european gas supply security · 2017. 12. 8. · ncg gpl baumgarten data source: bloomberg •...

European Gas Supply Security

Pierre Noël

www.eprg.group.cam.ac.uk

Pierre Noël

EPRG, University of Cambridge

CERI Sciences Po, Paris -- 19 May 2011

I. Attracting gas, diversifying supply

II. Security of supply and the EU internal market

Contents


III. Coping with supply disruptions

-I-

Attracting gas, diversifying supply


Russian gas: important, not dominant

40%

50%

60%

70%

80%

90%

100%

40%

50%

60%

70%

80%

90%

100%

40 years of

diversification


0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

Russian gas as a share of EU 27

gas imports


gas consumption


primary energy consumption

Source: BP Statistical Review of World Energy; International Energy Agency; Eurostat

0%

10%

20%

30%

40%

19

70

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08


gas imports


gas consumption


primary energy consumption

Source: BP Statistical Review of World Energy; International Energy Agency; Eurostat

Diversification is accelerating

50

60

70

80

90

100

bcm

pe

r ye

ar

QATAR

YEMEN

MALAYSIA

TRINIDAD

LNG into Europe


0

10

20

30

40

Jan

-98

De

c-9

8

No

v-9

9

Oc

t-0

0

Se

p-0

1

Au

g-0

2

Jul-

03

Jun

-04

Ma

y-0

5

Ap

r-0

6

Ma

r-0

7

Fe

b-0

8

Jan

-09

De

c-0

9

No

v-1

0

bcm

pe

r ye

ar

TRINIDAD

OMAN

NORWAY

EGYPT

NIGERIA

ALGERIA

Data source: Poten Partners

UK as EU Western gas corridor

0%

10%

20%

30%

40%

50%

60%

70%

80%

-

100,000

200,000

300,000

400,000

500,000

600,000

GW

h

LNG

Norway

Continent

gross imports as % of

total supply

• UK imports are booming –

way beyond UK ‘needs’

• Interconnector exports are

growing – despite fall in UK

production

• When continental oil-indexed

contracts are out of the

money, direct challenge from Data source: DECC

The UK effect

www.eprg.group.cam.ac.uk-600

-400

-200

0

200

400

600

800

01-Jan-06 01-Jan-07 01-Jan-08 01-Jan-09 01-Jan-10 01-Jan-11

Interconnector Flow (GWh)

money, direct challenge from

UK gas

• Emergence of a large

‘Western gas corridor’

• Based on commercial (non-

subsidised) LNG terminals

and merchant, point-to-point

interconnectors

Data source: Interconnector UK

Data source: DECC

• Europe’s dependence on Russian is declining; supply

diversity is growing rapidly

• Global gas supply and reserves are growing very fast,

especially in OECD countries (US, Canada, Australia)

• Europe has no problem attracting (non-Russian) gas to

(more than) compensate for EU production decline

Conclusions (I)


(more than) compensate for EU production decline

• Europe has a large non-conventional resource base

• There is no reason to subsidise, directly or indirectly, non-

economic pipeline projects meant to “reduce Europe’s

dependence on Russia”

-II-

Security of Supply and the EU“Internal Market”


• Efficient markets increase welfare, including through

enhanced security of supply

− Alternative gas is available in times of crisis

− Contestability breaks the link between contractual and

political ‘dependence’

The market / security nexus


• Two key questions for EU policy makers

− Are price differences arbitraged?

− If not, why?

o No transmission capacity available? Why?

o No investment in transmission? Why?

Supply diversity is in Western Europe

East of Germany

and Italy, Russian

gas is often not

‘contestable’ – no

pan-European

market for gas


NW Europe: the market seems to work

• Hub price convergence –clear econometric evidence of market integration (Hamsen & Jepma, 2011)

• Role of LNG in price convergence

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

02

-Ja

n-0

9

02

-Ma

r-0

9

02

-Ma

y-0

9

02

-Ju

l-0

9

02

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9

02

-No

v-0

9

02

-Ja

n-1

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02

-Ma

r-1

0

02

-Ma

y-1

0

02

-Ju

l-1

0

02

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p-1

0

02

-No

v-1

0

02

-Ja

n-1

1

02

-Ma

r-1

1

02

-Ma

y-1

1

EU

R/M

Wh

NBP

TTF

PEG_N

PEG_S

ZEE

NCG

GPL

Baumgarten

Data source: Bloomberg


convergence

• UK-Continent integration puts pressure on oil-indexation

Source: Spreadsheet sent to PN by Howard Rogers – updated with data from BAFA (German Federal Office for Economics) and Bloomberg

02

02

02

0

5

10

15

20

25

$/m

mb

tu

Brent

German, oil-indexed

Actual German

Average

NBP

• Huge spreads between West and East not arbitraged

− No capacity trading in transit pipelines

• EU market design prevents efficient investment?

