The Regulation of LNG Terminals in France

The Regulation of LNG Terminals in France

Summary Report by the Working Group

April 2008

S u m m a r y R e p o r t b y t h e W o r k i n g G r o u p o n t h e R e g u l a t i o n o f L N G Te r m i n a l s i n F r a n c e • A p r i l 2 0 0 8 3

CONTENTS Executive Summary ...................................................................................................................................................................................................................................................5

I. Introduction ..............................................................................................................................................................................................................................................................................8

II. Working Group members..............................................................................................................................................................................................................................10

III. Method .........................................................................................................................................................................................................................................................................................11

IV. Objectives ...............................................................................................................................................................................................................................................................................12

1. Context ....................................................................................................................................................................................................................................................................................12

2. The aims of regulation ........................................................................................................................................................................................................................................14

3. Issues .........................................................................................................................................................................................................................................................................................14

V. The world LNG market ......................................................................................................................................................................................................................................16

1. Reserves and trends in gas production .....................................................................................................................................................................................16

2. Trends in gas demand ........................................................................................................................................................................................................................................17

3. The LNG market .........................................................................................................................................................................................................................................................17

4. Conclusions ......................................................................................................................................................................................................................................................................20

VI. The Regulation of LNG Terminals in Europe and in France ...............................................................................................................21

1. The Players ........................................................................................................................................................................................................................................................................21

2. The American Approach .................................................................................................................................................................................................................................21

3. The European Approach .................................................................................................................................................................................................................................22

4. The French Approach .........................................................................................................................................................................................................................................23

5. LNG Terminal Operating Constraints .............................................................................................................................................................................................26

VII. Evolutions in the Regulation of Existing Terminals in France .........................................................................................................28

1. Key Challenge: Security of Supply ....................................................................................................................................................................................................28

2. Group Recommendations on Regulation Evolutions ..............................................................................................................................................28

a. Pricing Visibility ....................................................................................................................................................................................................................................................28

b. Sharing Risks between Investors and Subscribers..........................................................................................................................................29

c. Access to Short-Term Capacities .............................................................................................................................................................................................29

d. The Capacity Allocation Mechanism ....................................................................................................................................................................................30

VIII. Regulation of New LNG Terminals in France ..............................................................................................................................................................31

1. Plans for New LNG Terminals in France ...................................................................................................................................................................................31

2. Public Debate .................................................................................................................................................................................................................................................................33

3. Parameters to be considered regarding Exemption ................................................................................................................................................33

IX. Co-existence of Regulated and Exempted Terminals ..................................................................................................................................36

1. The “Use It Or Lose It” (UIOLI) Mechanism ...........................................................................................................................................................................36

2. Transparency ...................................................................................................................................................................................................................................................................36

X. Conclusions .........................................................................................................................................................................................................................................................................37

1. The attractiveness of the French market ..................................................................................................................................................................................37

2. Regulated LNG terminals ...............................................................................................................................................................................................................................37

3. Exempted LNG terminals...............................................................................................................................................................................................................................38

4. Interaction between regulated and exempted LNG terminals....................................................................................................................38


Executive Summary

1. Context The European Union is facing:• growing demand for gas mainly driven by the

construction of new gas-fired power plants (consumption increase of 2 to 2.5% per year by 2015);

• falling domestic production and dwindling gas reserves, leading to a greater dependence on imports (about 50% in 2007 increasing to about 80% in 2030);

• strong dependency on gas imports from Rus-sia (in 2030, Russia will supply about 50% of European gas demand).

To deal with this situation, Europe should take the following measures to improve its security of supply: • increase gas storage capacities;• diversify routes for gas imports in general and

especially routes from former Soviet Union states (pipelines);

• develop greater liquidity within the European domestic market, with a view to enabling more efficient pooling of resources between the dif-ferent countries in the event of a supply crisis;

• and diversify supply sources, importing great-er quantities of LNG (Liquefied Natural Gas), which currently accounts for only 7% of gas consumption.

These observations are also valid for the United-States and Asia, with a growing LNG demand to compensate for the gap between the demand and the supply. This trend will lead to a tight LNG market in the 2015 (1) timeframe.The LNG market is more and more dominated by the LNG producers and is characterised by less technical or contractual obstacles to LNG cargo arbitrage between destinations.The major issue is how to attract gas into LNG terminals located in Europe rather than to those in United States or Asia.In France, LNG, which currently accounts for around 30% of gas consumption, is a key factor

of the security of supply in opening up access to the world’s gas reserves and creating additional entry points on the territory. Its share is likely to increase in the future.

The new French LNG re-gasification terminal projects have to be examined carefully, with the aim of guaranteeing French and European secu-rity of supply and taking into account the growing liquidity of the European market, leading to com-petition between the different European terminals.

2. Issues

LNG terminals are specific infrastructures whose positioning in the gas production chain may vary from one country to another. Formerly, they were considered to be essential infrastructures as part of the downstream gas infrastructures (like trans-mission gas pipelines) and are thus subject to regulated Third Party Access (rTPA). This is the case in France at present.

In 2002, the United States decided to include LNG terminals in upstream gas production (like gas fields) and to exempt them from regulated Third Party Access.In 2004, Great Britain granted exemptions, on a case by case basis, to all new terminals within the framework of the EU directive.

The Working Group examined current regulation frameworks in Europe, the potential extent of exemption from regulated third party access al-lowed by the European Directive, and how regu-lated and exempted terminals might co-exist.In the case of regulated third party access, the Group drafted a response to the need for long-term pricing visibility expressed by investors and terminal operators and by users/shippers. It also examined the rules regarding the use of termi-nals with a view to providing steady revenue for the operator, access for smaller shippers and

(1) The Group has chosen the Year 2015 as the reference of the study, corresponding to the commissioning of the planned LNG re-gasification infrastructures.

S u m m a r y R e p o r t b y t h e W o r k i n g G r o u p o n t h e R e g u l a t i o n o f L N G Te r m i n a l s i n F r a n c e • A p r i l 2 0 0 86

Synthèse

ensuring the emergence of a secondary market of capacity, thus improving market fluidity and responsiveness.

Regarding exemption to the regulated third party access, the reasons behind granting this exemption, its scope and good implementation practice were specified.

3. Recommendations

The main recommendations made by the Work-ing Group can be gathered into four objectives:• making the French market more attractive;• encouraging the extension of regulated termi-

nals by improving the stability and visibility of the regulation framework;

• creating a climate conducive to the develop-ment of new LNG terminals, via possible ex-emption from regulated third-party access;

• ensuring the consistency of the rules applica-ble to regulated terminals and exempted ter-minals.

a. Making the French market more attractive

The Group recommends:• promoting the development of liquidity on the

French wholesale markets (mainly by reducing the number of balancing zones) and consoli-dating the integration of this market into the European market;

• encouraging the emergence of a European price index, or, at least, regional prices indexes;

• encouraging the build up of surplus re-gasifi-cation capacity by 2015;

• fostering an optimum investment level without a centralised planning.

b. Regulated terminals

The majority of the Group recommends:• establishing a long-term view of the tariff, for

a period of between 15 and 20 years similar to the one on which subscribers can commit themselves, and to the duration of the LNG contracts made with producers;

• establishing the tariff calculation method for the long term. This method will define risk shar-ing between the operator and subscribers;

• defining a tariff review clause every 4 to 5 years with a precise definition of the points consid-ered to adjust the tariff, taking into account economic changes or elements known after the event (such as the final level of subscrip-tion);

• setting the interest rate for the period in ques-tion, with the operator taking on the risk of interest rate changes and taking out financial hedge. Nonetheless, this rate may be revised at the meetings periods to take account of any major economic changes;

• taking account of the levels of subscription observed in the markets when calculating the tariff, implementing a system for sharing the additional income generated. This income would be shared between the customer com-munity and the operator, but would mainly be of benefit to the customer;

• taking account of the costs incurred in the reg-ulated assets base, excepting costs due to a poor management on the part of the operator;

• setting a depreciation period that will serve as an incentive to investors, but will not push up the tariff too much, somewhere between the length of the term for paying back the debt and the economic lifetime of the infrastruc-tures in question;

• encouraging productivity by means of the pro-cedure for controlling operating costs.


(2) UIOLI: an anti-hoarding mechanism whereby the operator of the infrastructure can sell unused capacity held by a “primary” operator on the secondary market, for the benefit of third parties.

c. Exempted terminals

In the case of new LNG terminals, the Group be-lieves that the principle of exemption from third party access is particularly conducive to encour-aging investment, given the high financial risks.

Most of the Group recommends conducting a case-by-case analysis of the scope of exemption (capacity and tariffs). This analysis should study the worthwhile nature of limiting this scope for the market (available capacity in the short term) with respect to the technical difficulty of adding a new shipper to the terminal, and to potentially increasing the cost of the investment.

