world gas markets: fundamentals & price trends•world lng liquefaction capacity increased from...

World gas markets: fundamentals & price trends

Evariste Nyouki, Head of Economic Research

Club Mines-Energie, 6 December 2012

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Agenda

Trends in world gas consumption

European gas market historical organisation

European gas market deregulation and impact on prices

The current world gas bubble

Outlook for gas prices

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A “golden age” for gas?

Source: BP Amoco & GDF SUEZ Trading

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67

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81

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11

Mill

ion

to

nn

es

oil

eq

uiv

ale

nt

(Mto

e) World primary energy demand*

Oil Gas Coal Nuclear Hydroelectricity Biomass & waste Other renewables

30%

22%

28%

4%

6%

9%

1%

Shares in 2011

Oil Gas Coal Nuclear Hydroelectricity Biomass & waste Other renewables

• According to the IEA, world energy demand through 2035 should increase by 1.2%/year.

• The increase on gas demand is expected to be higher: +1.6% (against +0.5% on oil and +0.8% on coal)… and its share of world energy demand should increase.

• But, to achieve this « golden age », gas has to remain competitive.

World energy consumption: average yearly growth rates Volumes

Mtoe

1965-1979 1980-1994 1995-2007 2008 2009 2010 2011 2011

Oil 5% 0% 2% 0% -2% 3% 1% 4059

Gas 6% 3% 3% 3% -3% 8% 2% 2906

Coal 2% 1% 3% 2% 1% 6% 5% 3724

Nuclear 26% 9% 2% 0% -1% 2% -4% 599

Hydroelectricity 4% 2% 2% 4% 1% 6% 2% 791

Biomass & waste 2% 2% 2% 2% 2% 2% 2% 1257

Other renewables 5% 8% 9% 14% 15% 18% 18% 195

Total 4% 1% 2% 1% -1% 5% 2% 13532

World GDP 3.0% 3.9% 2.8% -0.6% 5.3% 3.9%

| 4

Gas consumption: lower in Europe but higher in USA and Asia

Source: BP Amoco & GDF SUEZ Trading

• In 2011, European Union was the only region to record a drop in its natural gas consumption! • Consumption dropped to its lowest level since 2000!

USA21%

European Union14%

China4%

Japan3%

FSU19%

Others39%

Split of world gas consumption - 2011

661 630 652 631 634 623 614 654 659 649 673 690

440 452 452 474 487 495 488 482 491 460 497 44872 74 73 80 77 79 84 90 94 87 95 106

521 540 542 558 566 577 587 601 594 542 581 60025 27 29 34 40 47 56 71 81 90

108 131690 731 769 823 875 946 996 1032 1086 1103

1200 1249

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

bill

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s

World gas consumption

USA European union Japan FSU China Others

World gas consumption: average yearly growth rates Volumes

Bcm

1965-1979 1980-1994 1995-2007 2008 2009 2010 2011 2011

USA 2% 0% 1% 1% -2% 4% 2% 690

European Union 15% 2% 3% 2% -6% 8% -10% 448

China 21% 1% 12% 15% 10% 20% 22% 131

Japan 20% 7% 4% 4% -7% 8% 12% 106

FSU 8% 3% 1% -1% -9% 7% 3% 600

Others 9% 6% 6% 5% 2% 9% 4% 1249

World 6% 3% 3% 3% -3% 8% 2% 3223

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Agenda






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European gas market historical organization

Marchés nationaux

Monopole public

Compétition Gaz / produits pétroliers

Engagements de long-terme bilatéraux équilibrés

Une industrie fortement capitalistique

• La sécurité d’approvisionnement : une préoccupation nationale majeure

un importateur unique/limitation du négoce de gaz.

• Compétition gaz versus fuel lourd dans l’industrie et fuel domestique dans le secteur résidentiel tertiaire. Pas de marché captif.

