- 1 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Supply of LNG on the European Market Modeling Analyses and Related Research

Franziska Holz (DIW Berlin)Joint work with Ruud Egging and Steve Gabriel (University of Maryland)

and Christian von Hirschhausen, Anne Neumann, Sophia Rüster (TU Dresden, EE²)

Jacobs University Conference“Energy in Changing Environments”

Bremen, December 13-15, 2007

- 2 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Agenda

1. LNG to Europe

2. Model Results: LNG in an Oligopolistic Market Today and in 2011

3. Global Company Strategies

4. Conclusions

Sources: www.dnv.comwww.naturalgas.org

- 3 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

LNG to Europe – Theses

LNG is and will be an important part of the diversification and supply security efforts for European natural gas imports

LNG is a driving force of the “globalization” of natural gas markets

LNG will not be the dominant form of supply in Europe

LNG is contributing to the “flexibilization” of international natural gas markets

- 4 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Background Information: The LNG Value Chain

production

liquefaction

transportation

regasification

distribution

- 5 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

European LNG Regasification Capacities (2005 vs. 2010)

Sines

Huelva Cartagena

Barcelona

RovigoPanigaglia

Brindisi

Zeebrugge

Milford Haven

El Ferrol Bilbao

Isle of Grain

Fos sur MerFos Cavaou

Montoir

Revithoussa

Marmara

bcm/a in 2005bcm/a in 2010

Sagunto

WilhelmshavenRotterdam Gdansk

Krk

Tesside

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Russia36%

Norway20%

Netherlands11%

Others Pipe11%

Egypt2%

Trinidad1%

Middle East1%

Nigeria3%Lybia

0.2%Algeria

5%

Algeria8%

UK2%

Natural Gas Exports to Europe 2006

Source: BP Statistical Review 2007

2006:

Pipe: 87%

LNG: 13%

2004:

Pipe: 89%

LNG: 11%

- 7 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

EU Natural Gas Supply Costs (2005-2030)$/Mbtu (source: OME, 2001)

Source: OME, 2001 *Long-run marginal production and transport costs,excluding producer countries‘ royalties, in US-$/Mbtu

Gulf LNG

$ 2.79$ 2.30

$ 0.81

$ 3.10

$ 3.00

- 8 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Nominal Liquefaction Capacities Worldwide 2005 vs. 2010

Latin America

West Africa

North Africa

Middle East

Norway

Russia

Asia Oceania

Australiamtpa in 2005

mtpa in 2010Sources: IEA (2003), IEA (2004), Cedigaz (2004)

North America

- 9 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Agenda

1. LNG to Europe

2. Model Results: LNG in an Oligopolistic Market Today and in 2011

3. Global Company Strategies

4. Conclusions

Sources: www.dnv.comwww.naturalgas.org

- 10 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

The EGM (European Gas Model)

- Ruud Egging, Steven Gabriel, Franziska Holz, Jifang Zhuang: A Complementarity Model of the European Natural Gas Market, July 2007, Submitted to EJOR / DIW Discussion Paper # 732 / 2007

- Static complementarity model of the European natural gas (pipeline) market + global LNG trade for base year 2004

- Daily flows seasonal patterns over one year

- Detailed representation of the players in the natural gas value chain:- Producers- Transmitters oligopolistic players- Liquefiers- Regasifiers- Pipeline Operators- Storage operators- Marketers

- Equilibrium model (complementarity model), programmed in GAMS

- 11 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

EGM – Producers: Europe and Global LNG

Basic Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

NO, UK, NL, GE, IT, DK, …

NIG*

South East Asia*

Russia

T&T*

CaspianALG, EGP, LIB

ARB*

Australia*

* LNG exports ‘only’

- 12 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

EGM – Consumers: Europe and Global LNG Importers

Basic Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

EU27+NO, SWI, TRK

KOR*

CAN*

IND*

* LNG imports ‘only’

USA*

MEX*CHI*

JP*

TW*

- 13 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Different Simulation Scenarios

SBC: Strategic Base Case

Exporters (Transmitters) can exert market power

Calibration to fit 2004 data: only partial market power by major exporters

UKR: Disrupted Ukrainian Pipelines in a global context

Analyzing the “domino effect” of a regional market disruption in Eastern Europe on the European and global markets

2011: A projection five years ahead

Five years ahead

Given anticipated LNG + pipe line capacity expansions, and EC projections for demand and production

Where will bottlenecks remain and how do prices change?

