EAGC Viewpoint 2011 Final

8/3/2019 EAGC Viewpoint 2011 Final

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Europes gas hiatus:sad ending ornew beginning?Key messages from the 26th European Autumn

Gas Conference held in the French capital Paris,in November 2011

DECEMBER 2011

iStockphoto.c

om/alexpforbes

VIEWPOINT


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2 2011 Gas Strategies Group Ltd

VIEWPOINT

Europes gas hiatus: sad ending or new beginning?2011 looks set to be remembered as the year when the many challenges that face the European gas

industry demand uncertainties, contractual tensions, regulatory pressures and policies favouring other

energy sources converged, with a vengeance. Their effects have been compounded by unexpected

events such as Japans Fukushima nuclear accident and the Eurozones worsening economic crisis.

As we approach the end of 2011 we witness some of Europes biggest energy companies, which

subsume much of Europes gas business, standing battered and bruised, and facing a difficult and

uncertain future. Especially badly hit have been E.ON and RWE, particularly because of Germanys

nuclear policy reactions to Fukushima. But other big players, such as GDF Suez, have not escaped

unscathed. How should the industry be responding?

That was the main question at the centre of the discussion and debate at this years European Autumn GasConference (EAGC), held in Paris in mid-November.

To gauge the industrys mood and expectations, Gas Strategies has been canvassing the views of the

EAGC delegates since 2005. In electronic polling, we ask them to vote on carefully framed questions

about energy industry trends. This Viewpoint analyses their responses and considers the implications for

Europes gas businesses.

There are big questions facing the managements of these companies regarding not just how to respond to

events so far, but also the uncertainties of the future. A clear message from the EAGC was that the industrys

future lies in its own hands: there are opportunities for the big energy players to contribute towards shaping

their future business environments. However, to date, their record of doing so has been poor.

Perhaps the biggest challenge now facing Europes gas industry, with long-term consequences from how it

is addressed, is how natural gas is to be positioned in order to have an enduring role in Europes fuel mix.

Another will be to resolve the contractual issues that have left big players buying gas under oil-indexed

long-term contracts for more than they can sell it. If these two challenges are met, a third will be to ensure

that sufficient infrastructure gets built for gas to meet its potential in Europe. In particular, how will that be

financed? A fourth challenge will be to ensure that Europe attracts enough gas supply to meet its needs at

prices that make gas competitive with other energy sources.

The industry will have to meet these challenges against a backdrop of increasingly interventionist and

sometimes conflicting policy and regulation, and growing competition for supply from other gas-consuming

regions, especially China and India.

On the other hand, the opportunities that exist amidst these challenges should not be underestimated.

The industry may have failed so far in getting its positive story across but this does not mean that its story is

not a good one; there is still time to redouble advocacy efforts to demonstrate to policy-makers, regulators

and other stakeholders that gas is abundant, affordable and secure, and will continue to be so provided

the right policies are in place.

The contractual issues arising from the differential between oil and natural gas prices will take time to be

worked out; but there are no insuperable barriers to building better commercial structures.

At present, uncertainty over future demand caused by the uncertain policy environment is hindering

investment in new gas infrastructure. Meanwhile investment flows to renewable energy projects which

enjoy significant direct subsidies across Europe.

To gauge theindustrys mood

and expectations,Gas Strategies hasbeen canvassingthe views of the

EAGC delegatessince 2005. Inelectronic polling,we ask them tovote on carefullyframed questionsabout energyindustry trends

Photograph on front page:

Parisian doors at this

years European Autumn

Gas Conference in the

French capital, the industry

had to confront the

question of whether it was

exiting a profitable pastor on the threshold of a

promising future.


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VIEWPOINT

Gas does not enjoy direct subsidies nor does it need them. Investment in gas infrastructure has alwaysrequired someone to take market risk but that risk was taken by the industry on the basis of fundamentals

that were understood. Financial investors have also participated in funding gas projects but only when the

market risk was being absorbed by the industry. Today, European utilities are capital constrained, operating in

a competitive market with an uncertain demand outlook, and are increasingly unwilling to make investments

in major infrastructure projects.

Financial investors, although having more capital available, will not take the market risk, especially in such

uncertain times. Likewise, gas suppliers (upstream) who might have been persuaded to step in have a choice of

where to put their constrained capital: in low-growth uncertain Europe or in high-growth more certain emerging

economies. If investment is to flow into European gas infrastructure, there needs to be a re-orientation of policy.

Policy will need to recognise the future role that gas could play in the energy mix. It then needs to be given

time to bed down without further changes. Only then will confidence be restored and capital released.

Regarding supply, the unconventional gas revolution and the rapidly growing LNG industry will together

continue to globalise gas markets, bringing abundant and affordable supply to regions hungry for more gas.

The industry will need to reassure policy-makers and the public that it can handle the potential hazards that

arise from technologies such as hydraulic fracturing. If the industry successfully addresses this crucial issue,

the International Energy Agency is amongst those who see natural gas on the threshold of a golden age.

