The European Gas The European Gas MarketMarket: :

DDiversification iversification FFalse alse SStart? tart?

KonstantinKonstantin SimonovSimonov

National Energy Security FundNational Energy Security Fund

Moscow March 30,

2010

Has 2009 been the year of Has 2009 been the year of the great gas revolutionthe great gas revolution??

PPro argumentro argumentss: : The Shale RevolutionThe Shale Revolution in the US market in the US market Growth of liquefied gas supplies to EuropeGrowth of liquefied gas supplies to Europe DDiminution in the demandiminution in the demand for gas in Europe for gas in Europe Energy saving development Energy saving development Renewable energy industry Renewable energy industry Construction of interconnector gas pipelinesConstruction of interconnector gas pipelines

Ideal scheme for EuropeIdeal scheme for Europe

1. 1. The USA The USA rejectrejectss imports of gas imports of gas.. 2. 2. They don’t need They don’t need LNG LNG in North Americain North America, , and it and it

rushes to the EC.rushes to the EC. 3. Europe 3. Europe implementsimplements ‘‘20-20-20 20-20-20 strategy’ and strategy’ and

improves itsimproves its energy efficiency energy efficiency..4. Europe 4. Europe builds interconnectorsbuilds interconnectors, , liberalizes gas liberalizes gas

transportation infrastructuretransportation infrastructure, , dramatically increases dramatically increases the number of the number of LNG receiving terminalsLNG receiving terminals..

5. 5. Gas surplus occurs in the EC market;Gas surplus occurs in the EC market; the ECthe EC give givess up the Groningen System up the Groningen System andand comes down to spot comes down to spot tradingtrading. . Gas prices slump.Gas prices slump.

6. 6. Shale gas production begins in the EC which finally Shale gas production begins in the EC which finally buries Russia and other major conventional gas buries Russia and other major conventional gas suppliers.suppliers.

However, it's not all as However, it's not all as easy as it soundseasy as it sounds

Reduction of gas consumption would be hard to Reduction of gas consumption would be hard to achieve – it will require a complete technological achieve – it will require a complete technological revolution.revolution.

EEnergy efficiency nergy efficiency may failmay fail as a stake on as a stake on alternative energy sources alternative energy sources – – as it has already as it has already happened withhappened with the the biofuel, biofuel, with which they've with which they've already tried to frighten thealready tried to frighten the hydrocarbon hydrocarbon producersproducers some years ago. some years ago.

The crisis is not the best time for energy saving The crisis is not the best time for energy saving and investment in the alternative energy industry.and investment in the alternative energy industry.

IInterestingly, nterestingly, the country with most serious the country with most serious subsidies for solar energy generation such as subsidies for solar energy generation such as Spain has been caught in the deep economic Spain has been caught in the deep economic crisiscrisis. . In the crisis period, there will be no money In the crisis period, there will be no money left for that.left for that.

Europe's heel of AchillesEurope's heel of Achilles Gas equity Gas equity production is steadily decliningproduction is steadily declining, and this , and this

tendency cannot betendency cannot be stopped because ofstopped because of the the depletion of European conventional gas fieldsdepletion of European conventional gas fields

Gas equity production in the EC (billion cubic meters) and its share in the gas balance of the EC (%)

200

39

182

36

0

50

100

150

200

250

1 2

2008

2009

Source: Eurogas

Shale gas is a miracle but Shale gas is a miracle but it’s a local miracleit’s a local miracle

With respect to success in With respect to success in ununconventional gasconventional gas, Europe will have , Europe will have not so much to show as the USAnot so much to show as the USA. . The The technologies used in the United technologies used in the United States cannot be automatically States cannot be automatically transferred to Europe.transferred to Europe.

More rigorous ecological standardsMore rigorous ecological standards

Shale gas is a miracle but it Shale gas is a miracle but it is a local miracleis a local miracle

Optimistic forecast: Optimistic forecast: shale gas in the USA will be shale gas in the USA will be profitableprofitable provided that its price is not less thatprovided that its price is not less that $$66 per thousand per thousand cubic feet which corresponds to the price ofcubic feet which corresponds to the price of $$210 210 per per thousand cubic meters approximately.thousand cubic meters approximately.

