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European gas markets: Key trends

Dr Thierry Bros

Gazprom – 5 July 2017

Senior Research Fellow

Twitter: thierry_bros

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The changing landscape

EU Primary energy consumption

Down by 10,3% since 2006

1 600

1 650

1 700

1 750

1 800

1 850

7 000 9 000 11 000 13 000 15 000

EU

-28

Pri

ma

ry E

ne

rgy

Co

nsu

mp

tio

n

(Mto

e)

EU-28 GPB (€bn)

Most fuels down

Renewable x3.5

-30% 20% 70% 120% 170% 220% 270%

Renewable

Hydro

Total

Gas

Nuc

Oil

Coal

2006-2016 Evolution

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Source: BP Statistical Review June 2017, RichesFlores Research, Macrobond, thierrybros.com

2006

2016

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Who was right in 2007 about 2017?

EU Commission Industry

2020 objectives 20% from renewables

20% increase in efficiency

20% cut in greenhouse gas emissions

• Growth in demand

• Constrain in production

• High prices

• No alternative strategy

Policy has a better track record of forecasting than industry

Negatively impacting utilities 3

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No more ToP obligations?

Source: ENI, thierrybros.com

0,0

0,5

1,0

1,5

2,0

2,5

-6

-4

-2

0

2

4

6

8

2009 2010 2011 2012 2013 2014 2015 2016

€bn

bcm

ENI ToP obligations (+) & Makeup gas (-)

Accumulating deferred costs (€bn)

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Main steps of European gas liberalisation

• 1986: Privatisation of British Gas

• 1996: Establishment of the Network Code (TPA) and NBP

• 1998: Complete abolition of Centrica marketing monopoly

• 1998: Start up of the Interconnector

• 1999: Establishment of the Zeebrugge Hub

• 2017-2019: Brexit?

• 1998: Directive concerning common rules for the internal market (following telecom deregulation)

• 2003: Directive concerning common rules for the internal market and repealing 1998 directive

• 2007: Third energy package

• 2009: Art 194 of the Lisbon Treaty, carefully crafted compromise between national sovereignty governing energy mix, exploitation of natural resources and energy taxation and a shared EU competence for other areas

• 2015: Energy Union?

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Energy Union Dream or a reasonable ambition?

• The biggest change since the 1951 Coal and Steel Community Treaty • http://ec.europa.eu/avservices/play.cfm?ref=I098040&videolang=EN+EN&off=1 • Pool resources, connect infrastructures, diversify energy sources, reduce energy dependence and unite

in order to strengthen EU negotiating power vis-à-vis third countries

Energy security, solidarity and trust • The Commission will assess options for voluntary demand aggregation mechanisms for collective

purchasing of gas during a crisis and where Member States are dependent on a single supplier • When the conditions are right, the EU will consider reframing the energy relationship with Russia

based on a level playing field in terms of market opening, fair competition, environmental protection and safety, for the mutual benefit of both sides

A fully integrated energy market • Citizens take ownership of the energy transition and benefit from new technologies to reduce their

bills

Energy efficiency contributing to moderation of demand • 2030 indicative target (EU level): at least 27% for improving energy efficiency (compared to

projections) • NEW PROPOSAL (30/11/2016): binding EU-wide target of 30% for energy efficiency by 2030

Decarbonisation of the economy • 40% cut in greenhouse gas emissions compared to 1990 levels • The cornerstone of Europe’s climate policy is a well-functioning EU Emissions Trading System • Becoming the number one in renewables (27% for the share of renewable energy in the mix in 2030)

Research, Innovation and Competitiveness

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Europe: regions, markets & hubs

Source: Heather/Petrovitch

Only 2 ‘mature’ gas trading hubs in Europe: NBP and TTF 7

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Markets become price-correlated due to network unbundling

025 00050 00075 000

100 000125 000150 000175 000

km o

f pi

pes unbundled bundled

Source: thierrybros.com, company data

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What if?

• Energy transportation is viewed like roaming for telecom

• EU maximize overall welfare state The legislative process of developing harmonized market rules from the

Third Energy Package may be soon completed. Looking ahead, DG Energy is seeking for substantiated analysis as to whether the current regulatory framework in the gas sector is the most effective in order to maximize overall EU welfare or whether amendments may be necessary and if so what the key recommended changes are.

Put simply, a well-functioning, integrated EU internal gas market should mean: • the lowest possible gas prices (commodity & network) for EU consumers; • reduction (or elimination) of price differences across the continent that are

due simply to competitors being able to exercise market power in certain geographic regions;

• secured gas supply across the EU by having access to multiple sources of supply.