Despite the gloom that currently hangs over Europes natural gas industry, there are reasons to be cheerful. But

the managements of Europes major energy companies will need to promote the role of gas in Europes low-

carbon energy future and engage with policy-makers and regulators to portray gas as part of the solution to a

low-carbon future rather than a fall-back option should renewables prove to be too expensive or too difficult.

Advocacy key to securing gas demand in EuropeEuropes gas industry is dismayed by how effective the renewables lobby has been in securing massive

subsidies, though there are signs that governments enthusiasm for such subsidies is waning.

The level of demand uncertainty the industry is facing as a result of European energy policy was highlighted

by Jean-Franois Cirelli, President of GDF Suez. In his opening address he showed a chart that dramatically

ECF: Decarbonised pathways

Gas Advocacy Forum: optimised scenario,low gas price, nuclear sensitivity

Technology (March 2011)

Bumpy growth (March 2011)

Stagnation (March 2011)

Pale Green (March 2011)

Wood Mackenzie EMS (2011)

IEA: New Policies Scenario (2010)

IEA: GAS Scenario (2011)

CERA global redesign (Spring 2011)

CERA Meta (Spring 2011)

CERA Vortex (Spring 2011)

800

750

700

650

600

550

500

450

400

350

3002005 2007 2005 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Bcm

European primary gas demand

Source: GDF SUEZ Internal analysis

In his openingaddress Cirelli

showed a chartthat dramaticallyillustrated howwide a range offorecast existsfor gas demandevolution inEurope betweennow and 2030.Even five years

ago, such a rangeof forecastswould have beenunthinkable


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illustrated how wide a range of forecast exists for gas demand evolution in Europe between now and 2030.Even five years ago, such a range of forecasts would have been unthinkable; at that time the conventional

wisdom was that gas consumption would continue steady growth, flattening off as energy efficiency

measures were progressively implemented. There are some observers and analysts who still hold to such a

view today. But clearly there are many who do not.

The key drivers of future European gas demand, in addition to economic factors, will be the extent to which

energy efficiency can drive down overall consumption and the level of demand for gas in power generation.

At this years EAGC we asked delegates: Which new power stations, by fuel type, will attract the most

investment in Europe over the next five years? (see Question 4 on p12). Voting trends over the past six

years have been clear: wind has grown steadily in popularity, while gas has been on a downward trend since

2007. This year, for the first time, wind knocked gas off the top spot. More than half the delegates voted for

wind while less than two-fifths chose gas.

Other types of generation fared worse, notably nuclear and coal. Votes for nuclear, post-Fukushima, collapsed

from 29% in 2010 to just 5%. Votes for coal evaporated, with just 2% in favour. Solar, at 4%, was up on 2010

but down on 2009.

These results support the recognition that as Europe invests in more intermittent renewable power generation

capacity, mostly wind, more gas-fired capacity will be needed to provide backup. From an operational perspective,

wind and gas emerge as complementary electricity generation technologies. However, from a commercial

perspective, there remains the question of how the provision of such backup will be remunerated.

Despite the nuclear accident at Fukushima caused by the Great East Japan Earthquake of March 2011, it is too

early to write off nuclear as a substantial long-term contributor to Europes energy mix.

We asked attendees what they thought of the implications for European energy companies of Germanys

decision to shut down all nuclear power by 2022 in the wake of Fukushima (Q13, p17). Only 17% voted

that no more nuclear power stations would be built in Europe and that existing nuclear stations would close

early, boosting gas demand and prices, though another 44% thought that nuclears share would wane in

countries not heavily dependent on it.

When asked what would be the biggest driver of gas demand in the medium term, half the delegates opted

for demand will grow robustly as renewables fail to live up to their promise and nuclear power wanes

(Q1, p11). But 36% thought that continuing economic difficulties would dampen overall energy demand,

including gas demand.

When asked what the role of gas should be in a carbon-constrained world (Q5, p13), half the delegates saw

gas as a destination fuel in a low-carbon energy world, while another quarter saw gas as a bridge fuel

to a sustainable energy future. Only 2% thought its use should be minimised because it contains carbon.

The clear message that emerges from these various responses is that the gas industry remains convinced

that its product has a major role to play in Europes future energy mix, as an alternative to more carbon-

intensive fossil fuels and as a complement to intermittent renewables, especially in a post-Fukushima era.

Moreover, as several speakers stressed, gas can fulfil the role of a mainstream fuel relatively cleanly,without any subsidies, and at reasonable capital expenditure and fuel cost. As a backup to intermittent

renewables, there would need to be mechanisms in place to cover the costs of capacity to produce,

transport and store gas for the times it is needed. That said, if gas is a necessary complement to

Despite thenuclear accidentat Fukushimacaused by the

Great East JapanEarthquake ofMarch 2011, it istoo early to writeoff nuclear as asubstantial long-term contributor

to Europesenergy mix


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renewables, the more renewable capacity is put in place, the greater a role that gas will need to play inproviding flexible backup.

The gas industry may have a great story to tell but, as a matter of survival, the industry has to convince the

outside world. To date it has failed to do that.

