FOR ENERGY STUDIES Oil indexation • Oil products are no longer substitutes for natural gas in Europe, Gazprom, Sonatrach and some others still defends this pricing mechanismus. • Questioned by EC in antitrust proceeding against Gazprom (Sept 2011). CENTER FOR ENERGY STUDIES New mechanisms of trading and transport of gas • Acer's Gas Target Model • In transport shift from Distance Based/P2P arrangements to Entry-Exit systems. • In trading preference of hubs (ideally with gas exchanges) at the expense of OtC. CENTER FOR ENERGY STUDIES /— IPs withing EU 1=1 Market zones within MSs r-i^f— IPs at EU borders »=] Within-country transmission charge Transit -Point to Point Hub definition • A point (physical or virtual) at which title to gas can be transferred between buyers and sellers. • In a physical hub, the contractual place where the gas is exchanged corresponds to a specific and well identified geographical point on the transmission system (Zeebrugge Beach). • In a virtual hub, the contractual place where the gas is exchanged is being defined as a group of entry and exit points belonging to a whole transmission system or balancing zone (GASPOOL, NBP). • Both types should allow OTC transaction (preferrably through brokers) and Exchange trading. CENTER FOR ENERGY STUDIES Hub indicators • Liquidity — increases when number of customers, volumes traded, number of trades and price transparency all increases. • Churn factor — ration between the traded volumes and the physical throughput (re-trading ratio). Number of times gas volumes change hand within the hub. • Level of concentration — the Herfindahl — Hirschmann Index — higher numbers = fewer market participants. • Depth — significant volumes can be traded without resulting in excessive price moves. CENTER FOR ENERGY STUDIES CENTER FOR ENERGY STUDIES Established hubs * Broad liquidity ■ Sizeable forward markets which contribute to supply hedging ■ Price reference for other EU hubs and for long-term contracts indexation Advanced hubs ■ High liquidity * More reliant comparatively on spot products ■ Progress on supply hedging role but relatively lower liquidity levels of longer-term products Emerging hubs ■ Improving liquidity from a lower base taking advantage of enhanced interconnectivity and regulatory interventions ■ High reliance on long-term contracts and bilateral deals lliquid-incipient hubs ■ Embryonic liquidity at a low level and mainly focused on spot * Core reliance on long-term contracts and bilateral deals ■ Diverse group with some jurisdictions having - organised markets in early stage - to develop entry-exit systems Source: ACER based on AGTM metric results. ENERGY STUDIES Traded volumes at main EU hubs and compound annualised growth rate (CAGR), TWh/year and % 25,000 20,000 ^ 15,000 10,000 5,000 2016 values - TWh/year ■ OTC Exchange CZ-VOB 114 3 PL-VTP 0 37 DK-GPN-GTF 10 24 ES-PVB 22 7 SK-OTC 15 0 HU-MGP 0 0.5 LI-GET 0 0.3 NL-TTF UK-NBP DE-NCG DE-GPL I BELUX-ZEE+ZTP IT-PSV FR-PEGN+TRS AT-VTP ■ OTC Exchange Source: ACER based on REMIT data, Tray port and hub operators. CAGR 2012-2016 CENTER FOR ENERGY STUDIES Wholesale DA gas prices on gas hubs in the EU -BE -AT -DC GSP -DE hCG -FR PEG N -FR PCG STR5 -IT -NL -UK £ FOR ENERGY STUDIES 02 Comparison of EU wholesale gas price estimations, euro/MWh 35 LO i 0 — T L J i 4 * 6 7 S 9 10 11 12 1 2 S * 5 6 7 6 9 10 II 12 2014 2Q15 -H. TTF hub dnv-ahtodpnct -Norwtgwn got to Btigjum -Rinnan gas to tftt Cxtch RtpubOc R us van go. to Latvia 1 2 1 *■ % 6 7 8 9 10 11 12 MM -Algtwi gas b tatv 1 2 5 4 5 i 2017 CENTER FOR ENERGY STUDIES WHOLESALE PRICE FORMATION MECHANISMS IN EUROPE: 2005-2013 Oil-price escalation 2005 2007 Gas-on-gas competition 2009 Bilateral monopoly 2010 2012 Regulation ccst of service ■ 2013 Regulaiicn: social and political Other CENTER FOR ENERGY STUDIES Gas wholesale prices in EU MSs compared with market concentration and gas demand 2013 (euros/MWh) FR UK IE BE DE ES FT HU RO LU NL HR GR SI AT LT Fl EE CZ 5K 0 1,000 2:000 3.UUU 4:000 5:000 6.UUU 7:000 3:000 &.UUU 10:000 HHI Index of EU MS wholesale markets CENTER FOR ENERGY STUDIES Exl. Impact on Gazprom's EU policy • Gazprom forced to offer retroactive discounts on existing contracs (ENI - 7%, GdF, PGNiG, Eon; in 2013 USD 800 -900 mil.). • Gazprom accepts fundamental changes in the contracts in terms of oil indexation, ToP clauses (RWE's Czech subsidiary in 2013 — Court of Arbitration of the International Chamber of Commerce). = Gazprom is slowly willing to accept spot indexation in its future gas contracts (5/2014 — ENI — prices aligned with the market). CENTER FOR ENERGY STUDIES Hub prices in the EU, 2012 - 2016 CENTER FOR ENERGY STUDIES Exl. Impact on Gazprom's EU policy • Gazprom reduced the ToP minimum to 70% of annual contract quantity (from 85%), volumes taken in excess sold at hub-based prices. = oil indexation preserved in Gazprom's contracts, but base price lowered to adjust to hub prices. CENTER FOR ENERGY STUDIES Ex2: Nord Stream 1 and 2 NS I. • 2005 — 2012, 55 bcm. Only part of the capacity used due to 20% from 2016 onward). NS II. •To be commissioned in 2019, increasing the capacity to 110 