The Future Developments in the European Gas Sector · The Future Developments in the European Gas Sector 2020 - 2030 - 2050 12 January 2011, 10.30 – 16.00 Building of the European

The Future Developments in the European Gas Sector 2020 - 2030 - 205012 January 2011, 10.30 – 16.00Building of the European CommissionRue Joseph II, 54, Brussels

2Musterpräsentation Thyssengas Erdgaslogistik 2009

European Gas Industry 2020 – 2030 - 2050

Extended unbundling (seperation of grid from production/trade/sales)

Change of ownership structure

Fragmentation of the sector – a logical consequence

Mayor Trends

The share of gas in PEC - uncertain

Origination – bright outlook

The share of gas in special sectors of consumption - uncertain

The general acceptance of gas as a “clean and economic fuel” -questioned

The market’s legal framework – rapidly changing


Ongoing ownership unbundling

British GasBG

Lattice

Centrica

Example: UK National Grid

NGFinancial Investors

~1950

4 of 8 regional grids

Transco

2000

2002



* Final confirmation of EC expected

ENI/SNAM

Example: Italy

SNAM Retegas

Transit(e.g.49% inTENP)

SNAM

Retegas

Listed Comp. Majority still with SNAM

Market testdone, tender started,Trustee nominated




Example: Netherlands Gasuni

gts

gasterra

State

private

Example: Germany

BEB

Exxon/Mobil

Shell

Transport

Production

Gasuni D


Thyssengas History (I) – a typical example

TG is the result of several mergers and demergers mainly driven by general antitrust interventions of the German Cartel Office and the EU energy directive`s unbundling requirements

Founded in 1921 by August ThyssenOperator of the oldest (1910) German gas transport pipeline In the eighties AugustThyssen sold his shares to Exxon/Shell/German State RWE fully took over TG in 2003; Merger with Gas business of former VEW and WFG; acquisition of Hungarian and Czech gas companies; trade name: „RWE Gas AG“ (turnover ~ 6Bn €)2004 RWE Gas AG was terminated; founding of RWE Transportnetz Gas GmbH, the German Gas TSO (90 FTE´s, turnover ~ 200 Mio €)



Thyssengas History (II)

TG today is the result of RWE´s commitment against the EUC to sell its entire German Gas transport activities

Fully functioning TSO founded end of 2009 (270 FTE´s); again named „Thyssengas GmbH“

Tender started; social convention agreed (job tenures etc.); „trustee“ and „hold seperate manager“ appointed

December 2010 Macquarie infrastructure fund signed s.p.a.

closing expected soon





Example: Germany II

RWE

VEW(1927)

WFG(1928)

Thyssengas(1921)

RWE Gas AG

MacquarieInfrastructureFund1998-

2000

2000

20102004

ThyssengasRWE TransportnetzGas GmbH


Thyssengas‘ core business

TG today is a fully functioning, idependent TSO

„natural gas logistics“

Construction and maintenance of high pressure gas pipelines and equipment

Selling of gas transport capacity

Operating two market areas around socalled „virtual trading points“

Balancing of gas flow

But: no storage activities!

Thyssengas core business


Grid area and key figures

length of pipelines 4100 kmcompressor stations 6gas blending stations 2gas transported 10 bn m³ /aentries 17exit zones 317DSO´s connected 54final consumers connected 149

FTE´s 290

RAB 402 mio €income from network tarifs 160 mio €EBIT 07 79.1 mio €

08 53.8 mio €09 19.0 mio €10 (e) ~ -60mio €

Thyssengas core business


The number of players in the sector is increasing rapidly due to:

Fragmentation; Specialization

Competition (gas to gas gas to electricity, gas to wood pellets etc.)

Specialization

Different regulatory requirements (production, trade, storage, LNG-terminals; transport grid, distribution grid…..)

Easy entrance for new players to trade and supply; no need for big investments

Fragmentation of the value chain: Production, trade, supply, regulated and non-regulated logistics; metering/billing; appliances….

Number of players grows much faster than the market!


The investor’s point of view: the new structure offers more transparent risk profile

- Natural gas logistics: high investments coupled with low risk/low profit

- Production: high investment, high risk/high profit

- Trade and sale: high volatility, medium risk/medium to low margins

Industrial structure is changing

Manager’s point of view: structural decisions and new strategies

Shrinking companies and reduction of focus creates a new challenge

Limited number of options for action in regulated sectors

Market structure not yet clear although the integrated approach “is definitely dead and gone”

What are the attractive aspects of the new companies/segments from the viewpoint of an investor, employee, customer, other stakeholders?


