1. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Security of European Gas Supply What are the important issues for the future? Sylvie Cornot-Gandolphe Principal Gas Expert International Energy Agency GTE 2 nd Annual Conference, 23-24 September 2004

2. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Outline 1. European Gas Supply/Demand at a Turning Point Growing use of gas in the electricity mix Growing imports Imported gas-to-power 2.Major Security of Gas Supply Issues Growing import dependency/Access to resources Transit/facility concentration Substantial gas investment Investment drivers in open markets Market fragmentation 3. Conclusion

3. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY European gas supply and demand at a turning point

4. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Gas Demand in OECD Europe Source: World Energy Outlook 2002

5. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY OECD European Gas Balance bcm Source: World Energy Outlook 2002

6. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Imported Gas for Power OECD Europe Source: World Energy Outlook 2002

7. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Drivers/Challenges for gas to power Drivers for gas to power  Economic growth  Better electric efficiency / environmental performance  Low economies of scale / better fit to open power markets Uncertainties  Gas/Electricity interface More market response, but Risk of domino effect  Volatility of gas prices/high fuel costs  Contractual arrangements  Taxation-CO2 price

8. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Major Security of Supply Issues

9. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Adequacy of Gas Supply Global Gas Reserves by Regions (tcm) Source: Cedigaz

10. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Access to Gas Resources Revenue sharing: incentives for countries to develop their resources for export Incentives for investment into export infrastructure Financing and risk mitigation  Long-term contracts - proven instruments Adaptation to new competitive conditions  JVs/partnerships: integration along the gas chain (physical and financial)  Access to open liquid markets

11. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Transit/Facility concentration 80% of Russian gas production from three fields (Urengoi, Yamburg and Medvezhye) The Yamal-Nenets corridor transports 90% of Russian gas Ukraine transits 80% of Russian gas exports to central and western Europe Transmed (Algeria/Italy) transports 33% of Italian consumption GME (Algeria/Spain) transports 30% of Spanish consumption More than half of Norwegian production and exports from Troll and associated pipelines (Norway). LNG: 11 regasification terminals in Europe

12. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Substantial investment will be needed Source: World Energy Investment Outlook 2003 Annual gas investment in OECD Europe

13. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Price Signals in Open Markets US Spot and Forward Prices – Henry Hub Source: Energy Intelligence

14. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Amber Major pipeline and regas projects

15. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Challenges for Investment in Open Gas Markets Do not regulate when competition works  US Hackberry decision: LNG terminals not subject to TPA  UK: LNG terminals/BBL exempted from TPA When regulated, make sure the rate of return is competitive Do not exclude  long-term contracts  auctions for capacity

16. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Unbundling of Functions/ Responsibilities Multiple players, longer chains, more interfaces Unbundling between infrastructure and supply Unbundling of responsibility  Main responsibility vis-à-vis customers AND shareholders  Responsibility for own customers, not the whole market  Coordination of responsibility along the chain Unbundling of investment decisions  Transportation capacity to fit future supplies  Investment incentives for a regulated private business  Investment in insurance assets (for low-probability/high- impact events)

17. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Conclusion

18. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY Key messages The European (and global) supply and demand balance is at a turning point Markets play their role but cannot play it alone Governments have an important role:  To define clear security of supply policy objectives (f or both supplies and infrastructure)  To define clear responsibility of the various stakeholders  To ensure consistency of the regulatory framework with policy objectives Leave instruments to the market players  Mix of supply-side instruments, storage, demand- side response, spot and trading instruments

19. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY

20. SECURITY OF GAS SUPPLY IN OPEN MARKETS LNG AND POWER AT A TURNING POINT INTERNATIONAL ENERGY AGENCY www.iea.org