Serbia: Gasification Study prepared by ECA, financed by the WB Branka TubinMinistry of mining and energy

Outline Two key issues: Increased gasification

extent prices competitiveness storage supply cases: import and transit

Invest in a new import option support increased gasification? incremental volumes incremental investment cost effect on security and reliability preferred investment case

Increased gasification

Key issues

Increased gasification is likely to reduce Serbia’s already low system load factor, increasing peak demand beyond the daily capacity limit via Hungary

Seasonal storage could reduce the winter peak to relieve the import constraint

A new import point in southern Serbia would greatly strengthen the system and increase reliability and security of supply

A southern import point would facilitate increased gasification in southern and central Serbia, and provide increased reliability,

However, the non-enforcement to date of the take-or-pay clause of the transit contract and the flat annual prices from Gazprom, reduce the economic incentive to develop storage

Gasification

MontenegroSouthern Serbia

Northern Serbiafully gasified

Western and Central Serbia partly gasified

Southern Serbia gasification barely begun

Montenegronot gasified

Western & East Serbia

Northern Serbia

Belgrade

Prices International benchmarks indicate that relative gas prices between customer types in Serbia need to be adjusted to reflect costs

Comparison with import prices shows that absolute price levels need to be increased, particularly for small customers with high seasonal ‘swing’

New Energy agency (regulatory authority) is to be established soon, price methodologies developed and tariff systems approved

3.7

0.7

3.1

2.1

1.7

0.8

0.50.4

1.5

1.21

1.33

1.1

0.6 0.5

0

1

2

3

4

1 10 100

1 00

0

10 0

00

100

000

1 00

0 00

0

10 0

00 0

00

Approximate peak day demand, kWh log scale

Rel

ativ

e P

rice

France

SpainIreland

Germany

AustriaBelgium

Portugal

United Kingdom

SwedenCzech Republic

Slovakia

PolandHungarySerbia

Croatia

Germany

Finland

Hungary

SlovakiaSpain Czech RepublicRomaniaCroatia

Denmark

Serbia

Denmark

PolandFrance

Relative prices international price comparisons

Residential Commercial

Industrial

Relative gas prices for residential and industrial customers in Serbia need significant adjustments$300

$200

$95 $80 $75

$165$125

Annual demand profile

high seasonal swing

-5

0

5

10

15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Dai

ly v

olu

mes

(m

illio

n sc

m)

Transit contract daily maximumExpected maximum daily demand

Seasonal demand swing in Serbia is very high

-5

0

5

10

15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Dai

ly v

olu

mes

(m

illio

n sc

m)

Current supply and demand

with domestic production

Transit contract daily maximum Expected maximum daily demand

… but with domestic production approximately flat …

… the swing is met with imports.

Domestic production buys some capacity …

-5

0

5

10

15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Dai

ly v

olu

mes

(m

illio

n sc

m)

Swinging domestic production

Transit contract daily maximum

Expected maximum daily demand

… could buy some more capacity …

… but domestic daily output is limited and production is in decline.

Review of the current import situation

The existing Hungarian import contract does not provide sufficient capacity to meet peak winter demand

This situation will worsen with increasing demand and declining domestic production

However, most of the import capacity is unused for most of the year

Nevertheless, the contract requires that NIS pay for 80% of unused daily capacity under a ‘take-or-pay’ clause

Instead of meeting this requirement now, NIS has negotiated to increase its capacity liabilities in future years

The situation is becoming quite serious.

Possible solutions

negotiate with customers to shift demand from winter to summer

negotiate with customers to interrupt gas use on peak days

introduce seasonal prices

establish seasonal gas storage within Serbia to flatten the import profile

secure additional import capacity

Seasonal prices for gas

reflect the higher value of winter gas (and/or the cost of storage)

automatically recover revenues in line with the costs of delivering gas

allow the cost of import capacity and transmission capacity to be better reflected in prices

encourage those customers who can to reduce winter gas consumption and/or increase summer gas consumption

automatically produce lower average prices for customers with flat annual profiles and higher average prices for customers with high swing profiles

Annual demand profile

high seasonal swing

-5

0

5

10

15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Dai

ly v

olu

mes

(m

illio

n sc

m)

Transit CONTRACT daily maximum

The ANNUAL AVERAGE daily quantity is significantly below the

daily transit capacity

A flat import profile would be of economic value to Hungary and should strengthen Serbia’s position in contract renegotiations.

