The evolution of gas markets: an upstream perspective Olav Aamlid Syversen, Head of Gas Regulatory Affairs, Statoil

Florence School of Regulation, 24March 2014

Content

• The organisation of the Norwegian gas industry and its regulation

• Perspectives on the European gas industry

• Contracting and pricing in the new European market: company view

The organisation of the Norwegian gas industry

and its regulation

The importance of the petroleum sector for the Norwegian economy

Figure 3.4 The net government cash flow from petroleum activities

(Source: Norwegian Public Accounts)

Figure 3.4 The net government cash flow from petroleum activities (Source: Norwegian Public Accounts)

Net government cash flow from petroleum

activities (Source: Norwegian Public Accounts)

Source: Norwegian Ministry of Petroleum and Energy

26%

26%

47%

Petroleum sector’s

share of GDP

Petroleum sector’s

share of state revenue

Petroleum sector’s

share of total investment Petroleum sector’s

share of total exports

21%

An export oriented market

0

20

40

60

80

100

120

2003 2005 2007 2009 2011

bcm

Total production Consumption

0

1000

2000

3000

4000

5000

6000

Totalconsumption

Power Heat Energyindustry

Total consumption Power

Heat Energy industry

Domestic natural gas consumption by use, mtoe

Source: OECD/IEA Source: OECD/IEA

History

The size of the Government Pension Fund

(Source: Statistics Norway, Norges Bank)

1962 • Phillips Petroleum applies for licence

1963 • Norwegian state proclaimed owner of NCS resources

1971 •Ten «oil commandements» produced by Storting

1972 •Creation of Statoil (50% rules, later changed by Storting)

1977 • First gas sales to Europe

1985 • State Direct Financial Interest (SDFI) established

1996 • Troll «gas machine» on stream

1997 • New Petroleum Act into force

2001 • Partial privatisation of Statoil; establishment of Petoro

2003 •Reorganisation of gas transportation system

2011 • Two new major discoveries in the North Sea

7

Key public institutions for petroleum activities

Parliament (Storting):

Law making and taxation

Major development projects

General policy guidelines

Ministry of

petroleum

and energy

(MPE)

Ministry of

labour and

social affairs

Ministry of

finance

Ministry of

trade, industry,

and fisheries

Ministry of

environment

Resource

management

Licence

awarding

Regulation

Ownership

Health

Work

environment

Safety

Taxation and

state

revenues

Spill

contingency

The external

environment

Directorate for

supervision:

Norwegian

Petroleum

Directorate (NPD)

Directorate for

supervision:

Petroleum

Safety Authority

Directorate for

supervision:

Coastal

Administration

Directorate for

supervision:

Pollution

Control Authority

Petroleum Tax

Office

8

Key petroleum sector players

Gassco Petoro Statoil International

companies

Gas transport

operator

Management of

the SDFI • 137 licences

• 40 fields

• Largest Gassled

owner

Listed

international

energy company

Largest operating

company on the

NCS

Companies that

are awarded

licences by

Ministry

State ownership:

100%

State ownership:

100%

State ownership:

67%

State ownership:

N.A

The legal and regulatory framework

• General

− Resolution 1/1963 – national sovereignty over NCS

− Law 21/1973 on exploration (national sovereignty over NCS)

− Law 35/1975 on taxation, last amended in 2005 (link)

− Law 72/1990 on CO2 tax on petroleum activities

− Law 72/1996 on petroleum activities (Petroleum Act), repealing Law 11/1985 (link)

− Regulation 653/1997 – on petroleum activities (link)

− Regulation 749/2001 – on resource management

− Regulation 1625/2005 – on third parties’ use of installations

• Natural gas specific

− Law 61/2002 on internal market for natural gas (Naturgass loven – link - amended)

− Regulation 1724/2002 – on tariffs for defined installations (Gassled-tariffs) (link)

− Regulation 1342/2003 – Common rules for the internal market for natural gas (link)

• White Papers (government reports to Storting) on oil & gas sector (latest in 2010-2011) and climate (2012)

The Petroleum Act

• Chapter 1 Introductory provisions

− Right to deposits, resource managment, lincence requirements, scope and definitions