• Ressources en gaz provenant de régions éloignées

Investissement considérable en infrastructures (gazoducs, stockage, GNL…)

Une répartition des risques équilibrée entre acheteurs et producteurs :

• Risque prix : producteur (pricing net-back / produits pétroliers)

• Risque volume : acheteurs (Take-Or-Pay pour sécuriser le cash-flow du producteur)

| 7

An historical organization based on national companies

Zeebrugge

Fos

Montoir

Huelva

Carthagène

Barcelone

La Spezia

Revithoussa Skikda

Arzew

Marmara

Bilbao

Sines

GFU

GAZPROM

SONATRACH

GDF

Ruhrgas

Gas Natural

BG

SNAM

VNG

Distrigaz

| 8

Agenda






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Energy market opening in Europe

Décembre 96

Directive Électricité

Processus de Madrid

Août 1998 Août 2000 Juin 2003 Juillet 2004 Juillet 2007Directive Gaz EU Transposition France 2de Directive Eligibilité non-résidentiels Ouverture totale

Processus de Florence

Décembre 1996 Février 1999 Juin 2003 Juillet 2004 Juillet 2007Directive Electricité EU Transposition France 2de Directive Eligibilité non-résidentiels Ouverture totale

Décembre 1997 2003 Janvier 2005 Janvier 2008Protocole de Kyoto Directive CO2 Phase I Phase II

Ele

ctric

ité

CO

2G

az

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The new features and the emergence of gas trading places

Production Trading Transmission Distribution

Supply

Upstream: unregulated Regulated activities Downstream: unregulated

• Competition on imports

• Third Party Access (TPA) to the transmission and distribution networks

• Unbundling of accounts, to avoid cross subsidisation

• Competition on supply to end users, ie market opening

• Consequence of market opening: the creation of market places (ie trading places)

| 11

Gas market places in Europe

National Balancing Point (NBP) in UK: 1996

Zeebrugge in Belgium: 1999

HubCo and EuroHub at the Germany/Netherlands border: 2002

Title Transfer Facility (TTF) in Netherlands: 2003

Punto di Scambio Virtuale (PSV) in Italy: 2003

Points d’Echange de Gaz (PEGs) in France : 2004/2007

Gaspool (ex. BEB) in Nord-East Germany: 2004/2009

Central European Gas HUB (CEGH) (Baumgarten): 2005

NCG (ex. EGT) in South-East Germany: 2006/2009

| 12

Trend in traded volumes on European gas markets

Around 60% of trades are done on screens where the community of traders can ‘see’ the volumes

• Electronic OTC platforms: 80%

• Exchanges: 20%

The remaining volumes (40%) are done by voice

Continuous increase in traded volumes over the last years

• UK remains the biggest market (around 68%), but liquidity is significantly increasing in continental Europe, particularly on TTF (24%); Zeebrugge’s share is falling (3%).

Source : FSA Analysis of activity in the energy markets 2011 , Electronic trading platforms & GDF SUEZ Trading

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2005 2006 2007 2008 2009 2010 2011

TWh

Gas market size - Estimation of traded volumes on electronic platforms

PEGPSVNCGGaspoolTTF eOTCZeebrugge eOTCNBP eOTC

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Gas trading hubs develop mainly where there are physical interests

PSV

PEGs

Zeebrugge

NBP

Gaspool

NCG

Baumgarten

TTF

LNG

Russian gas

Norwegian gas

UK gas

North African gas

NBP (and US Henry Hub): structural liquidity! Continental Europe: more short term liquidity, fuelled recently by gas oversupply.

UK, 47

Norway, 98

Netherlands, 81

Others, 40

Former Soviet Union

(pipeline), 134

North Africa (pipeline), 41

LNG, 91

OECD Europe gas supply 2011 - Bcm

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Traded volumes = T/P * P/C * C = Financial trading * Physical trading * Consumption T = traded volumes P = volumes going to physical delivery C = consumption with P <= C T/P = churn ratio = indicator of financial trading P/C = indicator of physical trading

From physical volumes to traded volumes

Gas consumption (C) Traded volumes (T) Traded volumes going to physical delivery (P)* T/P P/C

Germany 1095 660 225 3 21%

UK 1081 13835 800 17 74%

Italy 913 360 160 2 18%

Netherlands 585 4245 850 5 145%**

France 548 310 110 3 20%

Belgium 215 650 158 4 74%**

Data for 2010 - TWh

Source: TSOs, Electronic trading platforms, Exchanges & GDF SUEZ Trading

*Estimates **As Netherlands is a major exporter country and Belgium a major transit country, part of volumes delivered on these markets is exported thereafter.

