the u.s. natural gas revolution: will europe be ready in time?
TRANSCRIPT
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p a p e r s e r i e s
The U.S. NaTUral GaS revolUTioN
Will eUrope Be ready iN Time?
Paolo Natali
Compagnia di San Paolo Fellow
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2012 Transatlantic Academy. All rights reserved.
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On the cover: A liquid natural gas tanker at port Mayumi Terao
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The U.S. Natural Gas Revolution:Will Europe Be Ready in Time?
Transatlantic Academy Paper Series
May 2012
Paolo Natali1
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The U.S. Natural Gas Revolution 1
Executive Summary
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The U.S. Natural Gas Revolution 3
Introduction
The shale gas
revolution has
the potential
to terminate
the Wests
dependency on
energy supplies
produced in
remote regions
of the world.
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g f
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Transatlantic Academy4
[G Kf ]. T IEg Ag, f , f k f
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f f
f f LNG
b E. Nb j Energy
Strategy Reviews j b
[B T ]. E ,
U.S. Cg R S
w LNG k w
b x g
[R ].
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Transatlantic Academy6
The relative
capacity of
member states
to attract natural
gas imports varies
widely across
the region.
The Decline of
Declinism in
Natural Gas, and
a Booming LNG
Sector
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Regional Natural Gas Prices
Source: U.S. Energy Information Administration 2012. Argos, Heren, Platts front month prices, 2012
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The U.S. Natural Gas Revolution 7
Demand for gas
will increase
overall in Europe
but geographical
speaking it will
be driven by the
eastern side of
the continent.
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w f
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E [P ]. T
q f b f g fw, U S
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LNG g f x (
b w ,
b f ),
kg f
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E [D ].
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The U.S. Natural Gas Revolution 9
Europe Gearing Up for the LNG Impact
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, 6 b.
A Tale of Pricing
T LNG g E
f g- w f
EU27 and Turkey.
Market Structures as Functions
of the Past2
World Gas Trade
Source: Congressional Cartography Program, 2010. Data from U.S. State Department and BP
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Transatlantic Academy10
fxb
k , w w b
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g ww . T,g w g kwg
LNG w g w k w
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k f f g w
LNG E : xg
Imports in Europe per Exporting Country 2010 Share of LNG World Imports 2010
Source: GIIGNL, The LNG Industry 2010 [Europe includes EU27 + Turkey]
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The U.S. Natural Gas Revolution 11
6 b, b w x w
3 b (g b b),
w w 5 b (w
4 b g)
LNG b
b, g 7 b (
f w w b b b, g
).
Regasification Capacity becomes Paramount,
but its Location Too
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g f
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f f g.
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b w f g
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Pricing of LNG from Qatar by Destination
Source: Waterborne LNG netback calculations 2011 (elaborated by Daniel Fineren)
Of the 20 existin
terminals and
the 6 that are
already under
construction, onl
one would direct
serve one of the
member states
that are currently
depending on
Russian imports
for the quasi-
totality of their
gas supply.
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Transatlantic Academy12
g- g g f
, x
f R .
Alternatives to Russian Gas
T R
g g wk w E.
Ag g fw S I
4 f , w
LNG terminals 2011-2020 by Volume ( bcm) Same by Price ( billion)
Source: GLE investment database and their internal assessment
LNG Terminals in Europe
Source: GLE map 2012
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The U.S. Natural Gas Revolution 13
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f g, x f G 76
f w g f R ff
: g g
f J 9, R gf
w b ff
g R , g
Gk [N ].
European Natural Gas Market and Major Import Sources
Source: BP, Statistical Review of World Energy, 2008
During the gas
supply disruption
of January 2009
the Revithoussa
regasification
terminal alone
was able to
entirely offset th
missing Russian
volumes.
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The U.S. Natural Gas Revolution 15
Physical vs. Regulatory Progress
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w g f jf
w b g .
T f g g
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B ]. I , b
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RPI-X g f
ff.
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f f g wk f g f
f b b.
Infrastructure and Governance
in the European Gas Network3
There is more
room for
optimization
of flows than
there is in the
improvement of
infrastructure.
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Transatlantic Academy16
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The Case for Improving Market Governance
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f f , b
b W
f W W II. Bf
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98, w wk-b
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g, b g g -w
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E. T g
ff w g, ff
k g . B
b w
wk.
T g f k bz
EU bk
99 b fw
ff g xg wk
q f f k f bg g
f f w
f k
, , b
wk. T b bj
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k b
g q k,
b f . A b
, b w g
EU , w f
N-, -- f;6 b f k b f
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b f w, g
k, .