Profitability of production from new shale gas fields in the USA

250

215

260

0 50 100 150 200 250 300

Barnett

Fayettville

Woodford

Source: EIA

Weak development of gas Weak development of gas transportation infrastructuretransportation infrastructure The EC speaks much about gas The EC speaks much about gas

marketmarket liberalizationliberalization, , but does very but does very little about it in real termslittle about it in real terms. . In the In the USA, they build much more gas USA, they build much more gas pipelines than in the EC.pipelines than in the EC.

Most plans of construction of Most plans of construction of Underground Gas Storage facilities Underground Gas Storage facilities andand LNG LNG receiving terminals receiving terminals remain remain as they areas they are..

LNG is not LNG is not a a panaceapanacea

Though Qatar increased Though Qatar increased LNG LNG supplies to supplies to Europe at Europe at 114% 114% inin 2009, 2009, its share equal toits share equal to 1515..9 9 billion cubic meters is not decisive.billion cubic meters is not decisive.

LNGLNG supply growth will require serious supply growth will require serious investments ininvestments in new NLG Plants in Qatar - it new NLG Plants in Qatar - it would be hard to achieve.would be hard to achieve.

Upon conditions of European economic Upon conditions of European economic recovery, Qatar’s LNG will cover recovery, Qatar’s LNG will cover its own its own declining declining gas productiongas production; however,; however, displacement of pipeline gas won't be an displacement of pipeline gas won't be an easy job to do.easy job to do.

The Asian countries will The Asian countries will provide serious provide serious rivalry rivalry fighting for LNG.fighting for LNG.

Competition for gas willCompetition for gas will take place anyhowtake place anyhow

The USA will likely cease import of The USA will likely cease import of gasgas. . However, that will be small relief However, that will be small relief for Europe.for Europe.

China and India will take awayChina and India will take away considerable gas volumesconsiderable gas volumes including including LNGLNG. . They will be major drivers of gas They will be major drivers of gas demand growth.demand growth.

The recent example:The recent example: Contract Contract between China and Australia for $between China and Australia for $60 60 billion.billion.

The The Turkmenian CaseTurkmenian Case: : defeat by Chinadefeat by China

The Europeans' expectations thatThe Europeans' expectations that a a weakening of Russia's positionsweakening of Russia's positions in CAR will in CAR will lead to the growth of the European lead to the growth of the European influence are melting away before their influence are melting away before their eyes.eyes.

It is small wonder thatIt is small wonder that the Nabucco Project the Nabucco Project that was greatly relied uponthat was greatly relied upon has been has been stuck stuck and still cannot collect the required and still cannot collect the required volume of gas to ensurevolume of gas to ensure pumpingpumping of at of at leastleast 15 15 billion cubic meters per year.billion cubic meters per year.

The Polish CaseThe Polish Case: : How to fall into How to fall into the diversification trapthe diversification trap??

Classic example of ‘Classic example of ‘unwise diversificationunwise diversification’:’: Poland Poland signed a contract withsigned a contract with RUERUE maintaining that maintaining that that was that was the way to the diversificationthe way to the diversification. . However, they did not However, they did not take into account what was the origin of the gas take into account what was the origin of the gas intended for RUintended for RUЕЕ;; say nothing about that say nothing about that 50% 50% of the of the company is Russian-ownedcompany is Russian-owned. .

Eventually, Poland signed a gas supply contract withEventually, Poland signed a gas supply contract with RURUЕ Е forfor 2 2..5 5 billion cubic meters per yearbillion cubic meters per year. . As a result, As a result, when RUwhen RUЕ Е began to have difficulties with the gas in began to have difficulties with the gas in 20092009, they had to, they had to go to Gazprom for those gas go to Gazprom for those gas volumesvolumes. .