Subject to this analysis, the Group recom-mends:• not making it a systematic obligation to reserve

capacities dedicated to short term contracts;• not restricting the scope of exemption (tariff

and capacity);• publishing the tariffs of exempted LNG termi-

nals;• not allowing a supplier (including related com-

panies) to hold for a long period more than 2/3 of the capacity of a new LNG terminal in France;

• monitoring market evolutions and reviewing the conditions regarding exemption during the life of the infrastructure;

Exemption in the case of extension of an exist-ing terminal is possible, this grant must be sub-ject to certain governance rules including no cross subsidies, and provisional upon an assur-ance that it will reduce the incumbent operator’s market share by opening up this infrastructure to third parties.

d. Cohabit of regulated and exempted terminals

Regulation must not benefit one regulation sys-tem to the detriment of the other. On the con-trary, it should encourage investment in both instances.

In the near future, regulated and exempted terminals will both exist. Once competition be-tween those two types of infrastructures will be effective, the outcome will be a choice of dif-ferentiated services, one of the key elements of which will be the price.The Group has proposed rules to carry out the “Use it or lose it” (2) mechanisms, compelling the primary shippers to return the non used capaci-ties. The procedure used should give shippers an incentive to be virtuous, without actually making the terminal less attractive, particularly in view of the arbitrage of gas destination.This mechanism, as well as the rules of trans-parency for publications, apply in the same way to exempted terminals as to regulated terminals, with the possibility of ex post monitoring by the regulator to verify the effectiveness of the mech-anisms implemented.

The security of supply and the fluidity of the market will be improved by this transparency of publications.


Estimations by the IEA (International Energy Agency – Natural Gas Review 2006) show that the liquefied natural gas (LNG) sector should grow significantly over the next few years, with its share in world gas supplies doubling between 2005 and 2010, rising from 192 to 350 bcm/y.

Thus resorting to LNG is one way of meeting gas demand forecast by this time.Indeed, the IEA’s forecasts regarding the per-centages of the different energy sources as a share of global energy consumption indicate growth in the share of natural gas use. Given that global energy consumption will grow, the volume of gas consumed will rise in proportion.

I. Introduction

Graph 1: Shares of different energy sources in global energy consumption (Source: IEA, Key statistics 2007)

Oil46.2%

NaturalGas

16.0% NaturalGas

20.7%

Nuclear6.3%

Nuclear0.9%

Nuclear5.0%

Hydro2.4% Hydro

2.7%

Hydro2.2%

Hydro1.8%

Other11.4%

Other0.5%

Other0.1%

Renewables& Waste

10.0%

Renewables& Waste

10.6%Other

13.5%

Nuclear6.9%

NaturalGas

22.6%Natural

Gas21.9%

Oil35.0%

Oil32.6%

Oil32.2%

Coal22.8%

Coal26.0%

Coal25.3%

Coal24.4%

1973

6,128 Mtoe

Oil46.2%

NaturalGas

16.0% NaturalGas

20.7%

Nuclear6.3%

Nuclear0.9%

Nuclear5.0%

Hydro2.4% Hydro

2.7%

Hydro2.2%

Hydro1.8%

Other11.4%

Other0.5%

Other0.1%

Renewables& Waste

10.0%

Renewables& Waste

10.6%Other

13.5%

Nuclear6.9%

NaturalGas

22.6%Natural

Gas21.9%

Oil35.0%

Oil32.6%

Oil32.2%

Coal22.8%

Coal26.0%

Coal25.3%

Coal24.4%

2005

11,435 Mtoe

Oil46.2%

NaturalGas

16.0% NaturalGas

20.7%

Nuclear6.3%

Nuclear0.9%

Nuclear5.0%

Hydro2.4% Hydro

2.7%

Hydro2.2%

Hydro1.8%

Other11.4%

Other0.5%

Other0.1%

Renewables& Waste

10.0%

Renewables& Waste

10.6%Other

13.5%

Nuclear6.9%

NaturalGas

22.6%Natural

Gas21.9%

Oil35.0%

Oil32.6%

Oil32.2%

Coal22.8%

Coal26.0%

Coal25.3%

Coal24.4%

RS 2030

17,100 Mtoe

Oil46.2%

NaturalGas

16.0% NaturalGas

20.7%

Nuclear6.3%

Nuclear0.9%

Nuclear5.0%

Hydro2.4% Hydro

2.7%

Hydro2.2%

Hydro1.8%

Other11.4%

Other0.5%

Other0.1%

Renewables& Waste

10.0%

Renewables& Waste

10.6%Other

13.5%

Nuclear6.9%

NaturalGas

22.6%Natural

Gas21.9%

Oil35.0%

Oil32.6%

Oil32.2%

Coal22.8%

Coal26.0%

Coal25.3%

Coal24.4%

APS 2030

15,400 Mtoe

RS: reference scenario, based on existing environment policies - APS: alternative policy scenario based on environmental policies currently being examined.

Mtoe: Million tons of Oil equivalent


It is also a means of reinforcing security of sup-ply by diversifying gas supply sources. Con-sequently, investment in re-gasification infra-structures is planned in a number of countries, particularly in Europe.European buyers are faced with an increasingly oligopolistic world LNG market. Regarding pro-ducer countries, key projects for liquefaction plants have recently been abandoned or post-poned, notably due to the significant rise in en-gineering costs. The export of gas in LNG form has to compete with local consumption needs to a much greater extent. Finally, the LNG mar-ket is becoming a global market with producers seeking to take advantage of arbitrage potential between the main markets, Europe, the USA and Asia.

Considering this backdrop, France, with its ex-tensive coastline, offers a host of options for the installation of new LNG terminals. There are currently two working LNG terminals in France: Montoir and Fos Tonkin. These terminals are managed by Direction des Grandes Infrastruc-tures de Gaz de France (Gaz de France DGI). A third terminal, managed by Société du Terminal Méthanier de Fos Cavaou (STMFC), is currently being built at Fos Cavaou.

There are currently four development projects for LNG terminals underway in France. These termi-nals are scheduled to be commissioned between 2012 and 2015. The public debate procedures have been initiated for three of these projects. The summary reports by the special public de-bate commissions (CPDP – Commissions par-ticulières du débat public) were submitted on 14 February 2008. The National public debate commission’s assessment (CNPD – Commis-sion nationale du débat public) is currently being drafted.

Alongside these projects, in 2007, Gaz de France Direction des Grandes Infrastructures organised an open season to extend the Montoir terminal as of 2011.

According to the French Act of 3 January 2003, LNG terminals are infrastructures subject to reg-ulated third party access. Accordingly, the tariffs for using these terminals are set by the Ministries of the Economy and for Energy based on CRE proposals. Pursuant to Article 22 of European Directive 2003/55/EC, this Act also provides for allowing new large-scale gas infrastructures (intercon-nections between Member States, LNG or stor-age facilities) to obtain exemption from regulat-ed third party access according to pre-defined conditions. By virtue of these legal provisions, the owners of new LNG terminal projects can request exemption from regulated third party ac-cess for their infrastructures.

CRE therefore considered it worthwhile to hold a general debate on the importance of LNG termi-nals in gas infrastructures in France and on how to regulate them. With this in mind, it has formed a Working Group with nine experts specialising in the liquefied natural gas (LNG) market, from universities, European energy regulators, LNG sector companies and the authorities, to study these questions.

Chaired by Colette Lewiner, Vice-President of CAPGEMINI, this Working Group met on five occasions between December 2007 and March 2008. The following report is a summary of the Working Group’s assignments.


Chairperson

Colette LewinerSenior Vice-President CAPGEMINI

Members

Philippe BoisseauDirector of the Gas and New Energies Division, Total

Deputised by:François DumasGas Infrastructures, Technical, Research and Development Director, Total

Walter BoltzChairman of the ERGEG (European regulators’group for electricity and gas) Gas Working Group

Laurent ChabannesChairman of Uniden (Energy-using industries union)

Pierre-Marie AbadieDirector of Dideme (Demand and Energy Markets directorate)

Jean-François CoralloDirector of Société du Terminal Méthanier de Fos Cavaou (STMFC) and Deputy Managing Director of Gaz de France Direction des Grandes Infrastructures

François LévêqueEconomics Professor at the Ecole des Mines Engineering School

François MorinProfessor Emeritus in Economics at Toulouse 1 University

Luc PoyerChairman of Gaz de Normandie

II. Working Group members


Although this Working Group was formed on CRE’s initiative, it will carry out its assignment in-dependently. The final report will comprise con-tributions from its members as well as outside contributions. The Chairperson took particular care to inform all the participants of the impor-tance of pooling their knowledge and expertise by actively taking part in discussions, without defending their own affiliations.

Non-members were able to contribute via the dedicated website (http://gttm.cre.fr/index.html), on which the agenda and minutes for each meeting were published. A list of the contribu-tions received by the Group is included in the Appendix.

The Group sought to achieve agreement on the different topics to be covered. For specific points on which consensus could not be reached, the different points of view are given, supported by detailed arguments.

III. Method


IV. Objectives

1. Context

Europe is facing:• growing demand for gas mainly driven by the

construction of gas-fired power stations (in-crease of 2 to 2.5% per year by 2015);

• falling domestic production and dwindling gas reserves, leading to a greater dependence on imports (50% in 2007 and 80% in 2030);

• major reliance on gas imports from Russia (in 2030, Russia will supply about 50% of Euro-pean gas demand).

