1

Gas market modeling issues

Péter Simon Vargha

Strategy Development

June 4, 2010

2

► Demand side:

power sector is key

– and tricky to model

3

Gas in Europe is all about power

Average annual growth rate of sectoral gas demand, OECD

Europe

-5%

0%

5%

10%

15%

20%

1970-1980 1980-1990 1990-2000 2000-2007

Electricity production Residential Industry

Source: IEA

Average annual growth rate of sectoral gas demand, OECD Europe

3

4

Household demand: decline coming?

0,00

0,05

0,10

0,15

0,20

0,25

0,30

0,35

0,40

0,45

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

tcm

/cap

ita

Household sector actual

Simlulation (dynamic, in sample)

Household sector forecast

Households

► Econometrics: “sticky” demand in the past,

increasing with GDP

► Demand sensitive to GDP as well as price

changes

► 30% increase in price would cut consumption by

10% in the long run

Household natural gas consumption declining

in Hungary

Actual and simulated gas demand in the

residential sector, OECD Europe

Risks weighed to the downside:

► Household gas availability/penetration not likely

to grow much further, adjustment to high prices

just started.

► We estimate that the price elasticity of

household consumption is around 30%

► Global warming already here: 2% less

household demand per decade (partly offset by

more cooling?)

400

450

500

550

600

650

700

750

800

2004 2005 2006 2007 2008 2009

mn

m3

Residential, adjusted for HDD Lineáris (Residential, adjusted for HDD)

5

Electricity consumption trends

GDP/capita (USD)

Electricity consumption (2007)

Source: EIA, IMF

kWh/c

ap

ita

Hungary

Croatia

Slovakia

Poland

Romania

China

India

Czech RepublicSlovenia

ItalyGermany

Austria

Japan

Australia

USA

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

12,000

13,000

14,000

15,000

0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000

5

6

► German nuclear phase-out: +30 bcm if

replaced by CCGT

► Longer-term nuclear revival: -30 bcm

► Renewable penetration: achievement

of the 20% target in 2020 equivalent to

-50 bcm gas vs. baseline, a more

realistic scenario means -25 bcm

► Renewables utilized flat out (getting

high feed-in tariffs)

► Heating equipment efficiency (20%

improvement): -14 bcm

► Coal to gas switch: +30–40 bcm, but

can be zero depending on the

renewable path

Gas demand in electricity generation: ‘one-off’ policy drivers as

important as relative price

► ETS cap is a hard target

compared to the renewables

target

► A binding CO2 constraint may

drive up power prices

► This creates room for

renewables (they need less

subsidies)

Renewables dominate new power

installations

‘One off’ policy factors:

a range of 100bcm

7

► Supply side:

unconventional boom in the US,

(and elsewhere?)

8

40

42

44

46

48

50

52

54

56

58

60

Jan-

05

May-

05

Sep-

05

Jan-

06

May-

06

Sep-

06

Jan-

07

May-

07

Sep-

07

Jan-

08

May-

08

Sep-

08

Jan-

09

May-

09

Sep-

09

Bcf

per

day

Unconventional Gas Has Led to Very Rapid Production Increases

in the US Lower 48 States (excludes Alaska and Hawaii)

Hurricanes Katrina, Rita

January 2007:

49.2 Bcf per Day

July 2008:

56.3 Bcf per Day

Hurricane Ike

February 2009:

57.4 Bcf per Day

Shut-ins due to

low prices

8

Source: IHS CERA

9

…and much more to come: North American Dry Gas Productive

Capacity

Source: IHS CERA

10

US unconventional boom adds 80 bcm extra LNG resource elsewhere

EIA US natural gas import balance forecasts in 2015:

net imports 80 bcm lower with unconventional

-50

0

50

100

150

200

Imports Exports Net import

bc

m

Forecast from 2006 Current forecast

Source: EIA

11

Supply: Huge Potential for Shale Gas Outside North America

Basins Outside North America With

Greatest Shale Gas Potential

Source: CERA

Shale gas recoverable resource

potential

Tcf

12

► Prices/pricing

13

The oil-gas price divide in the US – it will not go away

Source: NYMEX, BSA Associates

14

150 bcm new LNG liquefaction capacity will come onstream by 2014

Natural gas liquefaction capacity in operation and under construction

(peak capacity and date when first production due)