• Chapter 2 Exploration licence

• Chapter 3 Production licence

− Opening of areas, granting, state participation, operator, work obligation, duration, right of others, relinquishment,

surrender

• Chapter 4 Production

− Prudent production, PDOs, licence to install and operate facilities, production schedule, joint petroleum activities, use

of facilities by others, fees

• Chapter 5 Cessation of activities

− Decommissioning, liability, takeover by the state

• Chapter 6 Registration and mortgaging

• Chapter 7 Liability for pollution damage

• Chapter 8 Special comepnstaion to Norwegian fishermen

• Chapter 9 Special requirements to safety

− Emergency preparedness, safety zones, suspension of activities, qualifications, documentation

• Chapter 10 General provisions

− Prudent activities, management of activities, information, penal provisions, …

• Chapter 11 Management of the SDFI

Regulation on petroleum activities

Classification: Internal 2012-08-20 11

• Chapter 1 Introductory provisions

− Scope and definitions

• Chapter 2 Exploration licence

• Chapter 2a Impact assessments relating to opening of new areas for petroleum activities

• Chapter 3 Production licence

− Public announcement, application, fee, criteria for granting, conditions and requirements, state participation, work

obligation

• Chapter 4 Production

− Evaluation of deposit, PDOs, environmental impact assessment(s), production schedule, field report, transport

facilities

• Chapter 5 Production fees and area fees

• Chapter 6 Cessation of activities

− Decommissioning, impact assessment, liability

• Chapter 7 Information and documentation

− Drilling and well activities, annual field status report, info on petroleum produced, sales, plans and budgets, R&D

• Chapter 8 Management systems for petroleum activities

• Chapter 9 Access to upstream pipeline networks

• Chapter 10 General provisions

− Transfer of a licence, insurance, audit, labour and trade unions, use of Norwegian language, naming of deposits,

training of civil servants, supervision, penal provision

The licensing system

Nomination Announcement Application Negotiation Award

• NCS

divided into

blocks

• NPD

gathers

geological

& scientific

data

• MPE

carries out

impact

assessment

• Industry

consulted

• MPE

proposes

blocks for

licencing

• Storting

makes final

decision

• Announcement

of blocks and

areas by MPE,

specifying:

- Who can apply

- List of blocks

and areas

- Conditions for

the award

- Negotiation

issues

- Award criteria

- Documents

requirements

- Fee for

handling of

application:

NOK 60,000

- Application

deadline and

time of award

• Companies

submit their

applications

for blocks,

including:

- Blocks

applied for

- Priority

- Participating

interest

- Operatorship

- Exploration

work

obligation

- Duration

- Company

structure

• Issues for

negotiation

with MPE:

- Extent and

content for

the work

commitment

- Seismic

- Number of

wells

• Award

criteria:

- Technical

expertise

- Financial

strength

- Geological

understanding

- Experience in

NCS or other

similar areas

Naturgassloven – Act on natural gas

• Para. 1: Scope – transmission, distribution, supply and sotrage of natural gas not

covered by the Petroleum Act

• Para. 2: Definitions – mirroring relevant EU internal market definitions

• Para. 3: Access to infrastructure (not upstream pipeline systems)

• Para. 4: Delegated acts

• Para. 5: Annulment or change of licence

• Para. 6: Administrative penalties

• Para. 7: Review

• Para.8: Entry into force

Classification: Internal 2012-08-20 13

Regulation 1342/2003

• Chapter 1: Introductory provisions (scope, definitions)

• Chapter 2: Impact assessment and licencing etc.

− Small scale transmission, distribution and LNG infrastructure does not require

licence

− Non-discrimination principle

− Lincence conditions

• Chapter 3: Accounting, information obligations, maintenance etc.

− Requirements for operation, maintenance and development of infrastructure

− System information to third parties, use of information by operator

− Obligatory contractual information for consumers

• Chapter 4: Concluding provisions

Classification: Internal 2012-08-20 14

Gas transportation system

• The world’s largest subsea gas transport

network

• Export capacity is 120 bcm

• Upstream third-party access (TPA) system

• Developed in conjunction with production

EEA agreement

(1994)

Gas Directive (1998)

Update of Petroleum Law (2003)