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I f, f w E
g wk f ff.
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w w : f
b f g- bkg b
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f ; f ff ,
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f k b
(g w g)
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, w -b k
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x: b fw F, S,
I w f b x
[L M ].
The amount of
capacity that
remains unused
at cross-border
points varies
from zone to
zone, but on
average remains
higher than the
actual security
of supply needs
would suggest.
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The U.S. Natural Gas Revolution 17
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LNG . (T xg
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x w S, w
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w b b g
w. A
g, .. f fw g
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b b bw PEG N
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b f fxb G
f N, w w
w b b f b f
f g .
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xg fxb,
b g g k f f
b . T b-g f
b f bz f E g
k b b, b
g w
bf f gb g g b g. B b
b .
The harmonizati
of rules appears
to be something
that the gas
market left to
itself is not able
to provide.
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The U.S. Natural Gas Revolution 19
Cross-Border Gas Shipping Today
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A , -b g f g
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k f g
g b f g
b f T S O (TSO),
b b
g . I g
g ,
k f ff TSO w ,
x x w
g
g ff w
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g . I,
f , ,
f E q
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wg g f
D b TTF A b CEGH Bg, g x
b Bx .
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b f -f ,
g q, g g,
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f g
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g g f
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b w bg
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f (k-b bg w
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w f f,
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w (g,
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b g, gg
bk : b w
bk g f g-
f f
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k f .
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fw k, f x, S g
b k ff b gf
, b f Sk,
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b g LNG. U C
b, g f Ib
(M Eg)
Mk
What Policy Options for Europe?
4
Cross-border
shipping of natu
gas is a relatively
cumbersome
activity within
the EUs territory
due to the lack
of regulatory
coordination
among member
states and the
presence of a
large number
of Transmission
System Operator
(TSOs).
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Transatlantic Academy20
Box 1: From TTF to CEGH
Imagine that a company has bought, or is otherwise going to hold, a certain volume of gas for
a period of time, starting the following month (i.e. a front month contract), at the TTF hub in
the Netherlands. This company believes the price differential with the Austrian hub CEGH at
Baumgarten will increase, and therefore intends to sell this volume there. Leaving aside for
simplicity any license requirement, in order to simply ship the gas across the continent, the
company will need to complete the following:
Acquire exit capacity from the Dutch TSO GasTransportServices at one of the five exit points
toward Germany (Bocholtz, Zevenaar, Winterswijk, Vlieghuis, Bunde).
Match it with entry capacity into Germany from the appropriate TSO (Open Grid Europe,
Thyssengas, ENI GT DE depending on entry point).
Move it further inside Germany with other TSOs as necessary.
continued on page 21
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The U.S. Natural Gas Revolution 21
f Bg Tk. T Gk
R
Sk b.
A f Sk, g fw f
Bg b , b bf
g Bg, LNG
S w g
b Bx . T x f w
- fwk,
b f Sk LNG
g g S. T x f 9
g w
g b f g R
b bg G b
NCG g g Cz Rb.
T b
z k f S, f
g w b w
f q b NCG. B w g
g f , f, ff
f LNG S q NCG E
b, gg b
k g
f J 9.
continued from page 20
Use exit capacity at either Oberkappel (Open Grid Europe or GRTGaz Deutschland) or Burghausen
(Bayemets or Gascade).
Buy entry capacity from the corresponding Austrian TSO (BOG for Oberkappel, or Gas Connect
Austria for Burghausen).
The capacities acquired need to match in terms of volumes and timing, and in order for the shipping
to be guaranteed, all of them need to be firm capacities. Any failure to obtain firm capacity in a
segment of the route, with the consequent need to use at least interruptible capacity, will expose
the entire route to risk of being disrupted.
Imagine that, for example, the entry points from Germany are congested, and neither BOG nor GasConnect Austria have firm capacity available for the specified time framework. In addition, this time
the owner of the volumes is particularly unlucky, and it looks like no such capacity is available on
the secondary market either. BOG offers interruptible at Oberkappel. The possibilities are:
Sell the volume at the German NCG, provide the Austrian counterpart with gas sourced locally at
CEGH, strike two decent deals but forget about making a profit on the price differential. After all,
this is exactly the reason why there is a price differential.
Buy interruptible capacity at the Austrian entry point, be lucky, and still be able to fully exploit the
price differential.
Buy interruptible capacity at the Austrian entry point, be unlucky, and get interrupted for some
days during the contract. During those days, sell the German volumes at NCG day ahead and
provide the Austrian counterpart with local volumes sourced at CEGH day ahead, making a loss in
the process.