The employee’s point of view:

- permanent restructuring, M&A, cost pressure due to competition and shrinking companies may question job security; more change in recent 10 years than in 80 years before!

- specialization offers new jobs (trade, dispatching etc.) and asks for new skills (flexibility, willingness to change and learn)

- challenging cultural change due to new shareholders (strategic to financial and v.v.)

Industrial structure is changing


The share of gas in PEC

No consistent view on the future role of natural gas in PECWorldwide: WEC expects remarkable growth in all sectors

EU-level: EC expects growth especially in power generation

National level: e.g. unclear position of German Energy Policy Program (“no position for gas in power generation”

Still no European “energy focussed foreign policy” in sight

Present downward trend of consumption due to financial crisis

Concerns about geopolitical aspects of natural gas production

Brussels, 17.11.2010 COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENTCOMMUNICATION FROM THE EC, TO THE EP, THE COUNCIL, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONSEnergy infrastructure priorities for 2020 and beyond -A Blueprint for an integrated European energy network“Gas demand is highly dependent on energy policy choices. High uncertainty is surrounding the future of gas demand,…….”


Origination

Production and price competitiveness of natural gas

New sources for conventional production

- recent 400 to 500 bn m³ discovery in Israel

- options in the Caspian region

New unconventional natural gas - exploration started

Advanced technologies (exploration and production)

New pipelines

- Nordstream 1 85% ready

- Interconnector

- Rotterdam LNG

150 bn m³ LNG assumed for USA market but now at disposal

noticable trend towards oversupply in Europe today, but……

decreasing short term trade prices (ToP; long term contracts)

Theoretical range of reach still 60 years; diversification of supply


Downward trend in domestic supplyLow energy consumption of new buildings (“zero energy building”

Better insulation in old buildings

High efficiency of appliances; condensing boiler technology

No advanced technology ready for the market yet ( FC, Micro CHP,HP) (investment attentism – “wait and see”)

Insufficient research activities

Convergence of electricity and gas suppliers (electric heat pump vs. gas heat pump; “less interest in gas”

But number of new buildings constructed << than older housing stock

Limited margins in retail business

The battle for the traffic sector seems to be almost lostLack of consequent marketing!

Convergence of electricity and gas suppliers; e-mobility and “less interest in gas”

Positive trend in power sectorIdeal compensation for volatile production from renewables (quick start)

Low fixed costs compared to other fuels

But generally less acceptance of hydrocarbons

High potential in combined grid management with decentralized generation

Convergence of power and gas

Special sectors of consumption

06.07.2009

Transport Transmission

Synthetisches Gaseg. From coal with CO2 seperation

Biogas from Liquid manureBiomass (10% of annual cons.)

Distribution

Hydrogen

“Power to Gas”

CHP

µ-CHP (FC; µ-turbine)

Gas and steam plant

Gen. from renewables

Nuclear, coal, hydro etc.

Erdgas


Huge uncertainties concerning future technologies in terms of their availability, possible risks and cost competitiveness, standards……………energy mix and geographical distribution ……and new sources (unconventional gas, green gas, LNG/CNG, new import

infrastructure and upstream development in third countries) add to the overall uncertainty of future energy market developments and lead to sub-optimal market solutions (from an EU point of view).

Special sectors of consumption


Climate change policy and programs enjoy high public attentionThe public are

increasingly critical towards any kind of CO2 emission

assume a “zero carbon world” to be possible

are not aware of CO2 savings achieved (efficiency etc.)

Natural gas without strong countermeasures is gradually loosing its “clean fuel image”

Public awareness sets energy = electricity

Natural Gas needs “greening”Biogas plants connected to distribution grids

Biogas plants connected to high pressure grids

Natural gas lost economic acceptance due tothe recent high price phase and the interruptions of Russian supplies

Gas: clean, economic fuel


The investor’s point of view: Investments focus shifted towards

supplies outside Europe

clearer role of natural gas

growing markets

alternative technologies partially replacing natural gas

who is going to pay for security and diversification of supply (Nabuco)?