Gassled

• Owner of all pipelines, terminals and Kårstø process facility

• Established on 1 January 2003

• Joint-venture of main users of transportation system

• No employees, organised through various committee

Gassco

• Operator of gas transportation system owned by Gassled consortium

• State owned, neutral and independent

• Independence and equal treatment as guarantee of «efficient utilisation» of Norwegian gas resources

• System operation: planning, coordination and management of gas streams to the markets

• Capacity administration: allocation and distribution of transport capacity

• Development of infrastructure

Key figures

Regularity 1 99.17 %

Quality 2

99.99 %

Total volume of gas delivered to receiving

terminals 94.2 bn scm

Highest daily volume delivered

360.8 mill scm

Total volume of other products 3 delivered from

the gas transport system

7.99 mill tonnes

Gross tariffs NOK 25 236 mill

Operating costs NOK 5 105 mill

Operational investments NOK 830 mill

Major projects NOK 2 378 mill

1 Regularity is measured as the volume delivered from the transport system

(Gassled area D) in relation to shipper orders. 2 Quality standards are specified in Gassled’s terms and conditions, and are

measured in relation to the gas quality delivered from the transport system

(Gassled area D). 3 Ethane, propane, butanes, naphtha and condensate (light oil).

Source: Gassco

Capacity administration: access to pipelines

• Capacity available to all shippers provided that:

− spare capacity is available in the transportation

system;

− shipper’s need for transport capacity is

demonstrated;

− shipper’s gas complies with certain technical

specifications (quality and pressure);

− shippers demonstrates sufficient financial

strength or provides a guarantee.

• Access tariff set by Ministry; 9 tariff areas.

• Terms and Conditions for shippers (link)

− Booking, nominations, offtakes, monthly

invoicing similar to European TSOs Source: Gassco

Capacity administration: booking

• Long-term and medium-term products

− made available for long-term and medium term booking twice a year

− owners have preferential rights up to two times their ownership interest..

• Short term product

− made available on daily basis.

• Within day products (up to 4-5 weeks ahead)

− can be booked on a first come first served basis 24 hours a day.

• Right to use of capacity may be transferred in the secondary market on bilateral basis or through an open market

• Bids for and offer of capacity can be placed on the market place at any time for all capacity products (within day, short term, medium term, long term).

• Bids/Offers on the market are anonymous.

Infrastructure developments

• Gassco required to present recommendations and

investment proposals for Norwegian gas

transportation system

• Annual transport plan developed with shippers

based on capacity bookings

• Gassco ensures neutrality and comprehensive

assessment of alternative options and economies of

scales

Perspectives on the European gas industry

Slow

liberalisation

Early phase of

liberalisation

Liberalised

markets

• Development of liquid traded market

places

• Sales contracts and pricing based on

different market realities

• Market dynamics still create geographic

differences

• Liberalisation gives access to new

customers and sales channels

A “three speed” Europe

A changing gas market

Unbundling the traditional supply chain

Producer

National importer Regional / Local

distribution company Aggregator

End user

Towards the European Gas Target Model

• National markets – Local monopolies

• Long term supplies at beach/border

• Oil-indexed contract prices

A competitive pan-European market

Development of liquid traded market places

Diversified pricing: Oil or market indexed

TTF

NBP

Past Present

🚢

🚢

🚢

The 2020 package has contributed to high EU end-user prices, particularly in power

Retail electricity prices for industrial consumers in

2012

… and yet wholesale electricity prices in the EU are close to those in the US

31%

21%

48%

Ge, energy Ge, network Ge, taxes and levies

→ High cost impact of RES-promotion (net support from current schemes expected

to be €50bn/yr in 2020)

→ National policies are distorting pricing signals in the market

Breakdown of household electricity bill in Germany

2014

-03-

05

25 Classif

ication

:

Intern

al

Sources: Eurostat; Energy prices and costs report (European Commission, 2014), p. 177; Frontier Economics report on 2020 framework

Multiple targets in the 2020 package have weakened the ETS price signal

• EUA prices do not provide incentives for

− Low-emitting generation to run before higher-emitting*

− New investments in low emitting or non-emitting generation

− Market based RES investments

• There is currently a considerable oversupply of EUAs

− Oversupply is seen in the price level

• Four factors explaining the oversupply, which is expected to last into the 2020s

• National subsidies provide stronger incentives, but are also unreliable due to possible regime changes

Share of factors behind the oversupply of EUAs 2008-

2020

0

5

10

15

20

25

30

Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

EUA Price

Economic Recession

Overlappinginstruments

International credits

Distribution ofallowances by memberstates

2014

-03-

05

26 Classif

ication

:

Intern

al

Sources: GreenStream: Oversupply and structural measures in the EU ETS, September 24, 2013

EU energy policy framework

• EU 2050: Critical role for natural gas acknowledged

• EU 2030: Less targets, focus on affordability – slow process

• EU competition law may rein in subsidy spree (state aid guidelines)

• No functioning ETS anytime soon

• Fragmenting policies challenges market-functioning – towards re-nationalisation?