− TSOs & National Regulators control large entry-exit zones

− Impossible to sell LT capacity contracts along specific

paths (through entry-exit zones)

Still no pan-European gas market


paths (through entry-exit zones)

− …although this is how UK-Continent has been done

• European temptation to subsidise (and politicise) pipeline

investment

− ERGEG study / TYNDP / EU infrastructure package

− Pipeline investment decisions remain centralised in Europe

(within zones, and between zones)

• Remove long-distance transportation -- into zones and

between zones -- from TSO control and E-E pricing

− European ‘interstate’ system separate from E-E zones

− ISOs operating ‘European’ pipelines

− Capacity on ‘European’ pipelines clearly defined,

calculated, and sold via tradable long-term contracts

− Would kick-start a pan-European capacity market

Reforming the EU market model?


− Would kick-start a pan-European capacity market

− Would allow to have small zones, reducing inefficiencies

− Would allow investment decisions to be decentralised – a

key feature of a successful liberalised market

− Essential to flexibly adapt to rapidly changing supply

patterns

• We will have a pan-European gas market if we have a

pan-European market for transmission capacity

• The EU ‘market model’, based on large entry-exit zones,

is incompatible with a market in long-distance, ‘trans-

European’ transmission capacity rights

• The US experience is not transferrable but offers key

Conclusions (II)


• The US experience is not transferrable but offers key

concepts for reform

• The UK-continent experience (merchant pipelines, long-

term, point-to-point capacity contracts with short-term

trading) is a European success story

-III-

Coping with supply disruptions


Coping with supply disruptions: 01/09


Greece and

Bulgaria

January 2009 -- Greece

40

50

60

70

80

90

Milli

on

cu

bic

me

ters

LNG storage

LNG unloading

Regasification

Total consumption

Revithoussa LNG


0

10

20

30

07/0

1/2

00

9

08/0

1/2

00

9

09/0

1/2

00

9

10/0

1/2

00

9

11/0

1/2

00

9

12/0

1/2

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1/2

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1/2

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9

15/0

1/2

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1/2

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9

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1/2

00

9

18/0

1/2

00

9

19/0

1/2

00

9

20/0

1/2

00

9

21/0

1/2

00

9

Milli

on

cu

bic

me

ters

Data source: DESFA (Greek gas TSO) reporting to RAE (Greek energy regulator)

Demand fully met by LNG – including

spot cargoes

January 2009 -- Bulgaria


50% of demand left unserved.

Source: Kardejak (2009)

Measuring short-term gas supply security

Gas production

Imports available in N-1

Storage withdrawal

Dual-fuel for power plants + interruptible

industrials

Peak gas consumption

Gas that can be supplied

Demand reduction

Peak gas consumption

• Gas Supply Balance when Russian Gas not Available


• Gas Supply Security Indicator – 1st Day of Total Disruption

GSS = + as % of

Ex.: Greece in ‘N-1’ – minimum security

Security = 94% of

historic peak


Greece in ‘N-1’: maximum security

Maximum security =

137% of historic peak


Gas security in Russia-dependent EU


Source: Noel & Findlater, 2010

500

700

900

1,100

1,300

mil

lio

n o

ver

30

ye

ars

Estonia -- Heat back-up versus LNG

3 day's

storage

7 day's

storage

30 day's

storage

Light

fuel oil

15 day's

storage

Cost of improving security: Estonia

Security premium for an LNG

terminal is ~ 7%


-100

100

300

500

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

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nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

15

da

ys

1 m

on

th3

mo

nth

s6

mo

nth

s

€m

illi

on

ove

r 3

0 y

ea

rs

Disruption length over 30 years

Heavy

fuel oil

LNG

Source: Noel & Findlater, forthcoming

Supply curve for gas security: Bulgaria


• There is no reason to believe that Europe will be short of

gas and that there is a need to develop an EU strategy to

‘access’ gas reserves or diversify supplies through

politically-backed projects.

• A well-functioning, pan-European gas market would

increase supply security. There has been some progress

Final Conclusion: main messages


increase supply security. There has been some progress

but the institutional model chosen makes it very difficult to

trade gas across Europe and to invest in pan-European

transmission capacity.

• Even without a well-functioning market the most insecure

member states can make informed – and affordable –

choices to increase their ability to cope with disruptions.

european gas supply security · 2017. 12. 8. · ncg gpl baumgarten data source: bloomberg •...

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