Natural gas pricing in west europe

27/09/01

Natural Gas Pricing in West Europe

- IFA Conference 13th Sept. 2001 - Romarin Maillard

TGE/TM/MI- Natural Gas Pricing in West Europe - 27/09/01 2

European Gas Pricing - Table of contents

I. Commodities Pricing Theory

II. Gas PricingII.1. Gas Pricing TheoryII.2. An Example : The UK Gas Market

III. The Continental Europe Gas Market

IV. Possible Developments For Continental Europe

V. Conclusion



Characteristics of the supply market

- Capital intensive- Investment decision based on coverage of all costs (capex

and opex)- Long time between decision to invest and start of

production- Production decision based on coverage of variable costs

(variable opex)- Market control via :

• Investments (swing investors)• Production (swing producers)



Characteristics of the demand market

- Usually growing as per Gross Domestic Production (especially for gas)

- Low price elasticity in the short term unless substitutioncommodity exists for use in existing process

- Higher price elasticity in the medium term by selection of an alternative solution (process / commodity)

- Market control via :• short term substitution capability• medium term substitution capability



• Unsuitability between :- Supply- Demand

Prices fluctuation

• Fluctuation limited either via :- the demand market (limits : prices of competitive

commodities)- the supply market (limits : production variable cost and

marginal producer overall cost)


II.1. Gas Pricing Theory

Characteristics of the gas supply market

- Very capital intensive (4-5 G$ for 10 Bcm/year)- Very long time between decision to invest and start of

production- Low variable cost- No swing investors- No swing producers

No market control



• Characteristics of the European gas demand market

- Growing at an expected rate of 3% per year- Gas can be substituted :

• short term : dual fuel equipments• medium term : for all its use• US market could attract European gas if price differentials high

- Market control via :• short term substitution (Heavy Fuel Oil, Coal)• long term substitution (HFO, Coal and even Gas Oil or LPG)



Consequences for European gas pricing

• No market control through supplyPrice may vary between low variable cost and

marginal producer cost

• Market control via fuel substitutionPrice will be set according to the alternatives

fuel it displaces upward and downward along price curb


II.1. Gas Pricing Theory : Diagram

• Limits of gas price fluctuation

Price

0

Producer

Marginalproducer cost

Variable costs

Consumer

HFO

Coal

GO

GPL

At the end

If demand is not very high

If demand is high

If demand is very high


II.2. An Example : The UK Gas Market - Introduction

• Two markets :- Spot market : daily exchanges possible- Contracts market

• Volume of the spot market is only 20% of the physical market

Only a small part of the market is traded freely and even this part can be linked to oil products prices.


II.2. An Example : The UK Gas Market

Prices to industrial customers• Sales to industrial customers represent 50% of the overall

consumption• 50% of industrials customers are on an interruptible basis

Industrials customers are price-makers for the spot market

Observation : Price for interruptible customers stays between coal and HFO prices

Why ?Interruptible customers can switch between fuels :

- stop running coal based plants to go on gas if gas is cheaper- stop running gas based plants to go on HFO if gas is more

expensive than HFO



UK Energy prices for Industry

10.0015.0020.0025.0030.0035.0040.00

Q1 94

Q3 94

Q1 95

Q3 95

Q1 96

Q3 96

Q1 97

Q3 97

Q1 98

Q3 98

Q1 99

Q3 99

Q1 00

Q3 00

p/th

erm

Gas int HFO avg Coal avgEnergy Trend datas



Spot prices

• Winter level :- Price very close to HFO at burner type of dual fuel

(Gas/HFO) industrial customer

• Summer level :Price equal to the maximum of :- coal- winter price - storage costs



P = burner tip HFO equivalence

December 2000 Future

10.00

15.00

20.00

25.00

30.00

35.00

04/0

1/2

000

04/0

2/2

000

04/0

3/2

000

04/0

4/2

000

04/0

5/2

000

04/0

6/2

000

04/0

7/2

000

04/0

8/2

000

04/0

9/2

000

04/1

0/2

000

04/1

1/2

000

p p

er th

erm

P Futures gas priceIPE datas



Crude price = 26 $/Bbl Winter gas price (NBP) = 24-26 p/thExchange rate = 1.5$/GBP Summer gas price (NBP) = 18-20 p/th

Average gas price (NBP) = 21-23 p/th

Gas Prices

12

1619

23

27

1013

16

20

24

810

13

17

21

0

5

10

15

20

25

30

10 15 20 25

Brent $/Bbl

p/t

h

Summer gasprice p/thAverage p/th

Winter gas pricep/th


II.2. Gas pricing

Conclusion

• In an open market without "Supply price control", gas price set by "Demand price control" itself resulting fromfuel switching capabilities

• With a large capability of switching gas/HFO and gas/coal, gas price will stay between coal price and HFOprice.