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Box 2: LNG from Spain to Slovakia
In order to ship gas landed at the Bilbao LNG terminal, a shipper would first of all need to enter
and exit the Spanish system operated by the TSO Enagas.
The gas must then pass through the three PEG balancing zones in France (TIGF operated by the
eponymous TSO, then South and North operated by GRTGaz) to reach the German exit point at
Medelsheim.
After the border crossing, the gas would be in Germany and in the pipes operated by either
GRTGaz Deustschland or Open Gas Europe.
At this point, the long process already described in Box 1 needs to be completed in order to
reach Austrias eastern border at Baumgarten. As the Slovakian TSO Eustream now has physical
bi-directional capacity at the Baumgarten entry point, the gas can then be shipped into Slovakia by
booking the corresponding capacity.
More likely, however, the gas would be shipped through the Czech Republic (Waidhaus or Deustch
Neudorf entry and Lanhot exit) via the TSO Net4Gas.
This physical shipping of gas from Spain to Slovakia is not what would happen even in a more
virtually interconnected system, as there will always be different liquidity levels at different points in
the network, and most likely this would lead to cheaper opportunities physically closer to the point
of demand. In this case, unless the severity of the disruption drains out spot availability at hubs,
continued on page 23
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The U.S. Natural Gas Revolution 23
Mkg b g b
f fw
bw : f g b g z g,
w w , b ,
wb fw f g g f
R k . A g LNG
S g A w w
g b AOC f g Bg.
Of , fw f
g g
E f R -. T
f w w kg
g g w. B
ff ff fxb
E E k, b
b ff b g
b .
The Needed Change and its Drivers
Ig , g
w b
, w b
f g E
w w b f
f -b , k w b Bx
g f LNG S
Sk.
B -b x f
k bg
continued from page 22the spot price at NCG is likely to remain lower
than that of landing a spot LNG cargo in Spain
and shipping it in the byzantine way described
above. But with more virtual interconnection,
the costs of the two operations would
influence each other, mitigating spot price
spikes and therefore ultimately providing
physical volumes at lower prices.
f . I TSO bg z b, fwg
z w k
:
C
b f bkg
b . I f b
b,
g g b
.
Cg g b
gz w bk
f -b g
f g , w
b f g, w b k
bg g
w k
k .
Rg q w g,
TSO, g,
b z w
, , b
Box 3: Moving Gas Virtually from Italy to
Bulgaria through an Optimization Strategy
Customer A in Bulgaria wants 1 mcm/d.
Customer B in Italy has 2 mcm/d available
in Bulgaria delivered from Russia, and 1
mcm/d of LNG delivered to Italy.
Customer A buys 1 mcm/d Russian gas
in Bulgaria from customer B, which serves
additional customer C in Italy with 1 mcm/d
LNG instead of using the physical Russian
flow in exit from Bulgaria onto CEGH and then
PSV, which is now only 1 mcm/d.
The process reduces the westbound flow
rather than reversing it.
What would be
needed in the
first place is the
creation of cross
border capacity
products.
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Transatlantic Academy24
f g f
TSO g
g. Rg
b b g/x , g
f g E b,
w f k
f f bg .
L b
b f w, b ,
b g
f . O b
q q f f f
b b b f b
w b ( x f I PSV). Ow
b w k b f
/x g ff
.
A b ,
b f
E k
b. T EU g f g k E
gf w
z f , g
TSO g b w .
A f g
f b f b w
f. A ,
f Bg b
5 R g,
w x f P (48 ), w
f g ggb, R, w g
f (g R g
f gf 7 f
).
Dependency on Russian Natural Gas Exports
Sources. EU27 countries: Commission Staff Working Document accompanying the proposal for a Regulation repealing EU Directive 2004/67/EC
on the security of gas supply, July 16, 2007. Non-EU27 countries: U.S. Energy Information Administration, 2012
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The U.S. Natural Gas Revolution 25
F, g f f U.S. g gb LNG k,
f x w
f E, wk w
z, g
-b g. Kg
gf f b -
f- bff fg, b ff
w 5
jfb g. I
, g x x
U.S. g w b ,
f -k LNG x, w b
LNG , g
k f U.S. k. I
w, g- b w g
f
LNG g w , fg
k, b f
w b f gf
f E. W E g
b gf x
f f:
S, I, G
bk f
f b ;
g kg
b
g w-b f f
g;
w k k
w f b
EU E Tg S. T
b w b f
g, k g
f w.