The industry has taken some initiatives. For example, a grouping of large gas companies Centrica, Eni, E.ON

Ruhrgas, Gazprom, GDF Suez, Qatar Petroleum, Shell and Statoil has formed an organisation called the European

Gas Advocacy Forum. But this forum appears to have no web-site and to have published only one report.

A more radical form of advocacy was suggested in Paris by Professor Jonathan Stern of the Oxford Institute

of Energy Studies. He called on the gas industry to pull together and finance a gas-fired power station

fitted with carbon capture and storage (CCS) to demonstrate that gas really can be a long-term low-carbon

electricity generation technology.

A suggestion from another speaker was that the industry should finance a major advertising campaign, of

the kind that used to be done well by the UK gas industry when it was state-owned. Reports suggest that

the US gas industry is already gearing up to do precisely that.

In short, there is a clear alternative future towards which the industry can steered but for this to happen a

new management impetus is essential.

Getting the price rightThe long-running debate over how gas should be traded and priced has taken several significant and surprising

steps forward over the past year. The consensus in Paris appeared to be that long-term contracts would remain

fundamental to the industrys commercial operation but that hub-based pricing in such contracts appeared to

make more sense than oil indexation in a world where oil and gas prices show wide differentials.

Interestingly, it is not just European gas companies struggling with oil-indexed contracts that force them

to buy gas more expensively than they can sell it who are taking this view. Buyers in other parts of the

world, notably Japan, are also increasingly dismayed at having to pay oil-indexed prices when hub-based

prices look so much lower.

In Paris, Yuji Kakimi, General Manager of the Fuels Department at Chubu Electric Power Company, one of the

largest LNG buyers in Japan and indeed the world, spoke of the absurd . . . extraordinary disparity of LNGshipped into Japan being priced at 1.5 times the level of NBP price and 3-4 times the level of Henry Hub

price. This situation is unacceptable to Asian buyers, he said.

Chubu Electric is not the only Japanese LNG buyer that feels this way; while the EAGC was under way in

Paris, a senior executive from Tokyo Gas was expressing similar sentiments at an LNG conference in Rome.

The long-held assumption that oil-indexed long-term contracts will prevail in Asia Pacific LNG markets, even

if Europe moves towards hub-based pricing, is being questioned as never before.

Mr. Kakimi looked forward to the start of LNG exports from the United States, expecting that they would be

priced on the basis of Henry Hub. Chubu Electrics strategy, he said, included engaging in more upstream and

midstream involvement, with a long-term contract already concluded for coal-seam gas in Australia and an

agreement to participate in a shale gas development project in Canada. He even went as far as saying that

Chubu Electric was planning to invest in North American shale gas production and liquefaction to meet some

of its LNG requirements. The company also aims to promote its own LNG trading business.

The consensusin Paris

appeared tobe that long-term contractswould remainfundamental tothe industryscommercialoperation


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We asked delegates to vote on the following question: The divergence of oil and traded gas prices over the

past three years has led to unprecedented pressures on oil-indexed long-term gas contracts. Where are we

heading? (Q9, p15)

Half thought that the longer the divergence lasted the more long-term contracts would be re-negotiated

as buyers sought price relief and sellers sought to protect market share. Another 30% voted that long-

term contracts would move from oil-indexation to hub-based pricing. So four-fifths thought that the pricing

mechanisms in long-term contracts would be substantially revised. Only 16% thought that as sellers

temporary concessions to buyers expired, we would see a return to the status quo. A tiny 3% thought that

long-term contracts were no longer justified for most of the gas coming into Europe.

A follow-up question (Q10, p15) sought the views of delegates on the likely consequences of a widespread move

to hub-based pricing. Two-thirds thought that pricing dynamics would change in ways that are hard to predict.

One-fifth took the view that such a change would put too much power in the hands of the large players.

There is a growing sense that when it comes to oil-indexation in long-term contracts, the genie is out of the

bottle and not just in Europe.

Will over-regulation throttle infrastructure investment?Europes gas industry has a long history of complaining that it is being hampered by overzealous and/or

inappropriate regulation. Conversely, policy-makers and regulators have often voiced their frustrations at the

industrys unwillingness to help facilitate the creation of a single energy market. These trends may not be

new but the intensity has grown as policy-makers and regulators have shown new determination to create

a single market and as gas businesses have found themselves struggling with a welter of new policies and

regulatory initiatives at a time of growing economic hardship.

Four-fifthsthought thatthe pricingmechanismsin long-termcontractswould be

substantiallyrevised.Only 16%thought thatas sellerstemporary

concessionsto buyersexpired, wewould see areturn to the

status quo

Japan LNG import price NBP Henry Hub

Dec2010

Jan2011

Feb2011

Mar2011

Apr2011

May2011

Jun2011

Jul2011

Aug2011

Sep2011

$/MMBtu

1.5 times higherthan NBP

3-4 times higherthan HH

18

16

14

12

10

8

6

4

2

0

LNG import price, Henry Hub and NBP

Source: Chubu Electric Power Company


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Interestingly,only 2%thought thatunconventionalgas wouldbe a game-changer inEurope, pushingout LNG andpipeline gasfrom externalsuppliers

A big issue is the effect that all this will have on investment in the new infrastructure that Europe needs, notjust to meet gas demand growth, but also to enable the single market function effectively.