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Diversity in gas market players

Physical players

• Oil & Gas producers

• Gas & Power utilities

• Consumers

• TSO

• Storage & terminal operators

• Global traders

Financial players

• Banks

• Hedge funds

• Institutional investors

Diversity in market players with various needs

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Despite deregulation, gas market prices continued to be influenced by oil prices in Europe… but also in the US, at least until recently

Source: Nymex, ICE, Platts, Argus & GDF SUEZ Trading

• Links between oil prices and gas market prices in Europe: contractual links (via long-term oil-indexed contracts) & physical substitution links.

• These physical substitution links explain why, in a market without long-term oil-indexed contracts like the USA, gas prices used to trade between fuel oil and heating oil prices.

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Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08

EUR

/MW

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Gas market prices versus long-term oil-indexed prices

NBP TTF European LT oil-indexed

Cold winter

Mild winter

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/MM

BTU

Month-ahead gas versus oil prices in the US

Range Heating oil-Fuel oil Henry Hub

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Agenda






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A gas bubble due to the sharp increase in LNG flows from 2009, mainly from Qatar,…

Source: Waterborne LNG & GDF SUEZ Trading

•World LNG liquefaction capacity increased from 260 Bcm/year end 2006 to 371 Bcm/year end 2010 (+111 Bcm).

•The bulk of this increase is due to Qatar whose liquefaction capacity jumped from 35 Bcm in 2006 to 106 Bcm in 2011 (+71 Bcm). Qatar is now by far the world n°1 LNG producer (28% market share).

• Most these Qatari volumes were intended for the US market.

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World liquefaction capacity

Qatar Indonesia Australia Malaysia Nigeria Algeria Trinidad & Tobago Others

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… the strong increase in US gas production thanks to shale gas,…

Source: Energy Information Administration, Waterborne LNG & GDF SUEZ Trading

• Thanks to unconventional gas, US domestic gas production increased from 546 Bcm in 2007 to 651 Bcm in 2011. • This led to a significant drop in US LNG imports (22 Bcm in 2007 and 10 Bcm in 2011)… they were expected to increase. • As there are not yet market places in Asia, idle volumes went to Europe: Europe LNG imports increased from 56 Bcm in 2007 to 71 Bcm in 2009 and 90 Bcm in 2010.

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US and Europe LNG imports

Europe USA

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2007 2008 2009 2010 2011 2012

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US gas supply

Production Net pipeline imports Net LNG imports

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… the limited growth in other America countries (excluding USA)…


• The increase in US domestic production impacted US LNG imports but even more net pipeline imports (from Canada) which dropped from 85 Bcm in 2007 to 45 Bcm in 2011. • Due to higher pipeline imports from USA, Mexico LNG imports slowed down, from 5.85 Bcm in 2010 to 4.05 Bcm in 2011… but they rebounded in 2012 (+29% so far). And Canada LNG imports increased only slightly: 2.09 Bcm in 2010 and 3.30 Bcm in 2011… but they dropped in 2012 (-49% so far). • Overall, LNG consumption remains low in the zone (4.35 Bcm in Argentina in 2011, 3.81 Bcm in Chile, <1 Bcm in Dominican Republic, Brazil and Puerto Rico) but increased significantly in 2012 so far, particularly in Brazil (+265%), Argentina (+24%) and Puerto Rico (+114%).