• Lack of progress, continued uncertainty, complexity and inconsistency will continue

to hinder investments

2013

-10-

28

27 Classif

ication

:

Intern

al

Europe has no coherent energy policies

• Not fully integrated energy markets

• Energy policy is a national prerogative,

creating diverging policies

• Adapting to national differences is

challenging for market players

UK

Gas

Coal

Nuclear

Renewables

Shale gas

Poland

Gas

Coal

Nuclear

Renewables

Shale gas

Germany

Gas

Coal

Nuclear

Renewables

Shale gas

France

Gas

Coal

Nuclear

Renewables

Shale gas

Italy

Gas

Coal

Nuclear

Renewables

Shale gas

KEY Very

Hostile Hostile

Neutral/

Mixed

Mild

support

Strong

support

Source: Lambert Energy Advisory Ltd

Classification: Internal Restricted 28

Policies takes its toll on utilities

2014

-01-

28

29 Classif

ication

:

Restri

cted

0

100

200

300

400

500

600

700

Demand2012

Declineindigenousproduction

Demandgrowth

Supply gap2030

A European supply gap could emerge

• Europe will require new gas supplies

− Demand recovery?

− Falling indigenous production

− Strong competition for LNG

− Few low-cost options for new supply

• Uncertainties

− US LNG supplies to Europe

− European shale gas

− Russian exports

30 Sources: IHS CERA, Statoil

European supply gap towards 2030 bcm

Contracting and pricing in the new European market:

A company view

2013-10-28 32 Classif

ication

:

Intern

al

“Thanks to its flexible approach on gas prices Norway has become

the largest gas exporter to the EU.”

Tweet by Commissioner Oettinger on 22 November 2013

“Norway's flexible approach on gas prices gives it a competitive

advantage and Norway will be a long term key gas supplier for the

EU.”

Official statement by Commissioner Oettinger on 22 November 2013

Source: Wingas

History of Long Term Agreements

• Financial backbone for infrastructure development

• Security of supply

• New supply chain developments

Typical customer off take flexibility

• Duration typically 25 to 30 years

• Build-up, plateau, tail-off periods

• Beach/border point deliveries

• Volume, including daily and annual

customer off take flexibility

• Force majeure rights

• Pricing reference to alternative fuels

• Regular price reviews

• Conflict resolution mechanisms

Daily Take or

Pay obligation

Delivery obligation

Annual Take or

Pay obligation

Annual

flexibility

Daily

Illustrative customer

off take

Daily

flexibility

Key provisions in traditional long term contracts

Gas price formation in liberalised markets

• In liberalising markets, gas prices will

gradually adapt to new market realities

• New sales are mostly linked to hub gas price

• Other references available

Gas price development * [EUR/Mwh]

BAFA, German import prices

NBP, UK hub prices

* Sources: Heren, BAFA.de

0

5

10

15

20

25

30

35

2000 2002 2004 2006 2008 2010 2012

• Adapting to new market realities

through commercial negotiations

− Increasing share of gas hub

pricing

− Structural changes

• Reducing future price review exposure

Evolution of price indexation

Sales to end users

Traded markets

Relative change in sales channel

mix in Europe Sales through LTCs

Diversity and

flexibility in future

gas sales

portfolio

Portfolios of tomorrow

Directional development of sales portfolio

Current long term

contracts

Renewal

- Long-term contracts will remain, in

different shape

- More sales at the hub

- Upstream players serving downstream

users directly

38

The evolution of gas markets: an

upstream perspective

Olav Aamlid Syversen

Gas Regulatory Affairs

osy@statoil.com www.statoil.com

Classification: Internal 2013-03-05