We asked delegates: Will the Third Energy Package of directives and regulations finally succeed in creating

a single market within the European Union? (Q12, p16)

Two-thirds believed it would, but that we would not see a true single market until after 2020. Just over a

quarter thought it would not, either because the incumbents would continue to drag their feet and keep out

new entrants, or because the evolution of Europes gas industries since the Second World War makes a single

market an impossible dream.

With the assumption that gas will continue to be a major source of European energy supply, we asked: How

is the mix of gas supply sources to Europe likely to evolve over the coming two decades and what are the

implications for infrastructure? Which of the following is the most likely scenario? (Q15, p18)

Close to half the delegates thought that most LNG supply would be sucked into Asia Pacific as developing

economies grow, leaving Europe heavily dependent on pipeline gas from external suppliers. Europe would

therefore need to develop the much-vaunted fourth Southern pipeline corridor to import gas from Central

Asia, the Middle East and Africa.

Over two-fifths saw LNG supplying most of the growth in European demand, with pipeline gas imports

remaining important but not growing significantly. Interestingly, only 2% thought that unconventional gas

would be a game-changer in Europe, pushing out LNG and pipeline gas from external suppliers. Reassuringly,

only 7% thought that Europe would fail to meet its infrastructure needs, making insecurity of supply and highprices major political issues.

Assuming that policy-makers accept the argument that more renewables will require more gas-fired power

capacity as backup, demand for gas will get more peaky. We asked: Does Europe have the appropriate physical

gas infrastructure and commercial environment for gas to cope with and thrive in this scenario? (Q14, p17)

The responses were fairly evenly spread, between the 56% who voted yes, and the 44% who voted no.

A third of delegates thought that while the physical infrastructure would need major investment in pipelines

and storage, the commercial environment would provide the necessary incentives for investment and

profitable operation. A quarter were comfortable that with minor investment the physical infrastructure

would cope and the commercial environment would provide incentives for profitable operation.

Conversely, just over a quarter thought that while most of the needed physical infrastructure exists, the

commercial environment would neither provide the needed flexibility nor the incentives for profitable

operation. Just under a fifth thought that Europe had neither the necessary physical infrastructure nor the

commercial incentives needed to bring it about and that problems loomed.

On the issue of how the new infrastructure that Europe needs would be financed (Q16, p18), over a third of

delegates thought that a higher degree of equity or sponsor direct investment would be required. Just under

a third thought that Europes worsening financial and economic crisis would make it difficult to attract finance

to energy infrastructure projects. A quarter cautioned that the finance community would not step in and

save the day by financing the building of new infrastructure without long-term security. Only 9% believedthat securing finance would not be a major issue because there was plenty of pent-up money waiting to be

invested in sound energy infrastructure projects.


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VIEWPOINT

Concerns about the availability of finance also made themselves felt when we asked: What will be thegreatest strategic challenge to European gas companies? (Q11, p16)

Last year, in Berlin, a third of delegates opted for a radical shift in the power generation fuel mix, as

nuclear, clean coal and renewables expand their market shares and another third for the determination

of European policy-makers and regulators to create a single energy market. Less than a fifth opted for

recession or recurring weakness in the economies we operate in and only 7% for finance for new supply

and transportation projects becoming more difficult and expensive.

This year saw major shifts in opinion, with half the delegates opting either for economic weakness (33%) or

for finance becoming more difficult (17%). This was not surprising given current concerns over the economic

woes in the Eurozone.

These various responses illustrate clearly that if Europes gas industry succeeds in convincing policy-makers

that gas has a big role to play in Europes energy supply mix, the industry believes that getting sufficient

investment into the necessary infrastructure will be far from straightforward.

Securing investment in new gas infrastructure will require clear leadership. Governments need to decide

whether they want a zero-carbon future and if so by when. Having set their preferred trajectory, they need

to communicate with stakeholders, put in place policies and regulations that support that trajectory, and

leave them in place long enough for the industry and financial community to gain confidence that investing

in that trajectory will be profitable.

If the desired outcome is a quick transition to renewables, there will need to be incentives to build gas-fired electricity generation capacity as backup. If it is a slower transition with gas as a key fuel for the next

25 years, then subsidies can be avoided as long as renewable generation is not allowed to distort the

generation market.

The critical point is that policy uncertainty is driving wildly different demand outlooks. Policy in this case

is more important than economics in driving uncertainty so policy needs to be fixed before investment

will come.

Securing sufficient supplyOver the past two years there has been much talk of an impending gas glut and it is true that several large

European gas businesses currently find themselves over-contracted or long on over-priced gas. But that hasmore to do with demand being lower than expected than with an oversupply of gas. Indeed some argue that

the glut has failed to materialise partly because a lot of LNG has been going to Asia Pacific, partly because

the Green Stream pipeline from Libya was closed for much of the year, and partly because demand has been

rising strongly in other regions.

Looking ahead, there are concerns that Europe will face a growing supply-demand gap if gas finds its rightful

place in the energy mix.