Graph 2: Russian exports in 2020 (Source: Global Business Insight, 2006)

Dublin

LondonZeebrugge

Montoir Paris

Lyon

Fos-sur-MerBilbao

Ferrol

Lisbon

Sines

Huelva Cordoba

Cartagena

Valencia

Madrid BarcelonaRome

La Spezia

Rovigo Liubljana

Belgrade

Brindisi

Athens Izmir

Ereglisi

Marmara

Bucharest

Bratislava

Budapest

Vienna

Prague

Warsow

Minsk

Essen

Copenhagen

Brussels

Berlin

Tyra

Krk

Statfjord

Frigg

Heimdal

Sleipner

Gullfaks

KollsnesOseberg

Kårsto

Stavanger

Oslo

Stockholm

3

79 49

11

26 25

27

220

Existing

Under construction and planned

Speculative

Britpipe

GALSI

Green Stream

Baltic Pipe

Country

Data in bcm/y (2020)

Russia 600 220

Export potential (bcm/y)

Exports to Europe (bcm/y)


To deal with this situation, a number of meas-ures need to be implemented to improve secu-rity of supply: • increase in gas storage capacities in Europe;• diversify routes for gas imports in general and

especially routes from former Soviet Union states (pipelines);

• develop greater liquidity within the European domestic market, with a view to enabling more efficient pooling of resources between the dif-ferent countries in the event of a supply crisis;

• and diversify supply sources, importing greater quantities of LNG, which currently accounts for only 7% of gas consumption.

Similarly, in a growing global gas market, the share of LNG in world supply should increase. As well as being a necessary complement to world gas supply, this will also help to diversify supply sources thus bolstering security of en-ergy supplies in consumer countries, especially in the event of a crisis.

The major issue is how to attract gas into LNG terminals located in Europe rather than to the ones in United States or Asia.

Given the growing demand for LNG and cur-rent (and forecast) delays in the development of gas fields and in the construction of liquefaction plants in producer countries, the aim is to de-velop an LNG market by 2015 (1). The market will be dominated by LNG producers. In France and Europe, it will therefore be necessary to create attractive conditions for these suppliers, notably thanks to the available regasification capacities and attractive commercial conditions offered by LNG terminals. It would therefore be recommended to develop surplus regasification capacity by then. Indeed, the financial risk involved in a surplus capacity scenario is relatively low as investment in regasi-fication terminals only represents about 2% of the price of gas paid by the end users.

Graph 3: Breakdown of the price of gas for a private customer for heating in France, Paris, in 2007 (Source CRE)

On the other hand, a shortfall of capacity could threat the security of supply and result in con-siderable price rises for French and European customers.

Gas market laws have changed substantially since 2000 under the European Union impulse: the market is now more competitive, thanks to the end of monopolies and the emergence of smaller players (3).The development of LNG terminals in Europe to complement and compete with the develop-ment of conventional gas transmission networks (mainly with the gas pipeline projects from Rus-sia and the CIS) will also boost competition be-tween players upstream and downstream in the gas production chain.

The European Union’s goal is to create a fluid and competitive European gas market.Unfortunately, this is not the case at present.

To a certain extent, Northern Europe is a liquid market in which the French LNG terminals in the North zone (Montoir and the future termi-nals in Dunkirk and Le Havre) will be competing

(3) These newcomers are generally new businesses or foreign subsidiaries set up by existing utilities.

100%

80%

60%

40%

20%

0%

± 55%

± 31%

± 7%± 5%

± 2%

± 45%

Molecule Distribution Transmission Storage Terminal


with other European terminals (particularly Zee-brugge). This zone has the potential, in the near future, to become a liquid zone. However, in 2008, France is still divided into five balancing zones. This should fall to three by 1 January 2009 and then, gradually, to two, in the medium term. Reducing the number of balanc-ing zones comes up against a number of ob-stacles: the fact that there are several different TSOs and the need for substantial investment.The Working Group wants CRE to initiate a study on the investment required for a north/south interconnection to achieve a single bal-ancing zone in France.This study should take into account:• the needs of the market;• the flows needed for a fluid operation of the

market;• the benefits expected from a single gas zone.

However, the Group did accept that investment in gas pipelines and agreements on gas qual-ity to be concluded between now and 2015 will make it possible to achieve a fluid European regional market by then, benefiting from real cross-border competition. The Group thus examined the issue of French gas terminal regulation in a European context. While only the northern France terminals are currently competitive at European level (with Zeebrugge), by 2015, the French LNG termi-nals should be competing within three Europe-an zones: North-west, South and the Atlantic. The European terminals will also be competing against terminals in Asia and America.

The development of French LNG terminals would then help to improve security of French and European supply, as well as being a com-mercial springboard for France, whith an exten-sive coastline and substantial experience in LNG (since 1964) and an industry that is widely rec-ognised in the LNG market.

It should be noted that the plans to build LNG terminals in France meet with varying degrees of acceptability by the local population and some-times come up against strong opposition by the local community. Public debate and steps to take account of the concerns expressed have the effect of increasing costs and extending de-velopment schedules, and, therefore, increasing the risks involved for the investors.

2. The aims of regulation

The regulation of gas terminals in France must meet three objectives:• improve security of supply in France and in Eu-

rope by diversifying supply sources;• increase competition upstream (supply) and

downstream (marketing) in the gas production chain;

• allow France and Europe to make use of their geographical and historical assets to play a key role in future supply and increase their share in the global LNG market by encourag-ing investment.

3. Issues

LNG terminals are specific infrastructures whose positioning in the gas production chain may vary from one country to another.Formerly, LNG terminals were considered to be essential infrastructures forming part of the downstream gas infrastructures (like transit and transmission gas pipelines) and, as such, were subject to regulated Third Party Access (rTPA). This is the case in France at present.

In 2002, the United States, which, formerly, have been gas self-sufficient, wishing to develop LNG imports and their related structures, decided (FERC (4): Hackberry decision (5)) to include LNG

IV. Objectives

(4) FERC: US Federal Energy Regulatory Commission.

(5) Hackberry Decision: In 2002, the FERC decided to promote the construction of new onshore LNG terminals by no longer subjecting these infrastructures to regulation, http://elibrary.ferc.gov/idmws/common/opennat.asp?fileID=9608751


terminals in upstream gas production (like gas fields) and to exempt them from regulated Third Party Access.In 2004, for similar reason, Great Britain granted exemptions, on a case by case basis, to all new terminals within the framework of the EU direc-tive (6).

This difference in approach affects the status and regulation of LNG terminals, considered ei-ther as essential infrastructures or competitive facilities.

The EU directive takes these different approach-es into account. Indeed, while it considers that LNG terminals are subject to regulated Third Party Access, the directive includes an exemp-tion clause based on certain conditions, in appli-cation of Article 22 in the directive, as described in section VIII-3 below.

The Working Group examined current regulation procedures applied in Europe, the potential ex-tent of exemption from regulated third party ac-cess allowed by the EU Directive, and how regu-lated and exempted terminals might co-exist.

In the case of regulated third party access, the Group drafted a response to the need for long-term pricing visibility expressed by investors and terminal operators and by users/shippers: the majority of the Group recommends establish-ing a long-term view of the tariff, for a period of between 15 and 20 years. It also examined the rules regarding the use of terminals with a view to providing steady revenue for the opera-tor, market access for smaller shippers and en-suring the emergence of a secondary market of capacity, thus improving market liquidity and re-sponsiveness. The Group observed that inves-tors needed some form of guarantee regarding their financial commitment from the shippers, such as the “ship or pay” clause.

The Group issued recommendations regarding the primary shipper’s obligation not to keep un-used capacity with a view to blocking the com-petition (“Use It Or Lose It” (2)).

Regarding exemption to the rule of regulated third party access, the reasons behind granting this exemption, its scope and good implementa-tion practice were specified.

The Group also examined the conditions gov-erning the co-existence of regulated and ex-empted terminals in France.

In both cases (TPA and exemption), security of supply and market fluidity will be bolstered by greater information transparency, particularly in terms of information relating to terminals. The Group examined other countries’ policies on this issue and issued a recommendation.

Finally, the majority of the Group considered that developing a European gas price index, which is one of the consequences of a liquid market, representative of a balance between supply and demand for natural gas (similar to the US index) would improve visibility for producers and pro-mote arbitrage in favour of “Europe” destination for LNG cargoes. The actual development of such an index, is, obviously, related to the emer-gence of a real European gas market (cf. Ap-pendix 13).

(6) Directive 2003/55/EC of 26 June 2003.


V. The world LNG market

1. Reserves and trends in gas production

At the end of 2006, there were 183,000 bcm of proven gas reserves in the world, corresponding to 63 years of operation given the current level of

consumption, (Source: Cedigaz). Forty percent of these reserves are located in the Middle East, 31% in Russia and the Central Asia Republics, 9% in Asia and Oceania, 8% in Africa, 4% in North America, 4% in South America and 4% in Europe.

Graph 4: World gas reserves (Source: Cedigaz)1 - Terminaux Méthaniers France, CRE, le 14 décembre 2007

Gaz : 63 ans de réserves prouvées

North America (8.0)

F.S.U. (57.2)

Asia - Oceania (16.2)

Middle East (73.9)

Africa (14.5)

Latin America (6.9)

Europe (6.3)4%26% 27%

9% 13% 14%

31%28% 23%

40%

11% 10%

8% 6% 3%

4% 11% 19%

4% 4%5%

source : CEDIGAZ

Reserves end 2006 = 183 Tm3 Consumption in 2006 = 2.9 Tm3

ReservesProduction

Consumption

4

However, these reserves will be increasingly dif-ficult to recover for a number of reasons:• exploration and production costs are rising sharp-

ly, due to higher prices for raw materials and en-gineering services;

• over 40% of reserves (73,000 bcm) are acidic and will cost three times more to produce than the generally accepted cost of developing a con-ventional field;

• a complex geopolitical situation which will affect supply programmes.

