Natural Gas Sector Reform in Europe

Natural Gas Sector Reform in Europe Christian von Hirschhausen Dresden University of Technology, and German Institute of Economic Research (DIW Berlin...
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Natural Gas Sector Reform in Europe Christian von Hirschhausen Dresden University of Technology, and German Institute of Economic Research (DIW Berlin) Workshop “Natural Gas Liberalisation in Germany: Kick-start or Dead End?” Berlin 15 September 2006

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Background: EE2 / DIW Program “The Globalization of Natural Gas Markets” (2004-2007) -

Jointly between Dresden University of Technology, Chair of Energy Economics and Public Sector Management, and DIW Berlin

-

Research and advice to policy makers and the corporate sector, three modules:

1) Computational model of the European (and trans-Atlantic) natural gas market -

Competition/oligopoly, effect on prices, quantities Infrastructure bottlenecks (pipelines, LNG-terminals) Role of Russia …

2) Institutional economic modeling on governance structures and contracts -

Nexus between regulation and contracts Changing role of long-term contracts Vertical integration along the LNG value added chain

3) Econometric analysis of energy price developments -

Relation between North American, European, Asian gas and oil prices Cointegration and/or convergence of trans-Atlantic natural gas prices ?

http://www.tu-dresden.de/wwbwleeg/projekte/gg/gg.html

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Research Program “Globalization of Natural Gas Markets” WP-GG-17 Sophia Rüster and Anne Neumann: Corporate Strategies along the LNG Value Added Chain - An Empirical Analysis of the Determinants of Vertical Integration WP-GG-16 Anne Neumann and Christian von Hirschhausen: Long-Term Contracts and Asset Specificity Revisited - An Empirical Analysis of Producer-Importer Relations on the Natural Gas Industry WP-GG-15 Christian von Hirschhausen: Langfristige Erdgasversorgung Europas – LNG vs. russisches Pipelinegas? WP-GG-14 Christian von Hirschhausen: Strategies for Energy Security – A Transatlantic Comparison. WP-GG-13 Anne Neumann and Christian von Hirschhausen: Long-Term Contracts for Natural Gas - An Empirical Analysis. WP-GG-12 Karsten Neuhoff and Christian von Hirschhausen: Long-Term vs. Short-Term Contracts: A European Perspective on Natural Gas. WP-GG-11 Anne Neumann and Boriss Siliverstovs: Convergence of European Spot Market Prices for Natural Gas? A Real-Time Analysis of Market Integration using the Kalman Filter. WP-GG-10 Georg Meran and Christian von Hirschhausen: Corporate Self-Regulation vs. Ex-Ante Regulation of Network Access – A Model of the German Gas Sector. WP-GG-09 Franziska Holz, Christian von Hirschhausen and Claudia Kemfert: A Strategic Model of European Gas Supply (GASMOD). WP-GG-08 Christian von Hirschhausen, Berit Meinhart, and Ferdinand Pavel: Transporting Russian Gas to Western Europe - A Simulation Analysis. WP-GG-07 Anne Neumann and Christian von Hirschhausen: Less Long-Term Gas to Europe? A Quantitative Analysis of European Long-Term Gas Supply Contracts. WP-GG-06 Boriss Siliverstovs, Anne Neumann, Guillaume L'Hégaret, and Christian von Hirschhausen: International Market Integration for Natural Gas? A Cointegration Analysis of Prices in Europe, North America and Japan. WP-GG-05 Christian von Hirschhausen and Thorsten Beckers: Reform der Erdgaswirtschaft in der EU: Durch Regulierung zum Wettbewerb? WP-GG-04 Ferdinand Pavel, Boris Dodonov and Igor Poltavets: Is the Ukrainian-Russian Gas Consortium in the Economic Interest of Ukraine? Lessons from a European Gas Model. WP-GG-03 Christian von Hirschhausen and Anne Neumann: Liberalisierung der europäischen Gaswirtschaft - Neue Regulierungsbehörde soll mehr Wettbewerb schaffen. WP-GG-02 Anne Neumann: Security of (Gas) Supply: Conceptual Issues, Contractual Arrangements, and the Current EU Situation WP-GG-01 The Globalization of Natural Gas Markets - A Research Agenda.

Contact: [email protected] and [email protected] http://www.tu-dresden.de/wwbwleeg/projekte/gg/gg.html -3-

3 Theses

1. Natural gas supply is amply available

2. Demand is a great unknown, primarily because of unexpected high prices

3. Regulation is here to stay, and needs to be made compatible with investment incentives

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„Globalization of Natural Gas Markets“ (trade in 2002 and 2030, bcm)

112 1 6

13

139 63 66 184 11

22

189 19

27 57

52

Source: IEA, 2004

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Liquefaction: Sufficient Medium-Term Supplies of LNG Liquefaction Capacities Worldwide (2005 vs. 2010)

Norway

North America

Russia Middle East

North Africa

Latin America West Africa

Asia Oceania

Australia

mtpa in 2005 Source: Own calculations

mtpa in 2010 -6-

LNG and Pipeline Exports to Europe in the Next Decades … the share of LNG is increasing over time, especially in the next decade.

