The Spanish Wholesale Gas MarketAlejandro Alonso – Deputy Director of gas transport, distribution and

quality of serviceaas@cne.es

National Energy Commission (Spain)

1

Index

1. Introduction to Spanish gas system

2. Main liberalization measures in Spain

3. Development of gas trading in Spain

2

0

50

100

150

200

250

300

350

400

450

1985

1990

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

TWh

Raw material

Power Generation

Industrial

Residential

Market structure in 2007:

Consumption in Spain in 2007: 408 TWh

Total increase (last 5 years): 70 %

Prospect for 2012: (+ 4 % per year)

Domestic12%

Industrial51%

Power Generation

35%

Raw Material2%

Evolution of natural gas consumption in Spain

3

Gas consumption in Europe

Consumption, TWh0 200 400 600 800 1000 1200

Belgium

Spain

Netherlands

France

Italy

Germany

UK

Power generation Other

Gas natural consumption:

• Average growth in Europe about 2% in the last five years• Main demand driver is use of gas for power generation (UK, Italy and Spain)

4

Gas demand for power generation

Gas demand for power generation:

• Gas for power generation represented 35 % of gas demand in Spain in 2007• Actually 53 CCGT installed with a total power of 23.000 MW (31-12-2007).• Several more are in construction

5

6. DESARROLLO PREVISTO DE INFRAESTRUCTURAS

LARRAU

SERRABLO

CARTAGENA

ALMERÍA

CREVILLENTE

ALCÁZAR

PUERTOLLANO

ZAMORA

ALMENDRALEJO

F14SEVILLA

ALGETE

DENIAMONTESA

HARO

ZARAGOZAARBÓS

TIVISSA

VILLAR DEARNEDO

PATERNA

Segovia

Valladolid

Palencia

Llanera

PonferradaOrense

LermaAranda Soria

Talavera

Linares

Jaén

Algeciras

Málaga Granada

Lorca

Cuenca

Pamplona

HuescaAlfarrás

León

Villapresente Treto

BurgosFalces Figueras

CHINCHILLA

PLASENCIA

HUELVA

REGANOSA

BARCELONA

SAGUNTO

BILBAOGIJON

Strong investment in gas infrastructures to meet gas demand and new interconnections

Red color: installations in construction or in project

Entry capacity:49 bcm regasification capacity (6 LNG terminals)

12 bcmInterconnection with Algeria – Morocco-Spain – Portugal

8 bcm more under construction – Medgazproject: Algeria -Spain)

2,5 bcminterconnection with France (only from France – Spain)

6

Players in the Spanish gas system

• LNG Operators: 6 LNG plants ENAGAS (3- Barcelona, Cartagena, Huelva), BBG (1-Bilbao), SAGGAS (1- Sagunto) and REGANOSA (1- Mugardos)

• Storage System Operators: 2 UGS operated by ENAGAS

• Transmission System Operators: ENAGAS (89% of transmission pipelines). Other companies: Gas Natural Transporte, Endesa Gas Transportista y Naturgas Energía Transporte

• Distributor System Operators: 5 distribution groups: Gas Natural (85 %), NaturgasEnergía, Endesa, Unión Fenosa, Iberdrola

• Shipper/Traders: 32 trading companies registered, 17 of them actives in selling gas to final customers. Main traders are:

Gas Natural, Endesa, Unión Fenosa, Iberdrola, BP, Shell, Cepsa, Gaz de France, Naturgas (EDP), BBE.

7

The liberalization process. Main Legal Measures

EUROPEAN GAS LEGISLATION

6/1998 10/1998 12/20026/2000

Hydrocarbons Act

(Law 34/1998)Transposes the

Directive

European Gas Directive

(2003/55/CE)

RD 949/2001TPA rules and new

economic system

RD-L 6/2000Measures to

improve competition

European Gas

Directive(98/30/CE)

8/2001

RD 1434/2002Development

of gas activities and facilities authorization procedures

6/2003 7/2007

Amended of Hydrocarbons

Act(Law12/2007)Transposes the new Directive

9/2005

Proposal of 3rd Legislation Package

- Amended Directive- Amended Regulation- Creation of ACER

Regulation 1775/2005/EC

9/20074/2004

European Gas Directive(2004/67/CE)

Legislation regarding security of supply,

productivity encourage, operational issues and economic provisions

SPANISH GAS LEGISLATION

8

Positive development of the Spanish liberalization model

Gas release program in 2002 to boost competition

Ownership unbundling of the main TSO (ENAGAS). Strong investment in new infrastructures.

Available LNG entry capacity allows access to international gas markets for new players

Regulated access to gas infrastructures, including LNG regasification plants and basic underground storage.