At the same time, local production will stagnate, or even decrease, in North America, Europe and Asia.


2. Trends in gas demand

Forecasts suggest that demand for gas will increase substantially on all continents.

718 753 742 768

56 126 124

18

736809

868 892

0

300

600

900

2005 2010 e 2015 e 2020 e

Growth in gas import requirements within the three zones: Asia, Europe & North America

269344 365 372

66124

163

223

265

20

702608

507

394

0

300

600

900

2005 2010 e 2015 e 2020 e

307 312 270 225

209259

286300

48

80 155 220564

651711 744

0

300

600

900

2005 2010 e 2015 e 2020 e

+2.9%

+1.8%+0.9%

+1.9%+1.4% +0.5%

+5.2%

+3.7%

+2.9%

North America

USA-Canada-Mexico

Europe

EU35

Annualgrowth (%)

Asia*

* India- Pakistan- Bengladesh, Vietnam- Myanmar- Indonesia- Malaysia- Brunei, Philippines- China- Corea- Taiwan- Singapore, Australia- New Zealand –Japan.

~500 Gm3

to import

Regional production

Pipe importations

LNG demand

Graph 5: Growth in gas import requirements (Source: Total)

In importing regions (North America, Europe and Asia), demand for gas will continue to rise, mainly due to its increasing use as a substitute for coal and fuel oil.

The large exporting areas (Africa and the Middle East) will also see an increase in local consump-tion of gas (domestic and industrial consumers, use of gas in oil reservoirs to extend production cycles in existing oil fields, etc.). This will accen-tuate pressure on the balance between supply and demand. For example, domestic gas consumption in Nigeria is set to rise from 12 bcm/y in 2007 to 64 bcm/y in 2013 and, in Qatar, from 15 bcm/y in 2007 to 54 bcm/y in 2013.

3. The LNG market

By 2015, simultaneous growth of gas import requirements in the three geographic regions (North America, Europe and Asia) will put pres-sure on the market, generating a rise in LNG imports.Forecasts show that world demand for LNG will increase by over 8% every year for the period 2005-2020 (+10% for the period 2005-2015), despite a slowdown in completion of lique-faction projects currently under way. The last 18 months have already seen delays of up to a year on launch dates for these projects. The “engineering and construction” sector is currently saturated.


Today, it would seem that LNG supply can-not meet current forecasts for demand. This is borne out by a world summary (cf. Appendix 1)

of progress on liquefaction plant projects which reveals strong pressure on future LNG supply as of 2012.


191

303

516

620

0

15

21

61

0

100

200

300

400

500

600

700

800

2005 2010 2015 2020

Gm

3 /

year

0

100

200

300

400

500

600

700

800

Notional

Potential

Planned

Decided

Existing

Demand (supp)

Demand (base)

The LNG market could be tense as of 2012

+23 Gm3/year +31 Gm3/year

These forecasts (cf. Appendix 1) are based on technical criteria, but they also factor in envi-ronmental data that is now available: energy management policy, substitution of oil and coal, increasing percentage of gas in the electricity production mix. They assume that any geopo-litical restrictions that may exist at the moment (Iran, etc.) will be lifted in the future.On the other hand, these forecasts do not take into account the possibility of a major worldwide recessionary period, which would reduce de-mand for gas.

LNG will play an increasing role in gas supply by 2015. The market will be led by producer coun-tries, mainly Middle East countries, whose geo-graphic location facilitates arbitrage between the “Atlantic” and Asian markets, which were previously segmented.

These arbitrage opportunities will be facilitated by a strong rise in the number of vessels, gen-erating competitive freight costs. Arbitrage will be easier, including on long-distance. There are currently 250 LNG carriers, 4 of which have ca-pacity of over 200,000 m3. One hundred and thirty new LNG carriers have been ordered, around fifty of which will have capacity greater than 200,000 m3 (Source: Andy Flower – 2007).

These arbitrage opportunities will generate price interdependence in the three geographic regions concerned, which should lead to the emergence of a world market for LNG.

To take full advantage of these arbitrage op-portunities, gas producers will probably opt for mixed contracts, combining short-term and long-term contracts and involving shorter overall

Graph 6: LNG market trends (Source: Total)


contract periods (e.g. the last contract signed in December 2007 between Gaz de France and Sonatrach was only for 5 years).

The changes discussed above will lead to al-ternating periods of greater or lesser pressure on gas supply and demand and therefore to in-creased volatility in prices from one year to the next, or even on a seasonal basis.Such volatility is also linked to the fact that, as gas is a substitution energy and can be substi-tuted, the market will be increasingly influenced by pressure on other forms of energy. Because growth in demand for gas is mainly driven by the number of gas-fired power stations that will be built in Europe, there will be a correlation be-tween gas prices, coal prices and CO2 emission certificates (7), resulting from the application of quotas. Other external factors, such as natural disasters, environmental policy or technological innovation, will also take effect on the market.

Such volatility will result in greater fluctuation in the use of LNG terminals: e.g. temporary un-used capacities in a given region if LNG prices are pushed up by the situation in another area.

Thus, to allow buyer countries to take full ad-vantage of the new opportunities for arbitrage, they must dispose of surplus access capacity into gas infrastructures, such as LNG terminals. This increased flexibility in taking delivery of and storing LNG could be used to take advantage of periods when the price of LNG is low or to deal with potential supply crises.

With in background this surplus regasification capacity, investment in infrastructures will repre-sent a growing risk for investors. To encourage them to take the risks necessary to complete their projects, it is required to create a steady regulation environment in the long-term and to leave the market free to adapt itself to situations in the short-term.

Graph 7: European infrastructure requirements (Source: Total)

European infrastructures (LNG & pipes) requirements (Russia, North Africa, Caspian)

Europe ressources

0

100

200

300

400

500

600

700

800

2005

2007

2009

2011

2013

2015

2017

2019

2021

2023

2025

Bcm

LNG

Me-Caspian

Africa

Russia

Production

48143 207

75

200

2264

60

40

200

(7) It is forecast that electricity production will contribute for 80% to the growth in gas demand in Europe.



4. Conclusions

It seems undeniable that the LNG market will play an increasing role in world gas supply and demand, and that it will dominated by produc-ers’ and sellers’ by 2015.

This world LNG market is therefore moving to-ward the strong development of arbitrage be-tween destinations and the disappearance of current geographic segmentation. Competition between LNG terminals, European in particular, will escalate, in parallel with the development of a fluid domestic market for gas transmission in Europe.

The changes noted in the gas and LNG indus-try will lead to alternating periods of “long” to “short” on supply, resulting in greater price vola-tility from one year to the next, or from one sea-son to another. These different analyses indicate that the rate of use of terminals worldwide will fall on average and become more random (8).

The Group concluded that it would be worth-while for importing countries to develop a cer-tain level of surplus regasification capacity, to diversify their supply sources and thus improve security of supply. This surplus regasification ca-pacity will then allow the end consumers to ben-

efit from favourable arbitrage opportunities and from lower prices during certain periods.

In this context, a suitably-adapted regulatory approach should encourage investors in LNG terminals to take the necessary risks related to their projects.

It should be noted that regulation procedures for LNG terminals and the prices of the resulting services are attractiveness criteria taken into ac-count when concluding contract with producing countries.

To make the European market more attractive to the producer countries in comparison with the Asian and American ones, the majority of the Group would like to see greater fluidity between the gas markets, leading to the development of a European price index (cf. Appendix 13).The conditions required for the highest level of market liquidity are:• a reduced number of balancing zones result-

ing in greater interconnectivity between differ-ent zones and, consequently, the emergence of market prices;

• players big enough to play the role of “market maker”;

• trading platform (gas exchanges);• consistency between gas quality, nomination

and balancing rules between countries; etc.

(8) If all the LNG terminals currently planned across Europe are built, the average use of these infrastructures could drop from approximately 50% to around 35-40%. In France, average rates of use are currently higher than the European one.


VI. The regulation of LNG terminals in Europe and in France

1. The Players

Several roles are involved in building and operat-ing a terminal:• the investor;• the operator;• and the users or shippers.

In the current market, two or three of these roles are held within the same group.These roles will probably become more clearly defined as time goes by.In the case of an exempted terminal, the in-vestor concludes the contract directly with the shippers. The regulator has to examine the ex-emption and ensure that the terminal’s use con-ditions are sufficiently transparent and do not distort competition.In the case of a regulated terminal, the regulator is involved in establishing terminal use condi-tions and setting the tariff.

Different countries have adopted different ap-proaches to regulation.

2. The American approach

Existing terminals were built between 1971 and 1981 to deal with the oil crises of the 70s and to receive LNG from Algeria.