Expected MAXIMUM daily demand

-5

0

5

10

15

Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar

Dai

ly v

olu

mes

(m

illio

n sc

m)

Seasonal storage to release transit capacity

Meeting the daily peaks from storage

Reduces the transit

capacity required

Gas from storage

Gas into storage

On current Serbian demand levels, seasonal storage could release about 4.5 million scm per day of Hungarian transit capacity.

Cost of storage

Estimated cost of stored gas is reasonable: US$ 33/ mcm

Northern Serbia

c

b

Montenegrod

Gasification cases

Network extensionswithin Serbia

a south to Dimitrovgrad 28” 43

b west to Backa Palanka (in 2b and 3b)

c west to Badovinci (in 3c)

d south-west to Montenegro12” 79

e west to Visegrad 10” 12

f branch to Kosovo 12” 8

g south to Vranje 12” 22

h east to Negotin 12” 34

j strengthen backbone24” 30

k west ring via Valjevo12&14”18

mcentral ring via Trstenik12” 12

n branch to Majdanpek (no data)

p branch to Bor 10” 3

q branch to Ivanjica 10” 8

Pipeline cost estimatessize US$m

Southern Serbiagf

a

he

p

n

k

qm

j

Western & Eastern Serbia

Belgrade

Import and transit cases tie in with gasification cases

New import connections would: strengthen Serbia’s weak linear-radial

gas transmission system increase import (and transit) capacity increase security of gas supply

and may: allow for diversity of supply sources

Transiting gas through Serbia would: increase quantities and help the

financial viability of new pipelines

and may: generate additional revenues for NIS

New import and transit

investment cases

1a

2b

2c

2g

2a

Import cases

1.Major transit routes across Serbia

a south-to-north 48”5 712

b east-to-west 48”3 785

Pipeline cost estimatessize US$m

2d LNG

2f

2e

1b2h

2j

south-to-north

1a2e

Bulgaria

east-to-west

1b2h

Romania

Major transit cases to be carefully considered

Both major transit cases should be considered carefully because:

the east-to-west option was declared to be expensive

the south-to-north option was declared to be redundant by the Nabucco pipeline

Nabucco pipeline Sources: map OMVprojections NIS

Serbia is advised to pursue import options that would leverage regional developments

55

29

11

1714

Expected 2010 demand of 5 countries : 125 bcm

30 bcm/y

20 bcm/yTotal expected 2010 demand of other potential Nabucco shipper countries:

bcm/yGermany 114Italy? 93Czech Republic 14Slovakia 9Switzerland 6

Compare Serbia3 ~5

But, the way we see Serbia in the region is that new gas pipeline direction across the territory of Serbia would be much easier to construct due to flat terrain in comparison to Karpats mountain region

The route to west Europe would be shorter

Since central Serbia is only partly gasified there is a number of consumers to be connected

Serbia is in a position to have connections with Croatia, Bosnia and Herzegovina, Montenegro, Kosovo and Metohija and Macedonia

Albania

Import cases

1.Major transit routes across Serbia

a south-to-north 48” 5 712b east-to-west 48” 3 785

2. Import routes to serve Serbian demand

a via Hungary (existing)b via Croatia 20” 36c via Croatia - BiH 20” 73d via Montenegro 20” 195e via Bulgaria 20” 60f via Albania 20” 202g via Macedonia 20” 67h via Romania 20” 76j via Romania 24” 32

