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
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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 -