Uncertain future of the gas market

Manager’s point of view

No big market leaders existent to push research, product marketing etc. for the benefit of the entire gas industry

Limited number of options for action in regulated sectors (rely on revenue cap?)

Train staff for new technologies

Develop new marketing and research approach for natural gas (associations?)

Develop profit options in trade

Try to cover all – non-regulated – elements of the value chain (profit allocation)


The stepwise regulation of the sector has started a long phase of uncertainty

European and national legislation rotating in the driver seat

Unclear legal status of “interpretative notes”

Speculations about further legal measures

Low incentives for investments (different throughout EU)

Quality of supply regulation not yet developed

Definition of business model in many MS still with deficitsNo clear definition of activities (transport vs. distribution)

Gas storage and LNG chain elements as part of a consistent logistic system but regulated differently

Non-EU elements of pipeline systems outside EU-influence but hydraulically integrated

Capacity products definition too restrictive; more or less no incentives

Cross border regulation still at the beginning (national regulators focussed on national consumer protection)

The legal framework

06.07.2009

The market players and/or regulators do not anticipate future demand / capacity needs if it is not commercially viable or would result in higher tariffs in the short term. This will result in increased cost over time (in the long term) and higher environmental impact (for example a number of smaller pipelines instead of one large).


Investor’s point of view:

regulated business offers stable profit on the long run

high uncertainty regarding return on capital and afraid of being forced to invest

remarkable share prices paid for TSO/DSO

significant moves expected; lots of opportunities to invest


Benchmark based cost regulation may see the cheapest and not the best as winner

Consequent orientation of entire company towards regulatory optimization

Actively push technical rules; traditional goal oriented technical rules are insufficient

engineer’s sole discretion decisions on maintenance measures may turn out as problematic

The legal framework

Swimming against the current is useless! Orientate your company consequently and quickly on new business focuses (risk, capital needed). Accept business specialization and fragmentation.

Learn lesson from the conventional goods sector: Logistics formed the third element between production and trade/sales. It is much more than lorry driving or “case, chest, coffer and crate” handling. Natural gas logistics is nothing special but offers good opportunities to provide high level services.



Benchmark based cost regulation may see the cheapest and not the best as winner.

Consequent orientation of entire company towards regulatory optimization

Swimming against the current is useless!

Orientate your company consequently and quickly on new business focuses (risk, capital needed).

Accept business specialization and fragmentation.

Learn lesson from the conventional goods sector: Logistics formed the third element between production and trade/sales. It is much more than lorry driving or “case, chest, coffer and crate” handling. Natural gas logistics is nothing special but offers good opportunities to provide high level services.

Actively push technical rules; traditional goal oriented technical rules are insufficient

Engineer’s sole discretion decisions on maintenance measures may turn out as problematic

The legal framework


Employee’s point of view:

- Regulated business increases cost pressure. This may result in less job security

due to increasing cost pressure, competition (benchmark), reorganization

- New jobs offer attractive options (asset management etc.)

- Regulation may result in worsening of employment conditions. Since most costs of infrastructure operators are fixed, employment conditions may be the first valve opened to release cost pressure may result in less vocational training, extended outsourcing, lower wages.

- But we also see insourcing since regulators tend to prefer internal costs especially in integrated companies.

- Regulation may rather silently undermine free collective bargaining rightsCost regulation in most countries covers wages; collective bargaining rights are an important constitutional right (e.g. Germany: Art. 9.3) and shall be kept uninfluenced by the state and its authorities.

The legal framework

- Special regulatory treatment of HR costs (e.g. UK,Germany: staff costs fully regulated but costs related to any kind of vocational training are specially dealt with as “uninfluencible”!


Employee’s point of view (cont.):

The legal framework

-Special regulatory treatment of HR costs (e.g. UK,Germany: staff costs fully regulated but costs related to any kind of vocational training are specially dealt with as “uninfluencible”!

- EU harmonization may serve to develop new education and training standards: European gas engineer; European dispatcher training centre, gas logistics expert

-Think about regulated sector specific collective labour agreement.

Numerous signs of a discontinues change of the entire business! Will the new players be the old ones?

Example: European type writer manufacturers!


Documents

The Future Developments in the European Gas Sector · The Future Developments in the European Gas Sector 2020 - 2030 - 2050 12 January 2011, 10.30 – 16.00 Building of the European