Pipeline cost estimatessize US$m

1a2e

Bulgaria

Macedonia

2fMontenegro

Croatia

Bosnia andHerzegovina

Hungary

Romania2j

1b2h

Romania

2d LNG 2g

2b

2c

2a

Import casesSorted by capital cost Source/dependencies US$ million via Romania (north) Gazprom 32

via Croatia North African LNG 36Croatian terminal

via Macedonia Caspian/ Iran 67Turkey-Greece pipeline

via Croatia and BiH North African LNG 73 Croatian terminal

via Romania (central) Russia or Caspian/ Iran 76Nabucco pipeline

via Bulgaria Russia or Caspian/ Iran 60

Nabucco pipeline

via Montenegro North African LNG 195Montenegro terminal

via Albania Caspian/ Iran 202Turkey-Greece pipeline

Transit cases

3. Minor transit routes to neighboring countries

a to Croatia 20”18

b “ 20” 36

c to Bosnia and Herzegovina 20” 39

d “ n/a

e “ 10” 12

f to Albania and Montenegro

20” 140

g to Macedonia 20”56

Pipeline cost estimatessize US$m

AlbaniaMacedonia

Croatia3a

Bosnia andHerzegovina

3f 3g

3c

3d

3e

3b

Potential transit volumes

potential transit volumes in 2015, bcm

Croatia 0.5 Bosnia and Herzegovina 1.5 [Montenegro] 1.0 Albania 0.5 Macedonia 1.0 SubTOTAL 4.5

Serbia 3.5 TOTAL 8.0

Regional demand annual volumes

-5

0

5

10

15

20

25

2010 2015 2020 2025 2030 2035 2040

An

nu

al v

olu

me

(bc

m)

Croatia (10%)

Albania

Montenegro

Macedonia

Bosnia & Herzegovina

Serbia incremental imports

Assumed imports via Hungary

Imports via new pipeline

Delivered cost of gas

Based on the estimated capital costs and projected volumes of demand in Serbia and neighboring countries for regional gas transit, the transport cost of new import routes would be less than half the current Hungarian price

However, these estimates do not allow for transit fees (rent), so the total transit price may be higher

Industry structure

Currently a state-owned company for imports transmission distribution

+ 30 small distribution companies in Vojvodina

Transmission a single state-owned company is envisaged who is responsible for imports?

Distribution privatize or retain in state ownership two companies or many

Regulation give incentives to merge? (as per Bulgaria) exclusive franchises or gas supply

competition provide financial incentives to distribution

companies to gasify where economic?

Conclusions and recommendation

s

Recommendations

Increase gas prices to economic levels and reduce connection costs to economic levels to make the gas industry financially viable and facilitate increased gasification

Develop storage to: relieve the seasonal import capacity

constraint (providing sufficient capacity from the existing Hungarian transit contract for Serbia’s demand until 2010~2015)

provide a reliability reserve for the system Commence discussions with the

relevant authorities about supplying gas via Serbia to Montenegro, Croatia, Bosnia and Herzegovina, Albania and Macedonia

Enter discussions with the Nabucco consortium to take gas via a new pipeline

Regional transit opportunities could significantly increase volumes through a new import pipeline to Serbia

Therefore the Government of the Republic of Serbia made a conclusion on necessity to connect gas pipeline systems of Serbia and Bulgaria

In order to proceed with the activities leading to realization of this goal our Government proposed MoU to be signed with the Bulgarian side

Regional

initiative

Our Ministry proposed Energy strategy paper, it was adopted by the Serbian Government, now pending Parliament procedure

Although commercial- industry development strategy did not exist when this energy strategy paper was prepared, our ministry did decide to work on energy strategy paper. Therefore we believe that even higher gas consumption can be possible in case of dynamic commercial development

Energy Law stipulates the necessity to develop programs for energy strategy realization

Activities

already underwa

y

Therefore we decided to start working on guidelines for Serbia gasification action plan

National action plan is to be proposed by our Ministry and adopted by the Government

Both our guidelines paper and strategy paper are for the territory of central and northern Serbia due to inability to have accurate information from constituent Serbian part- Kosovo and Metohija and we are ready to be liable for natural gas supply of this part of Serbia as well

Thank you Branka Tubin

Ministry of Mining and Energybranka.tubin@mem.sr.gov.yu

www.mem.sr.gov.yu