OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

eO

XFO

RD

IN

STIT

UTE

FO

R E

NER

GY

STU

DIE

S N

atu

ral G

as R

ese

arch

Pro

gram

me

The global effect of LNG growth on European gas markets

Dr Thierry Bros

19th European Gas Conference – Oslo – 29/30 May 2018

Senior Research Fellow

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Gas markets work

Date Event Market ResultsState

intervention

2011Fukushima: 7% of global

LNG rerouted to Japan

Higher prices in Asia and

Europe with demand

destruction

No

2014 US Polar Vortex

Short-lived higher HH prices

with fuel substitution in

power generation

No

2015Groningen cap: loss of

9% of European supplyLower prices No

Winter

2016/2017

Cold weather & nuclear

shortages in France

Short-lived higher prices in

Southern Europe

Greece and

Italy declare

alert

12 Dec. 2017 Baumgarten blastVery short-lived spike mainly

in Italy

Italy declares

emergency

Jan 2018 US cold bomb cycloneShort-lived spike in New York (First Yamal LNG cargo to

Boston)

No

Feb 2018 Siberian weather in EU Short-lived spike in EU No2

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

EU sentiment changes vis-à-vis gas…

• Gas demand growing since 2014

• Gas infrastructure is the batteries of the new energy system

• Complete electrification will not work

• Gas is not just a bridge fuel for renewables, but it has its own future in Europe

• EU hasn’t stopped already all public funding for new interconnections

3Source: Florence School of Regulation

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

… But Europe’s schizophrenia remains

Policy makers Energy managers

On a foreign policy side, Russia is not an EU friend…

…but on the energy side Gazprom is the cheapest gas supplier than can, on top, provide any additional gas we may need.

EU Commission focus on consumers benefits (unbundling or roaming charges in telecoms)

Traditional energy managers focus on today’s P&L (integration, etc.)

4

With increased interdependency, how is Europe’s

schizophrenia going to evolve?

Who’s going to decide?

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

#FactCheck

5

Facts Fake News

If global gas markets were to tighten, Russia could quickly ramp up pipeline gas exports to Europe and displace some LNG there that could then be re-routed to alleviate shortages elsewhere.

Thanks to several comparative advantages, primarily the size of its reserves, the proximity of its current markets, its spare capacity (…) Gazprom is in a position to deploy strategy designed to create uncertainty about the price of gas.

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Gazprom doesn’t flood EU

6

Source: Gazprom, Entsog, thierrybros.com

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

3 options for Russia to manage prices

• Tightening supply - Increasing producers’ rent

• Demand destruction but no impact on exports

• 2012-2013

• Prompted new FIDs

High7.5$/Mbtu min

• Swinging supply

• Since 2014

• Most profitable in the long term

Med.c.6$/Mbtu

• Use of spare capacity

• Price war to shut in US LNG

• Lower revenues

• Can be done sporadically

Low4.5$/Mbtu max

7

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Month-Ahead Gas Prices

8Source: Argus Media, thierrybros.com

0

2

4

6

8

10

12

Jun-16 Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18

$/M

btu

All contracts roll on 16th - month 1 (1-15) month 2 (16-31)

LNG tightness (USGC FOB - HH) Anea TTF HH

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Preservation of competition• US Sherman Antitrust Act 1890

“An act to protect trade and commerce against unlawful restraints and monopolies”

• ACER 2017 Report on the Results of Monitoring the Internal Markets “Markets in NWE tend to score better on

metrics related to diversity of supply and upstream concentration. This results in better performing hubs”

2016 gross welfare losses: €3.5bn

• EU DG Competition “Competition policy in Europe is a vital

part of the internal market. Its aim is to provide everyone in Europe with better quality goods and services at lower prices. Competition policy is about applying rules to make sure companies compete fairly with each other. These are the reasons why the EU fights anticompetitive behaviour and encourages liberalisation.”

9

Source: ACER 2017 Report on the

Results of Monitoring the Internal

Markets

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

LNG supply growth

•32% of trade and growing

• Impacts also storage

•More buyers & sellers

• Increases global liquidity

•Even if more expensive than pipe, a low cost LNG project can thrive

•Customers are always better off

•Suppliers have to select low cost projects to be profitable

Competition Optionality

Security of Supply

Diversification

10

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Major projects to come on-line(on a FID basis)

11

Source: thierrybros.com

LNG only for North America & AustraliaNo upstream project in Trinidad and Tobago & Peru (LNG producers)

Russia25%

US21%

Egypt15%

Australia9%

Iran6%

Azerbaijan5%

Israel4%

Others15%

US52%

Australia23%

Russia18%

Others7%

LNG capacity

Russia30%

Egypt24%

Iran10%

Azerbaijan9%

Israel6%

Oman5%

Others16%

Pipe gas capacity

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Gas spare capacity

12

Source: thierrybros.com

Assuming transit via Ukraine unaffected, Groningen cap at 12 bcm/y & no major unconventional gas production in China

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

0

20

40

60

80

100

120

140

160

2016 2017 2021e (1.6% CAGR) 2021e (2% CAGR)

% o

f an

nu

al d

eman

d

bcm

Spare capacity (bcm) Spare capacity in % of wolrd consumption

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Quo Vadis

Quo Vadis• Is the EU gas sector framework

the most effective in order to maximize overall EU welfare?

• Following Naftogaz-Gazprom arbitration, same price in Ukraine and Germany

• Following EU Gazprom antitrust settlement, companies have the ability to switch Gazprom delivery point

Konoplyanik design• Proposal to establish a new

Ljubljana-based Soviet-style GOSPLAN… with an anti-Russian flavor

• Move delivery points of Russian gas to EU external border with higher entry tariffs to create entry barriers

• Great idea to be looked into!

13

Solution: one enlarged EU single zone with a single wholesale price, an entry fee and 2 exit fees to differentiate customers needing SoS and others

Validity of regulated transport tariffs (Norwegian Court of Appeal, June 2017)

OX

FOR

D I

NST

ITU

TE F

OR

EN

ERG

Y S

TUD

IES

Nat

ura

l Gas

Re

sear

ch P

rogr

amm

e

Thank you

14

thierry.bros@oxfordenergy.org

Twitter: @thierry_bros