- 14 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Basic Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

13.1

55.5

6.5 Japanimports:

75.1 bcm

SEA

ARB

NIG

T&T

ALG

EURUKR

RUS

JAP

AUS

KOR

USA

Atlantic Basin Pacific Basin

Strategic Base Case LNG Flows

Flows in BCM/year

ALG Pipe to EUR:95 bcm

ALG LNG to EUR:23.5 bcm

ALG LNG to USA:7.3 bcm

ARB toIND, TW, CHN,

KOR only

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Disruption of Ukrainian Pipeline: Global Effects due to LNG(“domino effect”) and improved mitigation possibilities

Underlying Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

+0.1

Changes in LNG flows (BCM/year)

Japan imports: -3.8 bcm

+4.3-4.3

+3.9

-0.9

-1.9

ALG pipes more to EUR, less LNG to USA

T&T

EUR

ALG

NIG

JAP

KOR

SEA

AUS

UKRRUS

ARB

USA

Atlantic Basin Pacific Basin

ARB is a swing supplier

between the Atlantic and the

Pacific Basin

-3.9

+0.9

- 16 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

LNG Input Data 2004 and 2011

Underlying Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

N-Afr:56 (+9)

Total liquefaction capacity in BCM/yr

(+increment)

ARB:121 (+77)

AUS:49 (+35)

W-Africa46(+32)

NO: 6 (+0)*

RUS: 13 (+6.5)

SE Asia: 90 (+13)

T&T:29 (+14)

World: 408.6(+185.2) *: already included in base run

USA: 104 (+84)

CAN: 10.2 (+0*)

Total regasificationcapacity in BCM/yr

(+increment)

World:479.1 (+226.8)

EU: 193 (+113)

IND: 6 (+3)* TW

24 (+14)

CHI: 15 (+11)*

KOR35 (+0)

JP: 90(+0)

MEX: 17.6 (+17.6)

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LNG Imports 2011Global market but with regional basins induced by transport costs

Basic Map from: www.insectzoo.msstate.edu/Curriculum/Activities/WorldMap.html

N-AMR: 136 (+105)

ASIA: 161 (+35)

EU: 91 (+54)

Flows in BCM/year

North America draws more LNG than Europe in the Atlantic competition for LNG

ARB becomes a swing supplier

- 18 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Agenda

1. LNG to Europe

2. Model Results: LNG in an Oligopolistic Market Today and in 2011

3. Global Company Strategies

4. Conclusions

Sources: www.dnv.comwww.naturalgas.org

- 19 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Global Players worldwide – Focus on the Atlantic Basin

Source map: http://www.janinelim.com/1040window/image/world.gif

BP

Shell

ExxonMobil

BG

Chevron

Sonatrach

GdF

Tractebel

Repsol/YPF

Union Fenosa

ENI

Imp.

Imp.

Exp.

Exp.

Exp.

Exp.

Exp.

Exp.

Exp. Imp.

- 20 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Company Strategies in the LNG Market - Globalization and More Flexibility

- Transaction costs (lack of liquid spot markets, high costs of asset-specificinvestment costs, etc) along the LNG value-added chain give incentives to vertically integrate (Rüster and Neumann, 2006; Nissen, 2007)

- Company-to-company relations instead of country-to-country relations, players are multinational

- Some long-term contracts today are without destination clause

Flexible destinations within the buyer‘s playing field

- Example: LTC between Trinidad and Tobago to Enagas/Repsol (Victor et al., 2006) „spot“ deliveries to Spain in cold winter 2005/2006 etc.

- 21 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Agenda

1. LNG to Europe

2. Model Results: LNG in an Oligopolistic Market Today and in 2011

3. Global Company Strategies

4. Conclusions

Sources: www.dnv.comwww.naturalgas.org

- 22 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

Conclusions

The next decades will bring an even more pronounced diversification of natural gas supplies to Europe with LNG playing an important role (> 10% of imports) and helping to ensure security of natural gas supplies.

LNG has been a significant part of the South European natural gas supply for years and is now expanding to Northern and Central Europe

Competition for LNG in the Atlantic Basin: North America may well take over part of the supplies

… and potentially lead to higher prices.

… but pipeline gas could fill the gap if LNG goes elsewhere, just as LNG can help fill the gap if pipeline supply fails.

LNG is one factor of the globalization of natural gas markets:

… global corporate strategies, with more and more flexiblecomponents.

- 23 - Jacobs University „Energy in Changing Environments“Supply of LNG on European Markets

References

Ruud Egging, Steven Gabriel, Franziska Holz, and Jifang Zhuang (2007): A Complementarity Model of the European Natural Gas Market, July 2007, DIW Discussion Paper # 732 / 2007

David Nissen (2007): The Industrial Organization of Energy Systems: A Transactional Approach. Presentation at the IAEE Europe Conference Florence.

Sophia Ruester and Anne Neumann (2006): Corporate Strategies along the LNG Value Added Chain - An Empirical Analysis of the Determinants of Vertical Integration. TU Dresden WP-GG 17.

David Victor, Mark Hayes and Amy Jaffe, ed. (2006): Geopolitics of Natural Gas: From 1970 to 2040. Cambridge University Press.

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Thank you very much for your attention!

Franziska Holz (DIW Berlin)fholz@diw.de