• A decrease in fuel switching capability will lead to a more tensed market with higher volatility. Loss of shortterm switching flexibility may lead to very high prices


III. The Continental Europe Gas Market - Particularities

• Not too many producers• Reserves far from consumption sites

High costs of transportation and development

• TOP Long Term Contracts indexed on oil products prices with important volumes and duration

• Natural monopoly of gas transporters• Share of gas consumption not so important than in UK

and gas power plants not so developed• Markets just at the beginning of deregulation


III. The Continental Europe Gas Market - Supply

North Sea6.3 Tcm Russia

47.7 Tcm

North Africa6.6 Tcm

LNG Caspian Sea5.8 Tcm

Source : Cedigaz - Proved reserves at 01.01.2000

Reserves and future supply sources


III. The Continental Europe Gas Market - Gas Directive

• Network Access negotiated or regulated

• Eligible customers : - Power plants- Customers buying more than 25 Mcm/year

• Accounting unbundling, transparent, objective and non discriminatory criteria

• Possible derogations for public service obligations (recognized subsidiarity for distribution)

• Possible derogations for «Take or Pay» contracts

• Exceptions for emerging markets


A progressiveA progressive openingopening......


Electricity Directive In force 19th February 19991999 2000 2003

Minimum opening 26% 28% 33%Minimum threshold 40 Gwh/year 20 Gwh/year 9 Gwh/year

Gas Directive In force 10th August 20002000 2003 2008

Minimum opening 20% 28% 33%Minimum threshold 25 Mcm/year 15 Mcm/year 5 Mcm/year



Reg TPANeg TPAMixNot yet decided

Third Party Access


III. The Continental Europe Gas Market - Conclusion

Conclusion

• A market driven by oil products prices and long-term contracts with high costs of transportation

• But pressure from European Commission for deregulation

So, what could be the future ?


IV. Possible Developments For Continental Europe

• Seasonal prices with more interruptible customers who are price-makers during Winter, and storage capacities regulating offer during Summer

Winter prices linked to HFOSummer prices = Winter prices - Storage

• Criteria to follow :- Pressure of the European Commission- Trading development and share of spot gas- LNG development- Consumption of gas- Offer of interruptible services


V. Conclusion

• A more and more complicated market with different rulesfor each country

• Level of risks increasing for buying gas

• What are the solutions ?- Customers grouping ??- Relocation ?? - Oil & Gas companies with good knowledge of the market

who are risk-takers - Why not TotalFinaElf ?


NWE

SWE

CE

Trading - Marketing in Europe

The gas/electricity The gas/electricity marketsharemarketshare“open to competition” in 2005“open to competition” in 2005represents 30represents 30--35% of the total 35% of the total

marketmarket

Strategy = use expertise built in UK and take advantage of European deregulation to develop

trading and marketing throughout Europe

NWE Key Indicators - 2005

◆ Electricity demand : 1035 TWh◆ Electricity open to competition : 385 TWh◆ Gas demand : 238 Bcm◆ Gas open to competition : 104 Bcm

SWE Key Indicators - 2005


CE Key Indicators - 2005



UKGas

Neth.Gas

NorvegianGas

GSO

South-West

Baumgarten

AlgerianGas

AlgerianGas

RussianGas

South West Hub

Bacton

Zeebrugge

Emden

SouthernSouthern EuropeEurope Hub Hub

Central EuropeCentral Europe Hub Hub

NorthernNorthern EuropeEurope Hub Hub

Possible Hubs

Gaspipes

Existing Hub

Gaspipes in project

LNG

LNG in project


Norway26%

Netherlands23%

Great-Britain40%

Others11%

Norway43%

Netherlands13%

Great-Britain39%

Others5%

Production : 18.5 Bcm in 2000

Reserves : 210 Bcm at 31.12.00

Onshore transportationStorageMarketingPower Generation

Reserves

Production

TotalFinaElf’s European Gas and Power Portfolio

Offshoretransportation

11 years of production


GSOGAZ DU SUD OUEST

TotalFinaElf Gas & Power UK 100 % (Sales : 2.8 (Sales : 2.8 BcmBcm, 10 % I&C, 10 % I&C

MarketshareMarketshare))

Humber Power (1260 MW)(1260 MW):

40 % + tolling (510 MW)(510 MW)

Interconnector 10 %((CapacityCapacity : 20: 20 BcmBcm/y)/y)

Cepsa Gas Comercialidazora50 % TFE / 50 % Cepsa

TOTALFINAELF Strategy :Significant Positions in European Gas and Power

GSOGAZ DU SUD OUEST

70 %(Sales : 3.7 (Sales : 3.7 BcmBcm))

Gaz de Strasbourg 25 %

Gaz de Bordeaux 16 %Storages 100 %

(Izaute Lussagnet)

Pipe projectCepsa/Sonatrach

CFM

45 %(Sales : 9.4 (Sales : 9.4 BcmBcm))

TFE G&P North EuropeBruxellesBruxelles

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Natural gas pricing in west europe