F, g g E b,
w z f fw w ,
f g. P g wb w
g f f g g
, g
g f g
w g .
The Opposing Factors
Igg wk ff k
f f k. T b w
E g wk b
f g g kg
gb k. T w k fwk f g
g E wk k g
w b bf
f g b gb k. A
f gb g fw kg
g w, k,
w fw w w
b f .
O f g f z
:
, w b b bw f b ,
w b E k f g
gg j fg
f q. O g
w b , b g f
f zg:
Rg g w
g w g
w k g
f , g ,
f. I , f , w
LNG w w k bf f
.
T g b x EU
E-w k g
An historical shif
in global gas flow
is taking place
right now, and as
in every market,
second comers
will have fewer
opportunities.
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Transatlantic Academy26
b. T kg k fg, f
b f fg
, wg f ff
bw E b,
g bg
f g
f x
g k f .
What Direction?
Mk ff b bg b b
k . A b , f g b f
. T w
, g w
f g wk,
f E g
k g f f
kg , f
. P f b
w g f
, w f g
bg f g b
wk b
f f .
B g f g fwk
b bz kg EU
(998, 3, 9), w f
b TSO
g g f
g g
, g g
, b
k ff f g
w w b f b f TSO -k f , g
f k f z j
k f z. F x, g
f g
wk f TSO
. If f f bw b f ,
-b w b f w k
f g w f ff
.
A x f g b, w
wg w g
k g, b
b g b g
g bz E k.
I w b b
b bg f TSO b f
TSO g . M, E
fg b
g f f w
gg z b. T
f b f gf
, f f -w b
w b- E
. A j k
g b wg
w fg k, w f
, f b.G f b
g ( w f -b
z g) w
( w g
), k
g- bf f z
k E . T
g , w
f f
EU-w g k, b f
.
E ff E b,
w w f
g k f,
w b g
f , b
g . A k b
The monopoly
power that is still
held at many
levels hinders
the spontaneous
development of
the European
gas market into
a competitive
playing field.
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The U.S. Natural Gas Revolution 27
q, g- g
g bk b ,
g bw g-
w w g g f b b
w b ff b ff,
jzg bf f -kg
f g f .
R g w b
- g- , k
b w w z
w g -b g
k g bf bg b. T
f gb g k w
g- LNG zgw, b
w . T f
x k g f
g kg E
.
Pressure from Abroad
under a Transatlantic Perspective
I b fg , LNG
f -x f EU f g, , E LNG
- f gb k. S
g f
f E g k w
b b -g f . T
g f q gb g k
gb , bf
E w b b , w b b
g.
C w b g b f
fg , g wk gg gf x
f , gb LNG
b, , f ,
f g g. T w
w gg
The Future of the Global Gas Market
Source: BG Group 2011
The real risk is
that all these
obstacles
slow down the
harmonization
process in a
way that easing
cross-border
shipping takes
too long before
becoming visible
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Transatlantic Academy28
k b C b , b w f
g gb g k. A ,
I f gg j g f
g wk. I gg k
f f A LNG, b
f U.S.-x LNG. A g g
f LNG k, b
. I , b 55
f LNG k
C, I, J, K, Tw. A
bkg f , S C
w kg w g k w.
D U.S. g k w
b , f g g
f g
xg wg
. T LNG
U S g bw b/, g 5-8
f gb k. T
b g f LNG W
E, S, w 49.5 b
gf f w b 5
b z . Pg
w b b f E
f U S. A
b f x ,
g w ff w A g
g . C,
f g w E w f
U.S. . B E
f A , g
f - LNG w
g.
Developments in
the U.S. domestic
gas market will
also be pivotal, as
the former largest
gas importer
disappears from
the demand curve
and might soon
start exercising
its weight on the
supply curve.
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The U.S. Natural Gas Revolution 29
I f E gz b b
gb g k q w
bg . E g
, b j
g .
A b w, EU
b g g bf
f . C-b g
b f b g
z f k ,
f TSO g w g q f
g . A E g
b g, b
f xg b g
b, f g f
q (
g f w, g g, )
z f ,
, wk q.
I b b f
LNG g w Ib
P Sk, P,
Policy Recommendations
5
Bg . O w w E k b b
g f LNG b k
f f f ff f
E .
T x f w
b g
g q f f
g, F Pkg f
bz f g k. T
f g bz k w
q g f TSO k E , w
z f g
g. C- bw TSO
gg b
b- . B
b kwg k f w
f f g b b
f , g
q. I g, EU k
q , w
k w k g .
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Transatlantic Academy30
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