Natural gas liquefaction capacity to be commissioned in 2009-2013

Source: IEA

15

Russia less of a dominant supplier to the EU in 2009

► Norway managed to

increase EU gas sales

during the crisis, due

to spot pricing

► Norway now is

roughly equal to

Russia in terms of EU

gas exports

► LNG import capacities

abundant: potentially

covering most EU

imports

-

20

40

60

80

100

120

140

Ru

ssia

(FS

U)

No

rwa

y

LN

G

Alg

eri

a

(pip

elin

e)

Lib

ya

(pip

elin

e)

Oth

er

bc

m

2008

2009F

0

50

100

150

200

250

300

350

400

EU LNG

regasification

capacity

2008 imports

bc

m

Pipeline imports in 2008

LNG imports in 2008

Proposed

Potential further expansion

of "under construction"

Expansion of existing

Under construction

Existing now

EU imports by source, Bcm/year

EU LNG regasification capacity and imports

Source: Eurostat

Source: iEA

16

Analyst forecasts: low spot prices will also persist in Europe

Long-term Price Outlook

weak spot prices compared to oil index

Source: Wood Mackenzie, Pira

PIRA Global Gas Price Forecast

17

EU27 gas consumption dropped 6% y-o-y in 2009

EU 27 gas consumption, annualized, adjusted with heating degree days

400

450

500

550

600

650

Jan-0

5

May-0

5

Sep-0

5

Jan-0

6

May-0

6

Sep-0

6

Jan-0

7

May-0

7

Sep-0

7

Jan-0

8

May-0

8

Sep-0

8

Jan-0

9

May-0

9

Sep-0

9

bcm

At the height of the crisis, EU gas

consumption was 20% lower than usual

Source: Eurostat

EU 27 gas consumption (annualized, adjusted with heating degree days)

18

And dropped more in oil-linked part of power sector

Change in Natural Gas Consumption in the

Power Sector in 2009 in selected EU countries, yoy

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

Slo

venia

Bul

garia

Aus

tria

Net

herla

nds

Pol

and

Cze

ch R

epublic

Lith

uania

Slo

vakia

Latvia

Unite

d Kin

gdom

Ger

man

y

Spa

in

Por

tuga

l

Rom

ania

Den

mar

k

Hun

gary

Est

onia

Change in Natural Gas Consumption in the Power Sector in 2009

Source: Eurostat

19

Gas pricing likely to move towards spot pricing in Europe

► Security of supply concerns lead to

infrastructure developments

► Interconnectors and storage facilities are

being built, which have the unintended

side effect of making spot pricing more

viable around Europe

► Russia wanted to control both price and

quantity in an adverse environment –

impossible

► Russia had to give in and move to

partial spot market pricing

► EON, RWE, ENI already renegotiated

part of their Gazprom gas to spot pricing

– others will join

► If the electricity price is set by spot gas

prices in the EU, this pushes towards

using spot markets: if others get spot

gas, and you don’t, you lose

Gas trading hubs in continental Europe

0

50

100

150

200

2003 2004 2005 2006 2007 2008

bcmBEB (2004)

CEGH (2005)

PSV (2003)

PEGs (2004)

EGT (2006)

Zeebrugge

(2000)TTF (2003)

European Gas Prices (Sep 2006 - Oct 2009)

Source: IEA

20

► Backup

21

Gas is abundant at relatively low cost.

IEA expects significant production growth

Source: IEA

Long-term gas-supply cost curveChange in natural gas production by major

country in the Reference Scenario

22

Gas – not competitive at higher oil prices

Full cost of wind vs. CCGT at 50 USD/bbl Brent

0

20

40

60

80

100

120

140

Wind CCGT

US

D/M

Wh CO2

OPEX

Fuel

Capital

Full cost of Wind vs. CCGT at 50 USD/bbl BrentFull cost of wind vs. CCGT at 100 USD/bbl Brent

0

20

40

60

80

100

120

140

Wind CCGT

US

D/M

Wh

CO2

OPEX

Fuel

Capital

increase

Full cost of Wind vs. CCGT at 100 USD/bbl Brent

22

Source: IEA

23

Supply: oil-indexed prices mean high LNG netbacks

per 1000

cmper MBtu

Liquification 135 3.9

Shipping

(assuming 9 th km)50 1.4

Regasification 47 1.3

Total LNG costs 233 6.6

Current LNG costs structure

Circa 2004 LNG costs structure

per 1000 cm per MBtu

Liquification 54 1.5

Shipping

(assuming 9 th km)50 1.4

Regasification 47 1.3

Total LNG costs 152 4.3Source: IEA