From 1980 onwards, the usage levels of the ter-minals dropped significantly. This was due to a rise in LNG prices combined with a reduction in the selling price of gas in the United States. The reduction in the selling price stemmed from the partial deregulation of gas prices (9), which had the following effect: • an increase in gas supply: attracted by prices

which were initially higher, producers invested in exploration and created additional produc-tion capacity;

• a fall in the demand for gas: the initial rise in prices caused end consumers to reduce their consumption.

Some terminals had to stop imports.

From 1999 onwards, LNG took the stage again due to a high demand for gas, falling domestic production and the opening of a new liquefaction plant in Trinidad, offering a source of production close to the United States. Several extension applications were then filed with the FERC (4).

To date, the five terminals in service are regu-lated. They are open to third party access and the applicable service conditions, including tar-iffs, have been approved by the FERC (4). There is a tariff per terminal. A reminder that there is a liquefaction terminal in the United States which exports to Japan (Kenai terminal).

(9) The partial deregulation of gas prices followed enforcement of the Natural Gas Policy Act of 1978.

Graph 8: Map of onshore LNG terminals in service in the United States (Source: www.ferc.gov)

Kenai, AK

Lake Charles, LA

Elba Island, GA

Cove Point, MD

Everett, MA

Peñuelas, PR



In 2002, the FERC (4) decided to promote the construction of new onshore LNG terminals by no longer subjecting these infrastructures to regulation (5). Following this decision, about forty companies filed applications with the federal regulator for building new LNG terminals.Several terminals are under way, though none have yet commissioned. The first is planned for the end of 2008.

In terms of capacity, the situation can be sum-marised as follows:

Number Total of terminals regasification capacity (in bcm/y)

Existing US terminals 5 53Approved US projects 25 329US projects pending approval 14 166

3. The European approach

The analysis in the previous chapter shows that investment in new re-gasification capacity is re-quired as this will ensure security of supply and foster competition.

In Europe, the different countries are either in-cumbent LNG players, or newcomers for rea-sons pertaining to security of supply:• incumbent players outside of France: - Italy has been importing LNG since 1971;- Belgium is a longstanding holder of import ca-

pacity;- Spain is a historic LNG importer, strongly de-

veloping its capacity since 2003 to meet high demand for gas;

• the key newcomers are: - England, which, in 2004, decided to create

LNG import capacity to offset a decline in North Sea gas production;

Graph 9: LNG terminals in Europe (Source: Cedigaz)

M e d it e r r a n e a nS e a

Id ku

Da m ie tta

S kik daA rze w

G a s siTou il

B a rce lo n a

H ue lvaC a r tag e na

E l Fe rro l

S a gu ntoS ine s

B ilb a o

A t la n t icO c e a n

M on t oir

Ze e bru gge

Fo s C a va ou

Isle of G rain

S o u th Hoo k

D rag o n

R ev y th o us s a

M a rm a raE re glis i

L a S p e zia

Izm ir

Ro vig o

B rind is iLiv orno

R o s ign a no

P rio lo

O x elö su nd

Ba ltic L N G

Ta ra n t o

G io iaTa uro

Trie s te

V a sil ik os

R eg a s— E xis tin g

Re ga s — P rop os e d

L iqu e f ac t io n

Re ga s — U nde r Co ns tru ct ion

U nd er C ons t ruc tionL iqu e f ac t io nEx is ting

L iq ue fa c tionP ro pos e d

G d an s kW ilhe lm s ha v e n

Ee m s h av e n

C a nv eyS ha n n on

Ang les e yTe e s sid e

M on fa lc on eK rk

B lac k S e a L NG

S a n F erd in a n do

P ortoE m pe do cle

L io nga s

G AT ETe rm ina l

E l M us e l

B ord e a ux

C on sta nt a

Le Ha v re


- the Netherlands, which is also planning to resort to LNG imports by 2012 for the same reasons;

- Germany, which also intends to develop two LNG terminals, despite less coastal potential.

To encourage investment, most terminals planned in Europe have obtained regulated third party access exemptions or are in the negotia-tion process, pursuant to article 22 (cf. para-graph VIII- 3).

There are two possible approaches for achiev-ing the right level of investment in existing LNG terminals:• a centralised method, requiring planning of

market needs and regulation of new capacity;• a market-led method, whereby investors are

free to make their decisions based on the reg-ulatory framework and current incentives, but with a higher level of risk.

Most of the Group believes that the second method will probably achieve the optimal invest-ment level. It also emphasises the fact that ex-ports to liquid and flexible markets with enough visibility and transparency are probably more appealing to producer countries.

At first glance, the generalised nature of US regulation (Hackberry decision (5)) does not seem adapted to the European gas sector.Indeed, the United States have a regional market system where competition between the players tends to be intense. On the other hand, Europe comprises national markets in which competi-tion is still quite weak. In Europe, where about 50% of gas consumed is imported, the market is more concentrated and less liquid.

However, European regulation should promote investment in regasification infrastructures, as it is the case in the United States.

In the regulated approach, all parties (investors, operators and shippers) need long-term pricing visibility.

In any case:• it is essential to ensure fair treatment by the

transmission system operators (whether their assets are separated or not) of the connection of new terminals at an acceptable cost for the market, regardless of who the investors and shippers are;

• the market players need as much information as possible on transit levels to the gas pipe-lines, the turnover rate for storage facilities and terminal usage levels to allow them to make their investment decision.

The availability of these data also encourages market trading and contributes to its fluidity.

4. The French approach

Historically, France has extensive experience in LNG terminals.Two LNG terminals are currently operating in France: the Fos Tonkin terminal (commissioned in 1972, capacity of 5.5 bcm/y) and the Montoir-de-Bretagne terminal (commissioned in 1980, capacity of 10 bcm/y).These terminals are owned by Gaz de France and are managed by its Direction des Grandes Infrastructures (DGI).

The Fos Cavaou LNG terminal (in construc-tion with operational opening planned for the


first half of 2009, with a regasification capacity of 8.25 bcm/y) is owned by Société du Termi-nal Méthanier de Fos Cavaou (STMFC) whose shareholders are Gaz de France (69.7%) and Total (30.3%).

On 26 October 2005, CRE proposed the sec-ond tariff for the use of LNG terminals, designed for application from 1st January 2006 until the commissioning of Fos Cavaou.

This tariff defines three emission services taking into account the diversity of shippers needs:

• the “continuous” service for shippers un-loading at least one cargo a month and for which emission on the transmission network between two unloadings is as continuous and regular as possible, according to the other ter-minal users;


Graph 10: Gas infrastructures in France (Source: GRTgaz)

Dunkerque

Taisnières

Gournay-sur-Aronde

Saint-Clair-sur-Epte

Saint-Illiers-la-Ville

Beynes

Germigny-sous-Coulombs

Trois-Fontaines

Alsace-sud

Cerville

Soings-en-Sologne

ChémeryCéré-la-Ronde

Cherré

Montoir-de-Bretagne

Etrez

Tersanne

Manosque

Fos Tonkin

Lussagnet

Fos Cavaou

Oltingue

Hauterives

Lamothe-Montravel

Cruzy

Obergailbach

Gaz de France

GRTgaz** pipeline

Gaz de France

Gaz de France

GRTgaz** planned pipeline

Gaz de France

Gaz de France

Arrival of natural gas by pipeline

Arrival of natural gas by LNG tanker

Gaz de France

TIGF* pipeline

TIGF* planned pipeline

aquifer storage

TIGF *aquifer storage

salt cavity storage

planned storage

LNG receiving terminal

landfall

LNG receiving terminal under construction

* Total Infrastructures Gaz France (TIGF) is a subsidiary of the Total Group

** GRTgaz is a subsidiary of the Gaz de France Group

100 km50250

Gaz naturel :le système de transport, les stockages souterrainset les terminaux méthaniers en FranceJanvier 2008


• the “uniform” service for shippers unload-ing one cargo a month at most. Each cargo is sent out through a constant quantity during a period of 30 days from the date of unloading completion.

• the “spot” service for cargoes unloaded dur-ing a given month M, taken out after the 20th day of month M-1. The subscription is taken out on the basis of the vacant slots in the monthly schedule at the subscription date.

Each cargo is sent out through a constant quan-tity during a period of 30 days from the date of unloading completion. A discounted tariff is ap-plied to this service.

Booking mechanism for the capacities of the two terminals in operation is based on the “first come, first served” principle. There is an automatically entry capacity allocated on the transmission net-work to optimise terminal functioning.

Concerning the Fos Cavaou terminal, follow-ing the deliberation of 15 December 2003, CRE indicated that “to promote the development of new LNG terminals, investors must have priority access to the capacities of the facilities that they developed in conditions allowing proper market functioning. CRE recommends that no supplier should have access to more than 2/3 of the ca-pacity of a new LNG terminal in France and that, while the competitive supply is not sufficiently developed, at least 10% of the new terminal ca-pacity should be available to all the suppliers, for short-term contracts, in non-discriminatory con-ditions”. The short-term was defined as a period of 3 years by CRE.

A sale was organised by STMFC on 27 June 2007 to allocate the capacities corresponding to short-term capacities and was open to all market players.Following the sale, four companies were placed first (Essent, Distrigaz, ENI and EDF) and they elected to appoint EDF to obtain all the capaci-ties proposed.For the next three years, holders of capacity at the Fos Cavaou terminal are thus Gaz de France (62.7%), Total (27.3%) and EDF (10%).