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Traded volume development

TTF now European largest hub

Source: Heather

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European wholesale gas pricing…

Oil-indexation

78%

Gas-on-gas

competition

15%

Others7% 2005

Oil-indexation

30%

Gas-on-gas

competition

64%

Others6%2015

Source: thierrybros.com, IGU

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… is influenced by Gazprom

Source: thierrybros.com, Gazprom, Argus

-40%

-20%

0%

20%

40%

60%

80%

0

2

4

6

8

10

12

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

$/M

btu

Gazprom ($/Mbtu) NBP ($/Mbtu) Spread (%)

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2 major gas shocks with completely different outcomes

Event Results

1991 Oil Build-up to Gulf War IEA strategic stocks release

2005 Oil Hurricanes Katrina & Rita in US Gulf of Mexico

IEA strategic stocks release

2011 Oil Libya: disruption of supplies IEA strategic stocks release

2011 Gas Fukushima: 7% of global LNG rerouted to Japan

Market answer: higher prices

2015 Gas Groningen cap: loss of 9% of European demand

Market answer: lower prices

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Europe import needs at record high

Source: IEA, JODI, thierrybros.com

0

5

10

15

20

25

0

100

200

300

400

500

2008 2009 2010 2011 2012 2013 2014 2015 2016

€/M

Whbcm

Netherlands production UK production

Other Europe production Europe consumption

TTF (€/MWh)

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US LNG vs Russian pipe

Source: Argus, thierrybros.com

15

0

2

4

6

8

10

12

Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16

$/M

Btu

HH Full cost of US LNG Price war to shut in US LNG TTF

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Gazprom EU exports at record high

Source: Gazprom, thierrybros.com

0

2

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14

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07.2016 09.2016 11.2016 01.2017 03.2017 05.2017

bcm

Via Ukraine Via Belarus Direct

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Gazprom exports and Europe dependency

0%

20%

40%

60%

80%

100%

0

5

10

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20

25

30

35

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45

50

bcm

Gazprom's exports (bcm) Russian dependency (%)

EU-28 dependency (%) EU-27 dependency (%)

17 Source: Gazprom Export, thierrybros.com

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Brexit’s impact on gas markets

Source: ENTSOG, thierrybros.com

• Policy For SoS, UK needs to reshape

its energy diplomacy

• Regulatory 3 EU-UK interconnectors?

• Markets NBP premium and volatility to

increase versus TTF

Independent trading houses, Norway and LNG producers could take advantage of the increased NBP premium & volatility vs TTF

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Brexit timing: a lenghty uncertainty

H1 17

• Triggering article 50 by the UK – 29 March 2017

• Negotiations guidelines adopted by the European Council – 29 April 2017

• Commission presented to the Council a recommendation to open the negotiations – 3 May 2017

• Council authorised start of the negotiations by adopting first set of negotiating directives – 22 May 2017

• Starting of negotiations – 19 June 2017

Q4 18 – Q1 19

• Union negotiator will present an agreement proposal to the Council and the European Parliament, taking into account the framework of the future relationship of the UK with the EU

• European Parliament must give its consent, by a simple majority vote (incl. UK Members of the European Parliament)

• Council will conclude the agreement, by a vote of strong qualified majority

• UK must also ratify the agreement according to its own constitutional arrangements

After leaving

• “To succeed, we need to devote the first phase of negotiations exclusively to reaching an agreement on the principles of the exit” Michel Barnier at the plenary session of the European Parliament (5 April 2017)

• “Bilateral agreements between the UK and one or more remaining EU countries, would be in breach of the EU Treaties” EU Parliament

• Intergovernmental agreements (UK-IR, UK-BE & UK-NL) to be renegotiate. As one or as 3?

• Impact on Nord Stream 2?

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Remember pre-markets time?

• On the 22st November 2005, at 170 p/th only 58 % of the Interconnector “reverse” capacity was used

• Licence obligations prevented Continental European gas

companies to release gas at the beginning of Winter

INTERCONNECTOR

Daily Flow UK/Continent

-550

-450

-350

-250

-150

-50

50

150

250

350

450

550

650

29/10 03/11 08/11 13/11 18/11 23/11 28/11

(G

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Gas displaces coal in UK

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Coal vs gas in Germany

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EU ETS

• Covers emissions from electricity generation & heavy industry

• Provides a common carbon price across participants

• Market mechanism

Least-cost approach without creating competitiveness challenges for industry

EEA countries (part of the EU single market) are members of the EU ETS

Switzerland & EU ETS to be linked

• But price too low to remove coal from energy mix

• Emissions not covered by EU ETS? 23

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UK & EU ETS?

Leave

• UK has since 2013, a national policy (Carbon Price Floor) that delivers coal switching

• EU ETS doesn’t deliver a price switching level Too many allowances

• Taxation works

• EU-27 to review the allowances or implement a tax

Stay

• Single energy / electricity marker

• Liquidity

• EU-27 unable to review the allowances or implement a tax

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Thank you

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