Entry – Exit contractual system (entry -exit tariff are postalized)

A single virtual balancing point for all Spanish transport system (including several small TSO). Biggest single balancing zone in Europe by area covered

Daily balancing period and width tolerance band. Principle of neutrality of penalties to TSO

9

Positive development of the Spanish gas market. Evolution of market shares

Evolution of market share by sales volume

Industrial market has been opened since 1999. Residential market fully opened since 2003.Actually there are 17 active marketers in the gas market. New entrants have nearly 50%of market share.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007

Grupo Gas Natural Iberdrola Grupo Unión Fenosa BPGrupo Endesa Shell Naturgas (G. Naturcorp) BBECepsa Gaz de France Incogas EdisonCentrica

10

Actual gas market structure in Spain

Total gas market: 408 GWh (shares by volume of gas

sales), in 2007

Residential market: 6,7 million clients (shares by number of clients) in 2007

Grupo Endesa11%

Grupo Naturgas Energía

9%

Grupo Unión Fenosa

1%

Iberdrola2%

Others0%

Grupo Gas Natural 77%

Centrica0,10%

thers,02%

BBE2,10%

Gaz de France2,36%

Shell2,50%

Cepsa3,95%

Total Grupo Naturgas Energía

5,20%

Total Grupo Gas Natural 50,63%

Incogas0,09%

Total Grupo Endesa8,40%

Iberdrola11,50%

Total Grupo Unión Fenosa12,61%

BP0,54%

17 active shippers (32 registered) in the Spanish market. Strong competence

5 active shippers in the residential market Cumulative switching: 2,7 Millions of clients

11

Spain’s physical isolation from the rest of Europe means it imports 68 % of its gas as LNG.Spain is Europe’s largest LNG importerand the third largest importer in the world.Diversity of supply:countries exporting LNG in the Atlantic basin are Nigeria, Algeria, Egypt, Libya, Trinidad, Norway and Equatorial Guinea. Persian Golf cargos could be send to Asia or to Europe. Many gas suppliers are active traders in the Atlantic LNG arbitrage market. The marginal price of gas in Spain is linked to the price that LNG cargoes could obtain in other markets, such us Henry Hub and NBP.The Spanish Gas Market can be a reference of LNG prices for Europe.

Spanish gas market: Diversification of supplies and LNG market

Diversity of supply. Spain receives natural gas from 10 different

countries

2007Algeria34,40% Nigeria

24,31%

Libya2,24%

Oman1,36%

Others & Portugal1,01%

Spain0,26%

Trinidad & Tobago6,44%

Norway6,53%

Qatar12,93%Egypt

10,29%

France0,23%

12

In 2006, LNG represented a 23 % of gas imports into Europe.Spain has the highest operational regasification capacity in Europe (49,5 bcm)Spain has available LNG entry capacity. That allows access to international gas markets for new players

Regasification capacity 2007, bcma0 10 20 30 40 50

Greece

Italy

Belgium

UK

Portugal

Netherlands

France

Spain

Actual LNG regasification capacity in Europe

13

TPA regime and balancing arrangements have a significant impact on trading

Regulatory recommendations:• Entry /exit balancing regimes allows creation of virtual balancing points and favours

trade

• Daily balancing regime. Flexible balancing arrangements and low charges favours concurrence. Hourly balancing regime can boost gas trade, but difficult concurrence

• Balancing penalties should be neutral to TSO (specially for vertical integrated TSO)

• Suppliers’ access to storage and flexibility tools of the gas system are fundamentalfor the success of natural gas liberalisation.

o Underground storage can cover daily and seasonal variations in gas demand.o LNG storage covers variations derived from the discontinuous supply from LNG carriers. LNG regasification capacity is used to cover daily and weekly variations in gas demand.o Pipeline linepack is used to cover flexibility requirements throughout the day.

• Gas market complements the gas system’s flexibility tools, allowing suppliers modulate their gas stock levels in the system.

14

Characteristics of Spanish wholesale gas market

• 17 marketers actives. Nearly all marketers import his gas with LNG supplies

• Poor pipeline connection with other European markets. The market is isolated from the rest of Europe

• Spanish Wholesale Gas Market is strongly influenced by LNG supplies characteristicsLNG has an international market and could be diverted to other importing

countries.Each LNG terminal is used by 4 - 5 marketers. ENAGAS coordinates the logistic

of ships (slot assignment) and LNG storage.For LNG storage, there are penalties depending on the gas stock levels:

• Booked “daily regasification capacity” includes 5 days of LNG storage free of charge

• If the monthly average LNG stock level is above 8 days of the daily contracted capacity (adding stocks in all LNG plants), there is a big penalty

• There is a single balancing point (call CDG) for all transport system in Spain. The tolerance band is between 0 and 50 % of the daily contracted capacity (equivalent to ±25 % tolerance band). Within-day nominations allowed until 11.30 h.