The view of Didier Favreau, Senior Economist at Cedigaz, is that Europe will need to grow its gas imports

by around 4.5%/year between now and 2020, to compensate for an annual decline of 3.2%/year in

indigenous gas production (around 80 Bcm/year) and to meet forecast demand growth of 1.3%/year.

The chart below, which includes Norway and Turkey, shows that Europe will need additional imports of

160 Bcm/year by 2020.

The criticalpoint isthat policyuncertainty isdriving wildly

differentdemandoutlooks.Policy in thiscase is moreimportantthan

economicsin drivinguncertainty so policy

needs to befixed beforeinvestmentwill come


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VIEWPOINT

However, as we have already seen from the chart (on p3) presented by Jean-Franois Cirelli, considerable

uncertainty exists around how much gas Europe will actually need, with policy being the main driver.

With a view to gauging what the sources of additional supply might be, we asked delegates: What is the

biggest challenge to the future availability of Russian, North African and Norwegian gas for supply to the

European market over the next two decades? (Q3, p12)

Interestingly, two-fifths of delegates, the highest proportion, thought that the increasing availability of LNG

meant that Europe did not need to worry about the availability of additional pipeline gas. A fifth thought that

mobilising the upstream investment needed in these supplier countries would be the main challenge. 15%opted for the increasing availability of Caspian Gas.

Could unconventional gas production in Europe come to the rescue? We have already seen that in the context

of infrastructure investment needs (see p7), only 2% of delegates thought that unconventional gas would

be a game-changer in Europe.

Exploring this issue further, we asked: What percentage of European gas demand will unconventional gas

production meaning shale gas, tight gas and coal-bed methane be supplying by 2025? (Q2, p11)

A third of delegates thought the contribution would be less than 5%, while only 4% thought it would

contribute more than 25%. More than two-fifths of delegates opted for somewhere between 5% and 25%.

A fifth of delegates opted for: These are early days for unconventional gas in Europe. It will take time and

drilling to appraise its true potential.

Interestingly,

two-fifths ofdelegates,the highestproportion,thought that

the increasingavailability ofLNG meantthat Europedid not needto worryabout theavailabilityof additionalpipeline gas

700

600

500

400

300

200

100

0

Bcm

/year

2010 20152020

LNG imports

Pipeline imports

Others (Europe)

United Kingdom

Netherlands

Norway

Strong growth (~4.5%/year) needed in gas imports Cedigaz

Demandgrowth1.3%/year

Productiondecline3.2%/year

IEA GASScenario1%/year

Source:Cedigaz

(2011)


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VIEWPOINT

Commenting on the issues surrounding future gas supply to Europe, in last years EAGC Viewpoint we wrote:EU energy and climate change policy is not just affecting the long-term trajectory of gas demand. The

promotion of renewables, nuclear and CCS at the expense of natural gas has not escaped the notice of

Europes existing and potential gas suppliers. Not surprisingly, they are wondering how much of and how

reliable a market for gas there will be in Europe in coming decades.

Europes policy-makers need to consider carefully how their policies will affect supplier-buyer relationships

over the long term. Just as suppliers have previously asserted concerns that they were not consulted in the

drive for a competitive single market in their product, there is a danger that suppliers who now additionally

feel that Europe does not offer sufficient security of demand will instead look to boost exports to markets

in Asia Pacific . . .

A year on, our views have not changed. If anything, post-Fukushima and the resulting uncertainties

surrounding the nuclear option the need for Europes policy-makers to act has become even more urgent.

Which way forward?It would be easy to comment that the while the challenges facing the European gas industry are now

deep and enduring, they have been emerging for some time. Gas Strategies EAGC Viewpoints of recent

years have recorded the industrys own view of this evolution. That observation notwithstanding, we invite

readers to consider that in the 12 months since the last EAGC in Berlin there is now such an overwhelming

convergence of threats that what we are witnessing is a clear end to the past: fundamental change in the

role of natural gas in a new and highly uncertain world of energy demand; the demise of oil as the relevant

hedge and indexation for natural gas; and the change in the priority of regulation to establish stability in

support of infrastructure investment and Europe as a supply destination.

As we said in our 2010 EAGC Viewpoint: In Europe there are few, if any, significant pure gas companies

remaining. Gas businesses now must earn their place, competing on risk and return for investment funds

against other parts of wider energy portfolio plays. If such investment is to survive it must thrive; there is no

middle ground in todays capital markets. In doing so Europes gas businesses must be able to formulate and

implement strategies that address all the challenges raised by demand, supply and pricing issues because

they are so closely inter-related.

The past has been some 25 years of expansion for the European natural gas industry. That expansion has

taken those previously pure national gas players into the global arena: global in both a fuller energy

platform and in geography. Success has been measured and delivered through the development in Whatbusiness we do.

The converging threats are not going to fix themselves. The past will not suddenly become the future again.

There is no justification for natural gas and energy companies to bet on the industry or policy-makers solving

the problem. Interestingly none of the speakers at the 2011 EAGC believed this would be the case either.

Business as Usual for the gas businesses of these now global energy players is already being redefined.