bcm. • Significant opposition from Poland, Baltic countries, Ukraine. • EC requests Council of the EU for a mandate to negotiate with the Russian Federation regarding the operation of the pipeline. • Also effort to subjugate the pipeline to the EU law. the EU law restriction OPAL capacity restricted, CENTER FOR ENERGY STUDIES Vyborg^/ ^--^ Volkhov Gryazovets-VyboFg" Russia Germany Olbernhau ^ CENTER FOR ENERGY STUDIES Ex2: The Nord Stream 2 controversy • Since the 2015 agreement project faces singnificant opposition. • Claiming that NS2 would generate „potentially destabilizing geopolitical consequences.. .it would strongly influence gas market development and gas transit patterns in the region (and) route via Ukraine". • The NS2 project „...can pose certain risks for energy security in the region of central and eastern Europe" • As such it should be either subjected to the EU energy acquis (third energy package) or banned for security reasons. 43 CENTER FOR ENERGY STUDIES Ex2: Nord Stream II. controversy • Energy security reasoning vaguely constructed: • „NS2 would reinforce Gazprom's dominance in Europe..." • „Cheap Russian gas could limit the feasibility of imports from alternative sources via existing infrastructure or hamper the new one..." • „Ukraine loses both profit and leverage..." • „(NS2) undermines Poland's (and Slovakia's) energy security stemming from its role as a transit country for Russian gas..." •Non-regulatory justification used: „(NS2.)...undermines EU's ambition to build an Energy Union" (diversification, limiting dependence on Russia, SoS...). Is that enough to ban the project? 44 CENTER FOR ENERGY STUDIES Ex2: Market dominance and price manipulation • Commission Vice-President Maros Sefcovic and his colleague Miguel Arias Canete, both responsible for energy, expressed concerns about the project, saying it would reinforce Gazprom's dominance as Europe's single biggest supplier of natural gas. 45 CENTER FOR ENERGY STUDIES Ex2: Market dominance and price manipulation However... If Gazprom wanted to „pump more cheap gas" west, it can do that already • 307 bcmy of the combined westbound capacity vs. 147 bcm of gas exports in 2014. • A circa 100 bcmy of surplus of fully developed gas in West Siberia that is available for sale into Europe at low marginal cost. Under Gazprom LTCs, buyers nominate the transferred volume (the record high exports in 2016 were driven by demand). Manipulating price at mature hubs is generally difficult (as the 2014 ^Ukraine curtailment" shows); Eastern European markets promised price review clauses. Buying more gas from Gazprom does not mean that other suppliers' export capacities go away (namely LNG and Norway). 46 CENTER FOR ENERGY STUDIES Ex2: Threat to energy security of transit countries (PL, SK) • Polish politicians from across the political spectrum have long opposed Nord Stream, claiming it undermines Poland's energy security stemming from its role as a transit country for Russian gas via the Yamal-Europe pipeline 47 CENTER FOR ENERGY STUDIES Ex2: Loss of transit income • Acknowledged for Ukraine and Slovakia, uncertain in case of Poland. • But is this relevant security argument? As stated it rather undermines the whole case against NS2. 51 CENTER FOR ENERGY STUDIES Compromising of security/diversification projects • What projects? Klaipeda and Swinoujscie LNG? Norwegian corridor? N-S corridor? How does a re-routing of existing supplies change their positions? • Re-routing of the gas flow may nevertheless require building of adititional capacities to avoid botdenecks ((calculated to €lbn of addititional costs). • Possible congestions in W-E direction separating CEE market, enabling for excersizing of market power. 52 CENTER FOR ENERGY STUDIES Ex2: The Ukraine The project will „strongly influence ... transit route via the Ukraine". This is already happening: transit have declined to 82,2 bcm in 2016 with no prospect of recovery (NSl-Opal). Domestic consumption from domestic sources + reverse import from CEE markets with a premium on Gazprom price. SoS secured, NS2 affects incomes and leverage. Does preservation of transit alleviate any of Ukrainian problems? Pricing policy of Ukrtransgaz improving business case for NS2. 53 CENTER FOR ENERGY STUDIES Ex2: Nord Stream I, II = Conflict of regulatory, market based approach of EC and more (geo)politicaly and security driven approach of national states. 54 CENTER FOR ENERGY STUDIES Sources • IEA (2014): Energy Policies of IEA Countries — The European Union. irušek et al. (2015V Energy Security in Central and Eastern Europe and the Operations of Russian State-Owned Energy Enterprises • ACER (2018): Annual Report on the Results of Monitoring the Internal electricity and Natural Gas Markets in 2017 • EC (2017): Second Report on the State of the Energy Union • Széles, Z. (2017) EU natural gas demand and supply • Remy, L. (2014): How to Establish a Proper Working Gas Hub? • DG Energy (2017): Quarterly Report on European Gas Markets, vol. 10 and vol. 9. • Stewart, P. (2016): Are LNG benchmarks still relevant? • Wikipedia: Nord Stream map (Bailey, S.) CENTER FOR ENERGY STUDIES