1The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

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The experience in Spain Loss of demand and the outlook for recovery in the conventional and power sectors

Alberto HernándezGas Supply and Development Director, ENDESA, S.A.

2The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

Limited indigenous production. Highly dependent on imports (>99%) for its gas supply.

One of the more liberalized markets in Europe.

Six operational LNG regasification terminals. International pipeline connections with Portugal, France and Algeria via Morocco.

Gas demand growth driven by power generation in the past.

Moderate degree of seasonality. Hydro power generation affects the seasonal gas demand in the power generation sector.

Long term gas prices are predominantly linked to oil prices.

1. Spanish gas marketOverview

3The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

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100

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400

2002 2003 2004 2005 2006 2007 2008 2009

TWh Utilization rate

Nominal production

Current production

2. Current situationGas Demand in Spain

- 10.4 %3. Total:

- 14.2 %2. Power generation:

- 8.0 %1. Conventional market:

2009 vs. 2008

Sharp decrease in gas demand in all sectors due to financial crisis.

Huge investment in CCGT capacity in the past years, but the utilization rate is low.

30% 43%57% 59% 56%

46% 52% 44%

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bcm

Conventional demandPower generation demand

4The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

Norway9%Qatar

12%

T&T10%

Egypt11%

Others10%

Nigeria14%

Algeria34%

2. Current situationGas Supply in Spain

• LNG: Represents ~75% of total Spanish gas imports (2009 & 2010).

• Role of Spot: Descending from 11,4% in 2004 to 3,6% in 2009.

• ToP: Almost all LNG contracts with 100% ToP; however some partially divertible.

• Sources: 11 supply countries. Algeria represents 36% of supply (47% with Medgaz).

Oversupply situation can be managed through LNG diversion as long as opportunity costs allows it.

7,5 7,7 9,17,1

11,2

-1,1-1,6-2,6

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2002 2003 2004 2005 2006 2007 2008 2009

bcm Shortfall / OversupplyTotal demandLT contracts (NG+ LNG)

5The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

2. Current situationGas infrastructures in Spain

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bcm Utilization rateLNG entry capacity

LNG imports

64%68%

64% 60% 50% 43%49% 44%

•Spare regasification capacity:

–44% average utilization of total available capacity and 85% utilization in a peak day in 2009

–In 2011, with Medgaz on-stream, expected average utilization will drop to 27%

•Balearic Islands connected to mainland grid in 2010

•Transport network bottle-necks consumption areas require regas capacity nearby

•Insufficient underground storage capacity (2,5 bcm)

•Limited international connections with Europe. New capacity expected start-up: 2013-2015 (+ 7,5 bcm/y)

Network constraints, limited international interconnections and insufficient underground storage restrict optimal operation.

6The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

Regulatory summary

Regulatory summary

Network is limited in terms of storage and length.Regulation restricts secondary capacity transactions and

price transparency in the benefit of security of supply.

– Gas network infrastructure belongs to transporters and distributors with regulated revenues. Open access to the network to retailers in transparency and no discrimination conditions.

– Market is totally liberalized. Retailers are free to set their commercial rates. Only 10% of gas consumed under Last Resort Tariff, with aregulated price based on market conditions.

– The regulator defines infrastructure needs and development.

– There are regulatory barriers and insufficient infrastructure interconnections to develop a liquid Iberian hub.

– Agreement to develop a integrated Iberian gas system (MIBGAS). Several issues pending of harmonization. Slow development.

2. Current situationGas regulation in Spain

7The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

2. Current situationPricing in Spain

• No liquid gas index in Spain.

• Gas procurement costs in Spain are mostly linked to crude price.

• Decoupling between crude price and gas spot indexes. Spot price more competitive than long term contracts.

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Customs Price (Pipe+LNG+Spot)HH (Spot ref.)NBP (Spot ref.)Brent m-1; m-6

Decoupling between oil related formulas and gas hub prices.

8The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

2,7%3,1% 3,3% 3,6%

4,0%3,6%

0,9% 0,8%

-0,4%

-3,6%-6%

-4%

-2%

0%

2%

4%

6%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SpainEU-27USAJapan

3. Expected developmentSlow recovery expected

Source: Eurostat, IMF

Indigenous gas demand in Spain is

expected to grow lower than gas

demand in other markets.

Power generation gas demand will be heavily

influenced by wind generation.

The Royal decree 134/2010 awards Spanish

indigenous coal a special status.

15% of total electricity generation may be

sourced by burning indigenous coal, ahead of

imported coal, oil and gas over the coming

five years.

The “thermal gap”, will be reduced

over the next five years, and therefore

the demand of gas.

Evolution of GDP

6.324

8.532

10.095

11.897

14.536

16.323

18.421 18.623

5.066

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8.000

12.000

16.000

20.000

2002

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MW

Wind Power, Installed Capacity

9The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

38,6 38,6

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2.002 2.004 2.006 2.008 2.010 2.012 2.014 2.016 2.018 2.020 2.022 2.024

bcm

3. Expected developmentSlow recovery expected

Gas demand is not expected to recover 2008 levels until 2012/13.

?

10The experience in Spain. Loss of demand and the outlook for recovery in the conventional and power sectors

4. How to manage riskImbalance between revenues and costs drivers

• Growing liquidity in the Atlantic Basin LNG market.

• High level of competition in Iberia.

• Large customers and CCGTs are price sensitive.

• Diversions and open access to idle LNG infrastructure allows arbitrage.

• 95% of gas procured is based on Brent indexed long term contracts.

• No new contracts to be signed until, at least, 2015.

• Reopener processes needed to adapt price formulas.

Increase flexibility – Decrease price