Top-down corporate re-organisations and asset disposal programmes appear to dominate this agenda and

gas is clearly a casualty. What has not yet become so evident is whether the gas businesses can conceive

and deliver fundamental change in how they themselves conduct their business. If not, we at Gas Strategies

question whether a loss of credibility in the boardroom will be the next and most forceful re-defining threat

to European natural gas. The ultimate loss in the competition for capital.

It seems that the time for debate and procrastination has run its course.

The convergingthreats are notgoing to fixthemselves.The past willnot suddenlybecome the

future again.There is no

justificationfor natural gasand energycompaniesto bet on theindustry orpolicy-makerssolving theproblem


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VIEWPOINT

Q1 European gas demand in 2010 recovered strongly after the unprecedented fall in 2009,but the future looks uncertain.

What is likely to be the biggest demand driver in the medium term?

0 10 20 30 40 50 60

%

Continuing economic difficulties will dampen overallenergy demand, including gas demand

A strong push to implement energy efficiencymeasures will cause gas demand destruction

Policies to mitigate carbon emissions will drivestrong investment in renewable electricity

generation, destroying gas demand

Demand for gas will grow robustly as renewablesfail to live up to their promise and nuclear power

wanes in the wake of Fukushima

36%

7%

9%

48%

1 Supply and demand

Signs here of renewable-subsidy scepticism and post-Fukushima optimism. But a clear message atthe conference was that the industry needs to get better at making its case. Economic woes in Europeremain an issue, which is not at all surprising given the constant barrage of bad news.

Largest share, one-third, sees marginal role for unconventionals in Europe. But there is some feelingthat they could be very significant. One-fifth see UCG contributing up to a quarter of European supply by2025. Very little support for more than that.

Q2 What percentage of European gas demand will unconventional gas production meaning shale gas, tight gas and coal-bed methane

be supplying by 2025?

0 10 20 30 40 50 60

%

33%

23%

19%

4%

21%

Less than 5%

5-15%

15-25%

More than 25%

These are early days for unconventional gas inEurope. It will take time and drilling to appraise its

true potential

Full results of the EAGC delegate poll


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VIEWPOINT

Q3 What is the biggest challenge to the future availabilityof Russian, North African and Norwegian gas for supplyto the European market over the next two decades?

0 10 20 30 40 50 60

%

12%

15%

20%

14%

39%

Growing demand in the domestic markets of someof the exporters means supply will be diverted into

domestic markets

The challenge of Caspian gas

There are gas resources but it will not be possibleto mobilise the upstream investment needed to

produce them

Lack of sufficient delivery capacity

Increasing availability of LNG means Europe doesn'tneed to worry

%

Q4 Which new power stations, by fuel type, will attract most investmentin Europe in the next 5 years?

2011

Paris

2006

Cannes

2007

Dsseldorf

2009

Bilbao

2010

Berlin

2008

Lake Como

0

10

20

30

40

50

60

SolarWind

Nuclear

Coal

Natural gas

LNG to the rescue, said two-fifths of delegates. Upstream investment remains an issue, said a fifth.Other factors are significant.

For the first time, gas was not the top choice. Very significant indeed. Wind was, though gas camesecond. All the rest were nowhere. Coal is yesterdays fuel, said delegates. Nuclear too, with its sharedown from 29% last year to 5% this year.


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VIEWPOINT

%

Q5 What should be the role of natural gas in a carbon-constrained world?

A destination fuel in a low-carbonenergy world a long-term role in a

sustainable energy economy

A bridge fuel to a sustainable energyfuture a temporary role while

zero-carbon alternatives arecommercialised

Gas contains carbon and thereforecontributes to global warming, so its use

should be minimised

Its role will be determined by economicfactors alone

51%58%

46%

23%18%

34%

2%3%3%

25%

22%17%

0 10 20 30 40 50 60

2010 Berlin

2011 Paris

2009 Bilbao

2009 Bilbao

2010 Berlin

2011 Paris

2008 Lake Como

Q6 What is the new long-term oil price (in 2011 US$)?

$35-$70/bbl< $35/bbl

1% 1%4%

10%

$70-$120/bbl

50%

>$120/bbl

10%11%

9%

14%

26%

66%

47%

13%

Renewed disciplineamong OPEC's members

means prices willbe managed within

a band decidedby the cartel

1%

5%

18%

70%

6%

0

10

20

30

40

50

70

60

%

2 Energy markets: pricing and contracts

Destination fuel remained the top choice, but support was down. Bridge fuel was up, as waseconomic factors. Carbon content of gas not seen as a big issue.

Greater support for higher prices, especially above $120/barrel. OPECs influence seen waning. Muchless support than last year for long-term oil prices below $70/barrel. This is a view supported by market

fundamentals.


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2009 Bilbao

2010 Berlin

2011 Paris

2008 Lake Como

2007 Dsseldorf

Q8 What will the average Henry Hub price be in 2011 and 2012?