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Other America LNG imports - Bcm/month

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… and the weak European gas demand

Source: International Energy Agency & GDF SUEZ Trading

Drop in European gas consumption: -5% in 2009, +6% in 2010, -9% in 2011; and -5% in 2012 so far Split of the -9% drop in 2011 • Residential/Commercial: -13% (-29 Bcm, to 192 Bcm), mainly because of mild weather • Industry: -5% (-7 Bcm, to 128 Bcm), mainly because of the economic slowdown • Power generation: -7% (-12 Bcm, to 165 Bcm), mainly because of the lack of (price) competitiveness

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OECD Europe gas consumption

Residential/Commercial Industry Power Generation Industry own use and losses

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The increase in Japan LNG consumption after the Fukushima disaster…

• Japan nuclear power generation in 2011: -43% on average against 2010; 0 TWh in June 2012 • Japan gas consumption from power generation: +20% in 2011, to 68 Bcm • Japan Residential/Tertiary gas consumption: -0.03% in 2011, to 29 Bcm • Overall, Japan total gas consumption: +11% in 2011, to 112 Bcm • Japan total LNG imports: +12% in 2011, to 108 Bcm; +13% in 2012 so far

Source: IEE Japan & GDF SUEZ Trading

1.8

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J F M A M J J A S O N D

Japan Residential/Tertiary gas consumption -Bcm/month

2008 2009 2010 2011

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Japan nuclear production - GWh/month

2008 2009 2010 2011 2012

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Japan Power Gen gas consumption - Bcm/month

2008 2009 2010 2011 2012

| 23

… and the structural increase in LNG consumption in other Asian countries…

• Sharp (structural) increase in LNG consumption in other Asian countries in 2011: +17%, to 106 Bcm.

• China: +33%, to 17.45 Bcm • India: +37%, to 17.36 Bcm • South Korea (SK): + 5%, to 49 Bcm

• In 2012 so far: +19% in China, + 15% in India, +3% in South Korea; +8% for total Other Asia countries •China intends to increase gas share in its energy demand mix (only 4.5% at present) and reduce coal share (70.4% at present). • Despite the expected increase in domestic production (partly from shale gas), China gas imports could then jump from 31 Bcm in 2011 to 62 Bcm in 2015 and 125 Bcm in 2020, via LNG and pipeline (mainly from Turkmenistan). Source: Waterborne LNG, BP Amoco & GDF SUEZ Trading

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Other Asia (excluding Japan) LNG imports

Range 05-08 2009 2010 2011 2012

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China gas supply/demand balance - Bcm/year

Production Consumption

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India gas supply/demand balance - Bcm/year

Production Consumption

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… tightened the world LNG balance…


• Despite the increase in liquefaction capacity, the strong increase in LNG consumption in 2010 (+22%) and 2011 (+9%) led to a drop in the reserve margin: from 24% in 2009 to 19% in 2010 and 12% in 2011.

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Monthly world LNG supply/demand balance

Asia USA Other America Europe Max liquefaction capacity

| 25

… but has had a limited impact on the comfortable European gas balance

Source: Waterborne LNG, International Energy Agency & GDF SUEZ Trading

• LNG supply to Europe was almost unchanged in 2011 (91 Bcm, against 90 Bcm in 2010) as additional LNG volumes went to the more rewarding Asian market. It collapsed in 2012: -24% so far.

• The European gas market remained comfortable nevertheless, mainly because of the drop in demand.

• As a consequence, the gas bubble, that emerged in 2009, increased in 2012.

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OECD Europe LNG imports

2009 2010 2011 2012

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OECD Europe consumption versus maximum supply

Production LNG imports Pipeline imports Consumption

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International gas markets: not yet totally integrated...

Oil indexed gas

Market references

Substitute

Fuel Oil / Gasoil

Henry Hub Fuel Oil /

Naphta etc…

JCC contracts

JKM

Coal

LT contracts

NBP / TTF…

LNG flows

Source: JCC= Japan Crude Cocktail. JKM= Japan/Korea Marker

| 27

… as LNG flows, although rising, are not high enough compared to gas consumption

Source: BP Amoco, Waterborne LNG & GDF SUEZ Trading

• Although rising, LNG flows represent only 10% of world gas consumption. • Moreover, behind this average, there are huge regional differences: the LNG share is very high in Asia, very low in the USA and medium in Europe. This situation explains price divergence between markets.