The tariff level is based on the operator’s author-ised revenue (payment from assets and cover-age of operating costs) and capacity subscrip-tion forecasts:

• operating costs are set based on an analysis of past fiscal periods, budget forecasts submit-ted by the operators for the relevant periods and audits on operators’ financial statements;

• capital costs cinclude one part deprecia-tion and one part return on capital calculated from the Regulated Assets Base (RAB). The RAB is evaluated at the current economic cost according to historical values reas-sessed with inflation and depreciated ac-cording to accepted lifetime: - 20 years for ancillary facilities and unload-ing mechanisms; - 40 years for regasification assets, civil engi-neering, storage facilities and other.

• the total rate of return on assets currently used is 9.25% for assets commissioned before 1 January 2004 and 10.5% for assets commis-sioned after this date.

7.25%

2%

1.25%Premium applied to assets commis-sioned from 1st January 2004

Risk premium specific to the activity

Weighted average cost of capital (WACC)


5. LNG terminal operating constraints

The purpose of a LNG terminal is to convert the intermittent arrival of liquid gas by ship into a con-tinuous delivery of gaseous gas by pipeline, while keeping strictly within minimum and maximum stock levels.

The role of the terminal operator is to handle the commercial constraints of shippers, which may reschedule their unloading, while also taking into

account the physical constraints of the terminal (number of jetties, number and size of tanks, emission capacity, etc.), as well as external fac-tors (tides, weather conditions, etc.).

These constraints can vary from one terminal to another. For example: • the Zeebrugge terminal has to manage the tidal

factor, which is not the case for current French terminals;

• storage tank capacities can vary significantly depending on the role played by terminals in managing consumption modulations.


-

100

200

300

400

500

600

700

800

900

Tho

usan

dm

3 LN

G

under construction

in service

Ile o

f Gra

in

Dragon L

NG

South H

ook

Zeebru

gge

Monto

ir

Fos Tonkin

Fos Cav

aou

Barce

lone

Huelva

Carta

gène

Bilbao

Sagunto

Ferro

l

Gijon

Sines

Panig

aglia

Adriatic

LNG

Revith

oussa

Mar

mar

a

Aliaga

Graph 11: LNG storage capacities (Source: Gaz de France DGI)


Operators can optimise management of these different constraints through adapting various pa-rameters:• maintenance programmes (grouping work, co-

ordination with the TSO, coordination with sea-sonal level of terminal usage, etc.);

• management of LNG inventory (Gaz de France terminals pool the gas in stock for the different shippers, while on the Isle of Grain, each ship-per has a dedicated virtual capacity);

• gas emission programmes on the network based on shippers’ profiles. E.g. the regulated terminal tariff encompasses two services:

- a “continuous” service for customers unload-ing at least 12 cargoes a year. Emissions are as continuous as possible between each cargo;

- a “band” service for customers unloading a maximum of 12 cargoes a year. Emissions are guaranteed and constant for 30 days.

This procedure allows “continuous” shippers to absorb the terminal’s physical constraints and their size determines the potential number of “band” shippers.

(GW

h/d

)

Continuous emission part

Continuous emission part

Emission on the network (including constraints)

1-Ja

n.

1-Feb

.

1-M

arch

1-April

1-M

ay

1-Ju

ne

1-Ju

ly

1-Aug.

1-Sep

t.

1-Oct

.

1-Nov.

1-Dec

.

1-Ja

n.

Graph 12: The co-existence of “continuous” and “band” services (Source: Gaz de France DGI)


VII. Evolutions in the regulation of existing terminals in France

1. Key Challenge: Security of Supply

In addition to environmental concerns, the key challenges of the energy policy are to increase security of supply while promoting active com-petition to benefit the end consumer and to en-sure company competitivity.

Despite the major role played by nuclear power in France’s global energy consumption, gas is a key source of security of supply, particularly in the functioning of new combined cycle gas turbines to produce the electricity required by 2015.In France, about 98% of overall French gas con-sumption has come from imports, with about 30% from LNG terminals (160 TWh of LNG were unloaded onto French terminals in 2006 - source: Gaz de France DGI website).

The opening of the European gas market cre-ated a new context.The national market with its monopolies and centralised planning is gradually being replaced by a deregulated market comprising many play-ers. To cope with any failures, forecast planning to adjust capacities to meet national needs is being replaced by prudential rules and the re-quirement for a reserve to cover the portfolio of sales. All gas suppliers in France must obtain a supplier license from the ministry guarantee-ing their gas import capacity (security of sup-ply and supply continuity). TSOs and distribu-tors, the gas transmission system operators in France, need to design their network to ensure the maximum daily gas consumption from the last 50 years.

From now on, transmission system operators must be able to offer capacity compatible with the deployment of new suppliers’ supply strate-gies, in line with demand from the market.The Group believes that it would be desirable for these measures (definition of the failure of a supplier and prudential rules) to be harmonised at European level.

Importing LNG could improve security of supply:• by increasing import volumes;• by diversifying supply sources and offering ac-

cess to 60% of worldwide reserves;• by forming an alternative to pipeline transmis-

sion, which has suffered from interruptions over the last few years, particularly due to rela-tions between Russia and former Soviet Union countries;

• by adding more entry points on the network.

2. Group recommendations on regulation evolutions

a. Pricing Visibility

The Group unanimously recognises that long-term pricing visibility encourages investment by operators and commitment from subscribers.Coordination between investors and subscrib-ers also needs to be encouraged.

In a regulated system, this coordination is fa-cilitated by the regulator and is based on tariffs. Bearing this in mind, the Group agreed to take:• a view of long term tariffs, over a period of

between 15 and 20 years according to the


subscription period and similar to the duration of LNG contracts. This period will also allow for operators’ “payback” (debt repayment);

• decision on the long-term methodology for calculating tariffs. This methodology will spe-cifically define how the risks are shared be-tween the operator and the subscribers;

• tariff revision clause: intervals of 4 to 5 years seem appropriate with a precise definition of the items taken into account. Within the stated period, this clause makes possible to adjust the tariff, taking into account elements known after the event (such as the final level of sub-scriptions);

• productivity incentives via the procedure for regulating operating costs.

b. Sharing Risks between Investors and Subscribers

The type of risks needs to be defined in advance, as well as how each risk will be dealt with. For example:• interest rate: current practice involves an in-

centive mechanism, taking risk into account and encouraging investment. Mostly the Group believes that the rate of return should be set over the period being considered, with the operator taking on the risk of interest rate changes and taking on financial hedge. This rate could however be reviewed at regular in-tervals (every 4 to 5 years) to take key eco-nomic changes into account;

• the level of subscription of the terminal: most-ly the Group recommends using the levels of subscription observed in the markets to cal-culate the tariff, implementing a system of

sharing the income from customer prospec-tion by the terminal operator. This revenue would be shared between the shippers com-munity and the operator, with key benefits for shippers;

• investment: costs will be taken into account in the regulated assets base, with the exception of those generated through poor management by the operator;

• investment depreciation period: the deprecia-tion period must be such that it is an incentive for the investor, but it must not push the tariff too high so that the LNG terminal can com-pete with existing terminals. The Group rec-ommends a depreciation period between the payback period and the economic lifetime of the relevant infrastructures.

c. Access to Short-Term Capacities

The average period for a long-term gas infrastruc-tures access contract can be up to 20 years.However, the market and active suppliers can change over such period of time.It is therefore necessary to allow periodic access to the infrastructure, which will also prevent any speculation regarding capacity.

For each regulated terminal, the Group thus rec-ommends defining a specific stable and minor-ity proportion (e.g. 10 to 15%) of capacity to be dedicated to short-term contracts, the duration (period of 3 to 4 years) and procedures should be specified.The Group notes that pooling several shippers together in a consortium (as at Fos Cavaou) seems to be a good solution allowing smaller shippers access to the terminal.


VII. Evolutions in the regulation of existing terminals in France

d. The Capacity Allocation Mechanism

Recent examples in the gas infrastructure sector highlight two methods for determining the level of an investment:• the open season (10);• bilateral negotiations.These mechanisms are for capacity allocation over the long term.For short-term capacity allocation, two other methods are more appropriate: • an open subscription period (11);• the “first come, first served” principle.

Although presented as “open season”, most calls for subscriptions in Europe are finalised on the basis of an bilateral negotiation, as for exam-ple, on the Fluxys LNG terminal in Zeebrugge or the Grain LNG terminal on the Isle of Grain.

Open season has the advantage of being a trans-parent and non-discriminatory approach. It also makes it possible to collect the needs of the en-tire market, thus indicating optimal investment level trends.

On the other hand, the analysis of results may turn out to be complex with demands from can-didates sometimes being very different both in terms of duration and the volume of capacity re-quested.

Bilateral negotiation is obviously less transparent and does not allow for forecasting the needs of the entire market, but it has the advantage of re-sponding to specific needs (exclusive supply for gas-fired power stations, etc.), making consorti-ums of small players possible and finalising previ-ously dimensioned projects.

The Group recommends: • continuing the “first come, first served princi-

ple” for capacity allocation on existing termi-nals, without time period restrictions;

• implementing open season according to the ERGEG (12) guideline of good practices in the case of extension on a regulated terminal.