< $5/MMBtu $5-$7/MMBtu $7-$10/MMBtu > $10/MMBtu

4%3%

16%

11%

51%52%

23%

9%

1%

35%

51%

14%

49%

32%

5%

29%

45% 42%

6%

24%

%

0

10

20

30

40

50

60

2007 Dsseldorf

2010 Berlin

2009 Bilbao

2011 Paris

2008 Lake Como

Q7 What will the average NBP price be in 2012 and 2013?

5%5%8%

6%

50 p/therm

59%

26%

51%

24%

45%

31%

60%

43%

25%

10%7%

20%

35%38%

1%2%0

10

20

30

40

50

60

70

80

%

Gas price has been well above 50p/therm for much of the past year, so the results are very interesting.More than half the delegates see prices falling to the 25-50p/therm range.

Prices will remain soft, is the consensus, with 87% seeing a $7/MMBtu ceiling. Support for less than

$5/MMBtu up strongly, reflecting continuing success of unconventional gas.


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Q10 Some buyers and sellers have been looking at hub-based price indexationas part of contract re-negotiations.

What would be the likely outcome of a widespread move to hub-based pricing?

0 10 20 30 40 50 60 70

%

Sustained lower prices than underoil-indexed pricing

Sustained higher prices than underoil-indexed pricing

Pricing dynamics would be different to how they arenow, in ways that are hard to predict

Be careful what you wish for a widespread moveto hub-based pricing could put too much market

power in the hands of the large players

10%

6%

64%

20%

Q9 The divergence of oil and traded gas prices over the past three years has ledto unprecedented pressures on oil-indexed long-term gas contracts. Where are we heading?

0 10 20 30 40 50 60

%

Long-term contracts are no longer justified for mostof the gas coming into Europe

This is the end of the artificial divide betweentraded market hub pricing and oil indexation.Long-term contracts will move to hub pricing

Sellers had been making temporary concessions tobuyers. However as these expire we will return to

business-as-usual

The longer the divergence lasts, the more long-termcontract volumes will be re-negotiated, as buyers

look for price relief and sellers seek to protect theirmarket share

3%

6%

30%

29%

16%

16%

51%

50%

2010 Berlin

2011 Paris

Surprisingly similar to last years results. Support for long-term contracts is up a little, which is interestingin itself. Otherwise very little change. The consensus is that contract terms are likely to change. Only16% see return to business-as-usual.

Clear majority believes that move to hub-based pricing would heighten price uncertainty. A fifth believesit would place too much market power in the hands of the big players.


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Q11 What will be the greatest strategic challenge to European gas companies?

%

Overdependence on imported gas

A radical shift in the power generation fuel mix, asnuclear, clean coal and renewables expand their

market shares

Recession or recurring weakness in the economieswe operate in

Finance for new supply and transportation projectsbecoming more difficult and expensive

The determination of European policy-makers andregulators to create a single energy market

9%

33%

18%

7%

33%

8%

22%

33%

17%

21%

2010 Berlin

2011 Paris

0 10 20 30 40 50 60

3 Management, business operation and change

Q12 Will the Third Energy Package of directives and regulations finally succeedin creating a single energy market within the European Union?

0 10 20 30 40 50 60 70

%

Yes even in advance of the deadline fortransposition into national law, companies were

restructuring to meet the legislative requirements

Yes but there is still a long way to go. We will notsee a true single energy market in Europe until after

2020

No the failures of the first and second legislativepackages showed how adept the incumbents are at

foot-dragging and keeping out new entrants. Whyshould things be different this time around?

No because of the way European gas industrieshave developed since the Second World War, the

single energy market is an impossible dream

4%

12%

68%

71%

13%

10%

14%

8%

2010 Berlin

2011 Paris

Interesting shifts in responses, with economic weakness now in the top spot. Fuel mix shift still seen asimportant, but less so than last year. Determination of policy-makers and regulators to create a singleenergy market still seen as significant challenge but less so than last year. Finance worries are greater.

Not a great deal of change. Clear majority that it will be at least 2020 before Europe has a true singleenergy market. A key issue raised in the conference was that it depends on how you define singleenergy market.


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4 Midstream infrastructure: pipelines, LNG terminals and storage

Q13 In the wake of Fukushima, Germany has decided to close all its nuclear stations by 2022.What are the long-term implications for European energy companies?

0 10 20 30 40 50 60

%

Because of the Fukushima crisis, no new nuclearstations are built in Europe and existing stations

close early, boosting gas demand and prices

Most of Europe continues with nuclear as before

Countries heavily dependent on nuclear power, suchas France, continue as before. Elsewhere, nuclear's

days are numbered

As climate change imperatives become the mainpolicy driver, Germany re-considers its decision and

nuclear programmes elsewhere accelerate

17%

23%

44%

17%

Q14 As intermittent renewables play a growing role in electricity generation, demandfor gas will get more peaky. Does Europe have the appropriate physical gas infrastructure

and commercial environment for gas to cope with and thrive in this scenario?