While While consumption of the Russian gas consumption of the Russian gas was declining was declining throughout entire Europe, it increased in Poland at throughout entire Europe, it increased in Poland at 14%14% in one year; in one year; with respect to gas volume with respect to gas volume consumption, consumption, it made Poland the fifth largest it made Poland the fifth largest consumer of the Russian gas in Europe. consumer of the Russian gas in Europe.

The Polish CaseThe Polish Case: : How to fall into How to fall into the diversification trapthe diversification trap??

The second stage of ‘diversification wars’The second stage of ‘diversification wars’: : Poland frightens us withPoland frightens us with LNG LNG from from QatarQatar. .

However, the terminal at Port ofHowever, the terminal at Port of Świnoujście in the Baltic Se Świnoujście in the Baltic Sea will be built bya will be built by 2014 2014 under the most optimistic scenariounder the most optimistic scenario, , and its capacity will be onlyand its capacity will be only 2 2..5 5 billion mbillion m33 at at the first stagethe first stage. . In additionIn addition, , it is a marvel how Polandit is a marvel how Poland, , runs away from the problem runs away from the problem that big LNG carriers from Qatar can touch at the port via the that big LNG carriers from Qatar can touch at the port via the Strait of BaltiyskStrait of Baltiysk..

Compatison of Qatar and other LNG carrier vessels (Cubic meters)

147 500 150 900

216 000

260 000

0

50 000

100 000

150 000

200 000

250 000

300 000

средний размер судов поперевозке СПГ (без учета

катарских) в 2007г

средний размер судов поперевозке СПГ в 2007 г

катарские суда Q-Flex катарские суда Q-Max

Compatison of Qatar and other LNG carrier vessels (Cubic meters)

147 500 150 900

216 000

260 000

0

50 000

100 000

150 000

200 000

250 000

300 000

Source: Energy Charter Secretariat

Average Size of LNG Average Size of LNG Carrier Vessels Carrier Vessels

(Excluding Qatar (Excluding Qatar Vessels) in 2007Vessels) in 2007

Average Size of LNG Average Size of LNG Carrier Vessels in 2007Carrier Vessels in 2007

Qatar’s Q-Flex VesselsQatar’s Q-Flex Vessels Qatar’s Q-Max VesselsQatar’s Q-Max Vessels

The Polish CaseThe Polish Case: : How to fall into How to fall into the diversification trapthe diversification trap? ?

The gas market has been The gas market has been changing very fastchanging very fast

Quarter I 2009

Quarter IV, 2009 2009

1. Germany -50.49% 64.25% -12,65%

2. Turkey -31.53% -13.37% -16.24%

3. Italy -51.47% -0.66% -14.70%

4. France -40,30% 18,70% -3.30%

5. Poland 19.30% 14,88% 14.02%

6. Great Britain 110% -8,50% 15.92%

Total -38.93% 19.72% -11.68%

Source: Gazprom

There is nothing more difficult than There is nothing more difficult than forecasting the evolution of gas forecasting the evolution of gas

marketmarket Market development forecasts are rewritten in the mode of Market development forecasts are rewritten in the mode of

WikipediaWikipedia There has never been as many experts’ speculations There has never been as many experts’ speculations

relating to the future gas marketrelating to the future gas market as inas in 2008-09 2008-09

Source: ExxonMobil

Possibility of strategic Possibility of strategic mistakemistake

The EC thinks thatThe EC thinks that the year of the year of 2009 2009 became became the beginning of a long-term trend. the beginning of a long-term trend. However, referring to the perspective of However, referring to the perspective of 2025-20302025-2030, the situation may , the situation may turn out to be turn out to be not so favorablenot so favorable..

Europe Europe is in a hurry to reject Russian gas is in a hurry to reject Russian gas andand considers itconsiders it expensive and politically expensive and politically dangerous. dangerous. However, it is far from clear that However, it is far from clear that it will be able to find it will be able to find a long-term a long-term substitutionsubstitution for it for it. . It must be borne in mind It must be borne in mind that the gas market situation is changing that the gas market situation is changing too fast.too fast.

Thank you!Thank you!

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