(10) An open season is a call for subscriptions allowing the transparent and non-discriminatory allocation of infrastructures access capacity and the dimensioning of supply to demand if necessary. The open season is often organised in 3 phases: qualification of the applicant, non binding application, binding application.

(11) An OSP is open over a relatively short period of time during which infrastructure access capacity is proposed on the market. When demand is greater than supply, the operator often allocates capacity on a prorata basis.

(12) European regulators’group for electricity and gas.


Exemption is a key measure for encouraging new investors. It should only be granted if it en-courages competition in the relevant market for the new infrastructures, and its scope of appli-cation should be carefully defined.

1. Projects for New LNG Terminals in France

To date there are four projects for new LNG ter-minals in France: • Dunkirk: this project is supported by Dun-

kerque LNG, a subsidiary of EDF, for a ca-pacity of 6-12 bcm/y, and a commissioning planned in 2012;

• Antifer: this project is backed by Gaz de Nor-mandie, whose stakeholders are Poweo (34%), E.ON Ruhrgas (24.5%), Verbund (24.5%) and CIM (17%), for a capacity of 9 bcm/y, and a commissioning planned in 2012;

• Le Verdon: this project is sponsored by 4Gas, a Dutch company founded in 2005 from the takeover of Petroplus’s LNG assets, whose shareholders are Carlyle and Riverstone, spe-cialists in private investment funds, for a ca-pacity of 6 to 9 bcm/y, and a commissioning planned in 2012;

• Fos: this project, called Fos Faster, is support-ed by Shell, for a capacity of 8 bcm/y, and a commissioning planned in 2015.

VIII. Regulation of New LNG Terminals in France

Le Verdon (project Pegaz)

Project 4Gas

Announcement August 2006

AntiferProject Gaz de Normandie

AnnouncementSeptember 2006

DunkirkProject EDF

Announcement October 2006

Fos FasterProject Shell

Announcement March 2007

November 2007: Endesa is ready to join 4Gas on the project

PEG TIGF

PEGSouth

PEGNorth

Fos-sur-Mer

Montoir-de-

Biriatou

Larrau

Bretagne

Antifer

Dunkirk

Taisnières H

Obergailbach

Oltingue

Le Verdon Projects

Existingterminals

Entry and exit points

Graph 12: Projects for new LNG terminals in France (Source: CRE)


VII. Regulation of New LNG Terminals in France

The planned schedule presented by the project owners forecasts commissioning over 2012 for the first projects:

The assessment of current and forecast regasi-fication capacity in France indicates a maximum possible capacity of 74 bcm/y by 2014 (30% of European requirements in 2020). It is important

to note that some of these projects will poten-tially not be completed. Moreover, it has not yet been decided whether the Fos Tonkin terminal will be maintained after 2014.

Port authoritydecision

Publicdebate

Technical studies

Authorisation applications

2006 2007-2008

Administrativeauthorisations

Start of construction

workCommissioning

Start 2009 2nd half 2009 2012

Current situationFos Tonkin 5.5Montoir 10Fos Cavaou 8.25Total 1 23.75 bcm/yMaximum capacity end 2012 1st scenario 2nd scenarioMontoir (if extension 1 implemented) + 2.5 Antifer 9 Dunkirk 6 + 6Le Verdon 9 + 6Total 2 +26.5 bcm/y +12 bcm/yMaximum capacity end 2014Montoir (if extension 2 implemented) + 4Fos Faster 8Total 3 +12 bcm/yTotal envisageable fin 2014 74.25 bcm/yEuropean LNG supplies in 2013 (IEA forecast) 140 bcm/yEuropean LNG supplies in 2015 (Total forecast) 155 bcm/yEuropean LNG supplies in 2020 (Andy Flower 2007 forecast) 220 bcm/y


2. Public Debate

Pursuant to the law of 27 February 2002, and to the decree of 22 October 2002, any crea-tion or extension of port infrastructures must be referred to the CNDP (national public debate commission) if the cost of the project exceeds €150 millions or if the surface area is greater than 200 hectares.When the CNDP itself decides to organise a public debate, it sets up a special commission (CPDP) to which the project owner submits a file for the debate (cf. http://www.debatpublic.fr/index.html)

The public debates regarding the Antifer, Dun-kirk and Le Verdon projects took place between September and December 2007 and, for the first time in the history of public debates in France, referred to projects sponsored by private inves-tors.

It should be noted that a key difficulty in public debate lies in the process itself, with the debate being held very early in the project, at a point when the technical and environmental studies are not yet completed and project sponsors may not be able to answer all the public’s ques-tions, which may end up fuelling the fears of the local population.

The main topics covered in these three public debates were:• lack of public understanding of the future rise

in demand for natural gas, a fossil fuel emitting greenhouse gas, when government communi-cation is mainly focused on the development of renewable energy;

• the positive effect of competition for end con-sumers, which is not a universally accepted point. It is therefore difficult for a public com-munity to agree on the development of LNG terminals sponsored by private operators, sometimes from other countries;

• safety and industrial risks;• protection of biodiversity;• tourism;• visual impact of these infrastructures.

In their report, the public debate special com-missions highlighted strong opposition, with a variable intensity according to the considered project. This opposition is emphasized by local associations and, in some cases, by local politi-cians.This situation is very similar to local opposition seen in the USA, although the “nimby” syn-drome (“not in my back yard”) and the fear of terrorist attempts on industrial sites are more predominant.

CPDP reports can be found at the following ad-dresses:• Dunkirk: http://www.debatpublic-dunkerque-

gaz.org/documents/cr-bilan.html;• Antifer: http://www.debatpublic-antifer.org/

documents/compte-rendu-du-debat.html;• Le Verdon: http://www.debatpublic-terminal-

leverdon.org/actualite/compte-rendu-debat.html.

3. Parameters to be considered regarding Exemption

The operators sponsoring projects for new LNG terminals stated their intention to request exemp-tion from regulated third party access pursuant to article 22 of European Directive 2003/55/EC and article 44 of the law of 9 August 2004.Five criteria imposed by European directive 2003/55/EC must be met to obtain exemption:• the investment must foster competition for gas

supplies and improve security of supply;• the level of risk associated with the investment

must be such that the investment will not be carried out if exemption is not granted;


• the infrastructures must be owned by an indi-vidual or a legal entity separate, at least with regard to legal status, from the system opera-tors within which it will be built;

• tariff is paid by the users of the infrastruc-tures;

• the exemption does not adversely affect competition or the proper functioning of the domestic gas market, or the efficiency of the regulated network to which the infrastructure is connected.

In the case of new LNG terminals, the Group be-lieves that the principle of exemption from regu-lated third party access is particularly conducive to encouraging investment, given the high finan-cial risks generated by this type of project.

Two options are available for financing an LNG terminal project:• “corporate” financing, whereby the investor

provides most of the financing for the project via equity;

• project financing mostly via a bank loan.

It is essential to make the second option acces-sible to new players competing with incumbent operators.With respect to project financing, banks require incomes from long-term contracts to ensure an adequate cover of the investment. Should the investor be holding unsold capacity, the ini-tial shippers having reserved capacity over the long-term will be obliged to pay a higher price to offset the shortfall in revenue. However, this unsold capacity can be covered by successive short-term contracts.

A project financing investment also makes it possible from the outset to determine whether the commercial conditions between the investor

and shippers provide for a stable income state-ment and debt repayment over the defined pe-riod (between 15 and 20 years). This long-term commitment is a basic element for investors and banks.

Most of the Group recommends conducting a case-by-case analysis of the scope of exemp-tion (capacity and tariffs). This analysis should study the worthwhile nature of limiting this scope for the market (available capacity for the short term contracts) with respect to the technical dif-ficulty of adding a new shipper to the terminal, and to potentially increasing the cost of the in-vestment.Subject to this analysis, the following is neces-sary:• the operator must not be systematically

obliged to keep capacity dedicated to short-term contracts;

• not limiting the scope of the exemption (tar-iff and capacity) to allow the investor to have complete control over the risk;

• leaving the investor to assess the market with capacity being allocated transparently, even if final allocation will most probably be via bilat-eral agreement.

In any case: • the LNG terminal tariff must be published;• the investors must have priority access to the

capacity of the facility that they developed so as to promote the construction of new LNG terminals;

• no supplier (including any affiliate companies) shall be able to reserve over the long term more than 2/3 of the capacity (13) of a new LNG terminal in France, so as to encourage the di-versity of players on the market;

• the rules of transparency for publications and the “Use It Or Lose It” mechanisms must apply in the same way to exempted and regulated

VII. Regulation of New LNG Terminals in France

(13) As specified in CRE deliberation on the protocol between Gaz de France and TOTAL, regarding the outcome of their joint stakeholding in CFM and GSO of 15 December 2003.


terminals, with the possibility of monitoring by the regulator after the event. In any case, the penalties for misconduct should be dissua-sive;

• proposal and implementation of a secondary market mechanism for capacity. An ex-post review of the performance of this mechanism could be carried out by the regulator;

• the investor in an exempted terminal may en-visage extension of his terminal if required by market conditions and subject to financial and technical feasibility;

• a review of exemption conditions according to market evolutions.