0 10 20 30 40 50 60

%

Yes with minor investment the physicalinfrastructure will cope and the commercial

environment will provide incentives for profitable

operationYes while the physical infrastructure needs major

investment in pipelines and storage, the commercialenvironment will provide the necessary incentives for

investment and profitable operation

No while most of the needed physical infrastructureexists, the commercial environment will not provide

the needed flexibility nor the incentives for profitableoperation

No Europe has neither the necessary physicalinfrastructure nor the commercial incentives needed

to bring it about. Problems loom

24%

32%

27%

17%

New question that reflects the impacts of the Fukushima nuclear crisis. General consensus is thatdemise of nuclear in Europe has been overdone. Less than a fifth see a major long-term nuclear declinein Europe.

Interesting question with a broad range of views, perhaps reflecting a strong sense of uncertainty.Overall, more than half the votes are for the two yes options, but not by much. 17% anticipate agrim future.


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Q15 How is the mix of gas supply sources to Europe likely to evolve overthe coming two decades and what are the implications for infrastructure?

Which of the following is the most likely scenario?

0 10 20 30 40 50 60

%

Unconventional gas becomes a game-changer forEurope, pushing out LNG and conventional pipeline

gas from external suppliers. Little new LNG andimport pipeline infrastructure is required

Unconventional gas delivers only limited supply. LNGsupply grows, requiring more regas infrastructure.

Pipeline gas from outside Europe remains importantbut does not grow significantly

Most LNG supply is sucked into Asia-Pacific asdeveloping economies grow, leaving Europe heavily

dependent on pipeline gas from external suppliers.The fourth import pipeline corridor goes ahead

Europe fails to meet its gas infrastructure needs andinsecurity of supply and high prices become major

political issues

2%

44%

48%

7%

Q16 How will the new gas infrastructure that Europe needs be financed?

0 10 20 30 40 50 60

%

There is plenty of pent-up money waiting to beinvested in sound energy infrastructure projects.

Securing finance will not be a major issue

The finance community will not step in and save theindustrys bacon by financing the building of new

infrastructure without long-term security

A higher degree of equity or sponsor directinvestment will be required

Europe's worsening financial and economic crisis willmake it difficult to attract finance to energy

infrastructure projects

9%

26%

36%

30%

Very low support for a shale gale in Europe, or a failure to meet infrastructure needs. Interesting, andclose, split between those who see LNG as the key new supply source and those who believe that newpipelines will be the way forward.

Less than a tenth of delegates see financing not being an issue. All the other responses are saying thatfinancing will get harder. Top spot goes to those who think more equity or sponsor direct investmentwill be needed, but note that these options are far from being mutually exclusive.


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About the EAGC Voting QuestionsOne of the unique features of the annual European Autumn Gas Conference (EAGC) Europes longest-

running natural gas conference and one of the years best networking opportunities is the opportunity to

poll attendees during the event. It is a rare chance to ask a significant cross-section of the industrys key

executives for their sentiment on how the industry is developing and what the future might hold.

Each year, over the course of the conference, delegates are asked a series of carefully framed, multi-

choice questions, the answers to which are given using an electronic voting system. This gives everyone an

immediate understanding of the mood within the conference hall. It also provides fuel for discussion and

debate over and above what is generated by the presentations and panel sessions.

Given the attendance at the conference, with distinguished speakers (who also vote) and senior-leveldelegates, the results provide a valuable insight into the preoccupations of the people at the sharp end of

European gas.

Rather than let the results of these polls fade with the memories of the conference, for the past seven

years Gas Strategies, which sponsors these voting sessions, has been involved in both the framing of the

questions, and subsequently producing a concise view of what emerged.

The results from this years event the 26th EAGC, held in Paris build on those that emerged from Berlin in

2010, Bilbao in 2009, Lake Como in 2008, Dsseldorf in 2007, Cannes in 2006 and London in 2005.

In framing this report we also canvass speakers, delegates and our own consultants about what the resultsmean and then analyse the replies and responses to see how they might be used to identify challenges and

to feed into the formulation of strategy. We hope these views will also fuel your own conversations long after

the events where they were recorded.


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About Gas Strategies Consulting

Bringing the best solutions to our clients

Gas Strategies is a specialist professional services organisation providing

commercial energy advisory services globally.

We operate in all sectors of the supply chain: upstream, midstream and markets,

and cover the full LNG Value Chain and gas-to-power.

Our clients benefit from a strong business model, in which our integrated service

lines combine to bring powerful solutions, meeting their specific needs throughConsulting, Training, and Information Services.

We provide advisory services in:

Project development support: from evaluation and feasibility assessment to

commercial structuring and realisation

Contract advice, negotiation and valuation; contract portfolio evaluation

and operational management

Commercial due diligence in project finance and M&A

Gas market supply, demand and pricing analysis

Monetisation strategy for gas exploration and production

Business strategy development and implementation

Regulation, restructuring and liberalisation

Competitor analysis and benchmarking

Report contributors

For further information on the contents of this report, please contact

the Gas Strategies contributors:

Pat BreenChief Executive

[email protected]

James BallDirector

[email protected]

Alex [email protected]

Chris WaltersManaging [email protected]

For more information:Please visit www.gasstrategies.com or call us on +44 (0)20 7332 9900

Documents

EAGC Viewpoint 2011 Final