15

Characteristics of Spanish wholesale gas market

• LNG storage covers variations derived from the discontinuous supply from LNG carriers. LNG regasification capacity is used to cover daily and weekly variations in gas demand.

• The operation of the daily OTC market complements the gas system’s flexibility tools, allowing suppliers to get the supply from LNG carriers and modulate their gas stock levels in the system.

• A small trader can bring a LNG cargo (150.000 m3 of LNG) every 15 days – 2 month. This trader have incentives to sell part of the gas just after unloading a LNG cargo, to avoid storage penalties. Gas trading facilitates logistic of LNG terminals.

01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

01 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

GWh

Minimum gas level

Ship unloading

LNGstorage

Days

Medium stock

16

Spanish Gas Hub

The Spanish OTC market

In Spain, the wholesale gas market trading is organized at the Spanish single balancing point (CDG), the LNG terminals, and the underground storages.

Gas trade is performed by bilateral agreements between the suppliers, in a similar way than spot LNG trading.

The gas trade is registered in a platform developed by ENAGAS, named MS-ATR. Platform use is free of charge; clearing service is not included.

There has been a very significant increase in the volume of gas traded by suppliers in the daily OTC market in the Spanish gas system and it serves to show the positive development of the liberalisation model.

The volume of gas traded in the Spanish gas system in 2007 has been 444 TWh and represent a 109 % of the total gas consumption of Spain. This volume is close to other European markets.

17

Spanish Gas Hub. Volume of gas tradedand number of transactions

Spanish OTC gas market (GWh/month)

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

mar-06

abr-0

6may

-06jun

-06jul

-06ag

o-06

sep-0

6oc

t-06

nov-0

6dic

-06en

e-07

feb-07

mar-07

abr-0

7may

-07jun

-07jul

-07ag

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sep-0

7oc

t-07

nov-0

7dic

-07en

e-08

feb-08

mar-08

abr-0

8may

-08jun

-08

PR. BBG PR. Barcelona PR. Cartagena PR. Huelva PR. Sagunto AOC Underground Storage PR. Reganosa

Most of volume of gas transactions is negotiated at the LNG terminals.

Spanish OTC gas market (number of transactions/month)

0100200300400500600700800900

1.000

mar-06

abr-0

6may

-06jun

-06jul

-06ag

o-06

sep-0

6oc

t-06

nov-0

6dic

-06en

e-07

feb-07

mar-07

abr-0

7may

-07jun

-07jul

-07ag

o-07

sep-0

7oc

t-07

nov-0

7dic

-07en

e-08

feb-08

mar-08

abr-0

8may

-08jun

-08

PR. BBG PR. Barcelona PR. Cartagena PR. Huelva PR. Sagunto AOC Underground Storage PR. Reganosa

Most of transactions are negotiated at the CDG (although its volume is quite smaller), in order not to get into unbalances at the single balancing point).

18

Spanish Gas Hub. Participants

SHARE IN THE SPANISH OTC MARKET 2007

ENDESA ENERGÍA13%

BBG4%

GAZ DE FRANCE5%

SHELL6%

UNIÓN FENOSA19%

GAS NATURAL COMERCIALIZADORA

12%IBERDROLA

13%

NATURGAS11%

VIESGO1%

BP3%

CEPSA12%

Incogas1%

OTC transactions in the Spanish Gas hub are negotiated in the platform MS-ATR, developed by ENAGAS

UNIÓN FENOSA is the largest company at the Spanish OTC Market, with a share of 19%. However, it share by volume of sales in 2007 was just of 13%.

19

Spanish Gas Hub. Gas Traded vs Gas Demand

The natural OTC gas market in Spain

The volume of gas traded in the Spanish OTC Gas Market in 2007 represents 109 % of the total gas consumption of Spain.

Spanish OTC gas market vs Consumption (GWh/month)

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

ene-0

7feb

-07mar-

07ab

r-07

may-07

jun-07

jul-07

ago-0

7se

p-07

oct-0

7no

v-07

dic-07

ene-0

8feb

-08mar-

08ab

r-08

may-08

jun-08

Transactions in OTC gas market Consumption

20

European gas trading in 2006

MS-ATR

NBP

PEG-Nord

Zeebruge (Be) and TTF (NL)

Country Gas traded 2006 (TWh)

Trading as % of total demand

UK 10.242 990%

Italy 624 70%

Netherlands 568 143%

Belgium 500 263%

Spain282

(444 TWh in 2007)72%

(109 % in 2007)

PSV

Main European gas Hubs