The Group notes that from a legal point of view, nothing prevents an existing operator from re-questing exemption for a new infrastructure. Nonetheless, this must depend at the very least on the hiving-off of this infrastructure and satisfac-tory rules of governance (managerial separation).

Exemption is possible in the case of extension of an existing infrastructure. It must be condi-tioned by compliance with certain governance rules and the assurance that the extension will contribute to reducing the incumbent operator’s market share by opening this infrastructure to third parties.Co-existence of the two systems on the same terminal should be examined by the regulator with care taken to avoid an imbalanced tariff be-tween regulated and exempted capacities. Like-wise, the same transparency and anti-hoarding procedures should be applied to the both re-gimes.

Moreover, the ERGEG is working to define a guideline of best practices regarding the appli-cation of article 22.


IX. Co-existence of Regulated and Exempted Terminals

Regulation should not favour one system over another. Indeed, it should encourage investment in both cases.Terminals currently operating in France are reg-ulated and should be for a few more years to come.The future will see co-existing regulated and ex-empted terminals which will probably result in price adjustment.

When competition between regulated and ex-empted terminals becomes effective, it will result in a differentiated services offer, with the price being an element of the offer.Given the growing number of terminals in Eu-rope, they will be in competition in their zone of influence outside of their own country.

Until new capacities are available, the regasifica-tion capacity offered by French terminals is fixed until 2012.

In the short term this situation may create situa-tions of “shortage” which will displace demand for capacity reservation to other countries. In the medium term, a better balance between supply and demand for capacity will lead to an adjust-ment of prices exercised by exempted terminals with respect to those of regulated terminals.

1. The “Use It Or Lose It” (UIOLI) Mechanism

This mechanism is intended to ensure optimal use of the infrastructure by giving shippers ac-cess to the infrastructure when capacity is physi-cally available, but unused by the primary holder.

The Group agrees that this mechanism appears complex from the market’s standpoint, but con-tributes to the maximum optimisation of the in-frastructures.

The procedure used should give shippers an in-centive to be virtuous, without actually making the terminal less attractive, particularly in view of the arbitrage in the destination of the gas, which is very specific to LNG compared with the gas pipelines.

Up to now, none European facilities (Zeebrugge, Isle of Grain) have produced the expected re-sults.Two mechanisms can be identified:• an ex-post mechanism whereby a penalty is

applied or capacity is withdrawn from shippers hoarding capacity;

• an ex-ante mechanism with the obligation to offer unused capacities back on the market. Prior notice is a sensitive parameter that must be adapted to the LNG supply chain, which is more complex than that of gas pipelines. In view of France’s geographical position, close to producer countries, the Group recom-mends prior notice of between 2 weeks and 1 month.

The Group considers that the procedures for im-plementing these mechanisms must be flexible and reviewable with hindsight and that they will apply only to those terminals whose complete capacity has been subscribed to.

The Group considers that these mechanisms must be similarly applied to regulated and ex-empted terminals.

The Group emphasises that in a fluid and trans-parent market with surplus capacity, these mechanisms should no longer be necessary.

2. Transparency

Security of supply does not depend on import capacity and regulation alone.Transparency of data regarding access to the infrastructure also plays a key role.

Currently, information published by operators of existing French terminals complies with the ERGEG12 guidelines for best practices: techni-cal capacity, reserved capacity, observed flows, berthing slots available, etc.The transparency of the French LNG terminal operator publications is now considered satis-factory by the Group.

The Group considers that the level of transpar-ency should be similar for future LNG terminals.


LNG represents about 30% of France’s current gas consumption and is essential in terms of se-curity of supply. In coming years, LNG is due to play an even greater role, as the availability of pipeline gas decreases and gas consumption increases under pressure from the electricity generation sector.

The shape and operation of the LNG market are undergoing radical and durable changes. One of these changes is that sellers have come to dominate the market, helped by increased de-mand and limited supply. The LNG market has also become more flexible than before, and it will become even more so in the future. Indeed there will be fewer and fewer technical or con-tractual obstacles for sellers of LNG wishing to arbitrate between prices in different regions. As a result, the LNG market is becoming more and more global.

Building new LNG terminals or LNG terminal extensions involves large investments which are amortized over long periods, as well as sig-nificant technical and financial risks. Because Europe’s gas market is liberalised, investments in LNG terminals will be made by private com-panies.

A stable and favourable regulatory framework will be needed to facilitate investment in new LNG regasification capacity inside France. Such capacity will allow new entrants to build strong, durable positions on the French market. It will also contribute to a diversification of French gas supply sources. Consumers will benefit from a reinforced competition and greater supply se-curity.

The Working Group’s main recommendations are to increase the attractiveness of the French market, facilitate the extension of regulated ter-minals via more regulatory stability and visibility, and create a favourable climate for the devel-opment of new LNG terminals. Exemptions from third party access could contribute to this last objective, although a degree of coherence would need to be ensured between rules gov-erning regulated and exempt terminals.

1. The attractiveness of the French market

To boost the attractiveness of the French mar-ket, regulators and administrative authorities must:• encourage the development of a more liq-

uid wholesale market in France (reducing the number of balancing zones in France would contribute to higher liquidity) and so would stronger ties between France and neighbour-ing markets;

• facilitate the emergence of a European whole-sale price index, or at least of a set of regional wholesale price indices;

• encourage the creation of excess regasifica-tion capacity by 2015;

• let the market decide what the optimal level of investment level should be, and not set this level in a centralised way.

2. Regulated LNG terminals

A majority of Working Group members recom-mended: • putting in place long-term tariffs with a dura-

tion of 15 to 20 years: the exact duration will depend on the duration of the commitments shippers are able to make and will be close to the duration of the LNG supply contracts signed by shippers with producers;

• establishing a long-term tariff methodology – this methodology will lay out how risks are to be split between the terminal operator and ter-minal users;

• putting in place periodic tariff reviews: a review every 4 to 5 years would seem appropriate; the parts of the tariff affected by the reviews would have to be precisely identified; reviews will allow for an adjustment of the tariff on the basis of elements that can only be known after tariff-setting, such as the final level of capacity reservations;

• tariffing operational expenses in way that en-courages productivity improvements;

• setting an interest rate which will be valid for the entire duration of the tariff; the operator of the terminal will have to bear interest rate

X. Conclusions


risks; if the operator chooses to do so it will be able to hedge against these risks on finan-cial markets; nevertheless, if warranted major economic changes, periodic tariff reviews will allow for a modification of the interest rate es-tablished during the initial tariff-setting;

• basing tariffs on capacity reservation levels typically observed in the market; any extra revenue stemming from additional reserva-tions secured by the terminal operator will be shared with terminal users (the brunt of the revenue should go to the users);

• incorporating costs into the Regulated Asset Based except for those costs linked to poor management on the part of the terminal op-erator;

• setting a depreciation period that encour-ages investment but does not cause tariffs to increase too much. The depreciation period should lie somewhere between the debt pay-back period and the economic lifetime of the infrastructures.

3. Exempted LNG terminals

The Working Group recommends: • that investors not be systematically obligated

to set aside a share of capacity for short-term sales;

• that there is no a priori limits on the perimeter of the exemption (both in terms of the rules a ter-minal can be exempt from and of the share of the terminal which the exemption applies to);

• that the tariffs of exempt LNG terminals be published;

• limiting the amount of capacity a single supplier or group of linked companies can hold in a new terminal to 2/3 of that terminal’s capacity;

• monitoring market conditions and reviewing the conditions of an exemption over the course of the life of the underlying infrastructure.

Granting an exemption for the extension of an existing terminal is possible but will be subject to certain governance rules. In addition, the exten-sion will have to contribute to a reduction of the incumbent’s market share, via third party access to the underlying terminal.

4. Interaction between regulated and exempted LNG terminals

Regulators should not favour one access regime over the other. Instead, they should encourage investment under both regimes.In France, existing LNG terminals are regulated, and this situation will persist for some years.However, at some point in time regulated termi-nals will begin to coexist with exempt terminals and this will probably lead to an adjustment in prices.True competition between regulated and ex-empt terminals will manifest itself via the offer of differentiated services where price will just be one factor. Rules regarding transparency and Use-it-or-lose-it mechanisms should apply equally to regulated and to exempted terminals. There should be an ex-post control by regulators of the mechanisms put into place.

X. Conclusions

This report attempts to faithfully transcribe the debates of the Working Group as well as the external contributions that were sent to the Working Group. The report was written using a pedagogical ap-proach, in the hope that its contents would help illuminate debates on France’s LNG market and on LNG terminal projects.

The members of the Working Group express their thanks to CRE’s staff for their availability and as-sistance regarding the drafting of the report.

Summary Report by the Working Group on the Regulation of LNG Terminals in France http://gttm.cre.fr

Phot

o cr

edits

: L’

Espa

ce P

hoto

Gaz

de

Fran

ce -

cov

er: A

ntoi

ne G

onin

- p

. 4:

Ced

ric

Hle

sly

- p.

11:

Phi

lippe

Dur

euil

- D

esig

n: créap

ix

Date post:	24-Oct-2014
Category:	Documents
Upload:	eemeli-rinne
View:	37 times
Download:	3 times

The Regulation of LNG Terminals in France

Documents