137 143 150169 178

189

211226 227

243

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5%

6%

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8%

9%

10%

11%

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World LNG flows Share of world gas consumption

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Price comparison: low prices in the US, high prices in Asia, Europe in between

Source: Platts, ICE, Nymex & GDF SUEZ Trading

• Divergence between US and European/Asian prices from 2010. • Divergence between European and Asian prices from 2011, after Fukushima. • Sharp (structural) drop in European gas market prices below oil-indexed prices from 2009. However, cold weather can temporarily make these prices converge again.

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Month-ahead gas prices

UK NBP European LT oil-indexed US Henry Hub Asian JKM

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Illustration of the weather-sensitivity of the European gas balance: the UK example

• Cold weather pushed UK total gas demand to record levels in the past few days. • If the weather continues to be cold through the winter, UK will need LNG supply above the current levels (42 mm cm/day) or higher imports from Zeebrugge via the Interconnector. • But, in case of normal weather, the UK could afford lower LNG supply.

Source: National Grid & GDF SUEZ Trading

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04-Nov-12 04-Dec-12 04-Jan-13 04-Feb-13 04-Mar-13

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UK demand versus supply (actual and expected)

UK domestic BBL Langeled LNG Interco Storage Demand Cold demand

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Agenda






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Medium-term outlook for US LNG exports

Source: Energy Information Administration, GDF SUEZ Trading

-15

-10

-5

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US net LNG exports

US net LNG exports

• The US should become a net LNG exporter from 2016. • However, despite the numerous LNG liquefaction projects (up to 80 Bcm/year), the EIA does not expect massive exports: « only » 2 Bcm/year in 2016, rising to 19 Bcm/year in 2020.

| 32

European gas medium-term supply/demand balance

Source: Waterborne LNG, International Energy Agency, GDF SUEZ Trading

World LNG market: probably tight in 2013, then more comfortable

• In 2012 so far, world LNG demand is slightly lower (-0.55%).

•Our assumption for the whole 2012 year: -0.7% in world LNG demand.

•Then, we expect demand to increase by 5%/year on average in 2013-2015.

•Given these assumptions and as almost no additional liquefaction capacity is expected before 2014, the reserve margin should increase to 14% in 2012 (up from 12% in 2011), drop to 12% in 2013, and increase again to 17% in 2014 and 15% in 2015.

European gas market: oversupply should reduce from 2013

•Assumptions on demand: -4% in 2012, +5.0% in 2013, and +1%/year thereafter

• Further drop in domestic production and low LNG supply

• Increase in pipeline imports, due to

Algeria (Medgaz: 8 Bcm/year from 2012)

FSU (Central scenario: 14 Bcm/year of new gas in the second line of the Nord Stream from 2013; Low scenario: 0 Bcm/year; High scenario: 27.5 Bcm/year)

•Given these assumptions, the reserve margin should reach a maximum in 2012 and then begin to drop (although remaining at relatively high levels), which could narrow the gas-to-oil spread.

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Annual world LNG supply/demand balance

Asia USA Other America Europe Liquefaction capacity Reserve margin (RHS)

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050

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OECD Europe gas consumption versus maximum supply: annual

Production LNG Pipeline imports Consumption Reserve margin (RHS)

| 33

Is the gas-to-oil de-correlation (particularly in the USA) sustainable?

Source: Nymex, Argus, Platts, GDF SUEZ Trading

• US Henry Hub gas prices dropped below the heating oil-fuel oil range from mid-2007 due to the rise in unconventional gas production. • From 2011, they even dropped below coal prices... but are now coming back to parity. • However, the current increase in US gas consumption and expected increase in US oil production (thanks to shale oil and gas to liquids projects) could narrow the gas-to-oil spread in the coming years.

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Month-ahead gas versus oil & coal prices in the US

Range Heating oil-Fuel oil Henry Hub Coal

| 34

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