Total exports to Europe in bcm per year

… LNG imports could be limited by the import (regasification) capacity in Europe (conservative modeling assumptions) 700 23% 600

26%

24%

21% 500

10%

400

LNG

300

Pipeline

200 100 0 2003

2010

2015

2020

2025

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3 Theses

1. Natural gas supply is amply available

2. Demand is a great unknown, primarily because of unexpected high prices

3. Regulation is here to stay, and needs to be made compatible with investment incentives

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Pricing at Spot Markets: Henry Hub and NBP (daily data based on daily quotes, USD/MBTU)

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Demand Issues

- Fuel mix - Competition with hard coal - Future of nuclear

- CO2-policies -International competition

- Demand elasticites („demand destruction“)

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Natural gas demand in EU-25 under different oil and gas price scenarios 700

Mtoe 650 600 550 500 450 400 350 2000

2010

“High oil and gas prices” “De-linkage of gas and oil prices”

2020

2030

“Low gas availability for Europe” “Soaring oil and gas prices”

Source: EC, European Energy and Transport Scenarios on Key Drivers, 2004, p.61

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3 Theses

1. Natural gas supply is amply available

2. Demand is a great unknown, primarily because of unexpected high prices

3. Regulation is here to stay, and needs to be made compatible with investment incentives

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Working Hypothesis: Markets Help Supply Security

"There is no inherent conflict between the liberalization of electricity and gas sectors that meet reasonable supply security goals …

… as long as the appropriate market, industry structure, market design, and regulatory institutions are developed and implemented.“

Paul Joskow, Beesley Lecture, London, October 25, 2005, p. 2

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Critical Issues in Natural Gas Markets‘ Regulation

a) Production d) LNGRegasification Distribution b) Liquefaction

e) Pipeline

c) Shipping

f) Storage „DOWNSTREAM“

„UPSTREAM“

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LNG Regasification Terminals … „the tail, the dog is upstream“ (Jim Jensen, 2006) Relatively modest investment volumes (several hundred mn. USD/EUR) High arbitrage gains to be made (“storage”) Is TPA exemption necessary? - EU: Art. 22 of Gas Acceleration Directive 2003/55 - U.S.: FERC Hackberry Decision

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U.S.: Investments are Forthcoming (… albeit serious siting issues, „NIMBY“)

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LNG-Regasification in Europe: Rapidly Expanding …

Gdansk Wilhelmshaven Miford Haven

Isle of Grain Zeebrugge

Montoir

El Ferrol

Panigaglia Rovigo

Bilbao

Fos CavaouKrk Fos sur Mer Barcelona Brindisi Sagunto

Sines Huelva

Cartagena Revithoussa

Source: Own calculations

Marmara

bcm/a in 2005 bcm/a in 2010 - 17 -

Natural Gas Storage: Competition and/or Regulation? (seasonal storage vs. peak storage)

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U.S.: Change of Regulation Paradigm? Currently 14 storage facilities regulated by FERC, for the time being on a costbased level

Need for additional capacity: from cost-based to market-based rates? More generous interpretation of market power by FERC

A “missing money” problem in favour of market-based rates?

Emergence of independent merchant storage operators (e.g. Falcon Gas Storage)

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… and More Storage Necessary in the Future Net Surplus/Deficit of Storage Capacity (in bcm)

Source: Höffler and Kübler (2006)

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Conclusions

1. Natural gas supply is amply available

2. Demand is a great unknown, primarily because of unexpected high prices

3. Regulation is here to stay

4. „en guise de conclusion“

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European Regulatory Benchmarking: State of market competition and liberalization 9 8 7

score

6 5 4 3 2 1 0 GB

A

E

I

NL

D

F

Source: own calculations, Eurostat 2005, Europäische Kommission 2004, Oxera 2003



Natural gas in Europe insufficiently competitive



Large reforms ahead in Germany - 22 -

Natural Gas Sector Reform in Europe Christian von Hirschhausen Dresden University of Technology, and German Institute of Economic Research (DIW Berlin) Workshop “Natural Gas Liberalisation in Germany: Kick-start or Dead End?” Berlin 15 September 2006

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BACKUP

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EU-25 Natural Gas Supply Costs (2005-2030) $/Mbtu (source: OME, 2005)

$ 2,4 $ 3,1

$ 2, 45

$ 1,45

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Capacity bottlenecks 2025: LNG imports, from Norway and UK, between Fr/Sp, and Ger/NL/Bel/Fr

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Price for Natural Gas in Germany*

9 8 7 6

€/G J

5 4 3 2 1 0 S

D

L

Fin

HR

F

A

P

DK

H

GB

PL

B

CZ

SLO

SK

E

NL

* Erdgaspreise für Industriekunden mit einem Verbrauch von 41860GJ und einer Benutzungszeit von 1600h, 2005 (ohne Steuern) Source: Eurostat - 27 -

Issues in Regulation Regulation and investment, in particular in - Storage - LNG facilities

Appropriate rate of return?

Benchmarking and X-factors in incentive regulation

Network access, incl. storage

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Russia: Only one Supplier in a Diversified Import Portfolio Russia is an important supplier to Europe but its share in European imports is not likely to exceed 30% the next decades 700

Venezuela

Exports to Europe in bcm per year

24%

23%

26%

28%

30%

Trinidad

600 Nigeria UK

500

Netherlands Norw ay

400

Russia 300

Middle East Iran

200

Iraq Egypt

100 Lybia Algeria

0 2003

2010

2015

2020

2025 - 29 -

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