ALBA SOLUZIONIConsultancy and information services in the energy sectorwww.albasoluzioni.com

Energy Commodities ConferenceAthens12 June 2019

Italy and Greece:Gas markets converge

ALBA SOLUZIONI

Alba Soluzioni

Independent consultancy established in 2005 operating in the energy sector with focus on Italy

• Italian gas & power market report

Gas e Elettricità Oggi

GeEO - Italian Gas & Power

• Italian Regulatory Alert Service

• AlbaStack Italian power price forecasting service

• AlbaFlows daily European gas service

• Tailored consultancy services

www.albasoluzioni.com

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Construction started May 2016 , Greece and Albania sections almost complete - first gas expected Jan 2020

Work started on Italian microtunnel drilling site and offshore exit in December 2018

Offshore pipelay started in April 2019

Snam tendering for connection pipeline

Construction of the 3 bcm ICGB pipeline started in May 2019 with completion scheduled for late 2020

TAP connectsthe Virtual Trading Point inGreece to Caspian supply and Italy’sPSV gas market

Shah Deniz II gas buyersThe TAP pipeline Destination Company bcm paDEPA 1Bulgargaz 1Sub-total 2Hera 0.3E.ON 1.6Gdf Suez 2.6Confirmed volume 4.5Enel NDAxpo NDShell NDNatural Gas Fenosa NDRemaining share 3.5Sub-total 8

Total 10

Southeast Europe

Italy and beyond

TANAP started shipping Shah Deniz 2 gas to Turkey last summer

Hub to hub spreads – example PSV/TTF

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Gas will flow from TTF to the PSVif the premium at PSV over TTF- the PSV/TTF spread -exceeds the incremental cost of transportation

If a shipper has already booked capacity, he should flow gas as long as the PSV/TTF spread exceeds the incremental cost of usage, if any(commodity component)

If additional capacity is available (eg UIOLI), shippers will buy it if the PSV/TTF spread exceeds the total cost of transport – capacity plus commodity

NBPTTF

ZeebruggeZone

PEGNord

PSV

BBL

IUK

TENP

Transitgas

Bacton

Balgzand

s’GravenvoerenBocholtz – NCG 0.2 €/MWh

Blaregnies/Taisnières

WallbachExit 0.2 €/MWh

Oltingue

Passo Gries

NCG

VTP

Tarvisio

TAG

Obergailbach

WAG

Waidhaus

Oberkappel

Baumgarten

VTP exit 0.9 €/MWh

Floor price inTransitgas auctions is variable – we assume 0.70 €/MWh as proxy for long term tariff

PEG exit 1.65 €/MWh

TTF exit +NCG entry

PSV entry + commodity

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Capacity Holland-Germany-Switzerland-Italy at around 2 €/MWh is not enough to provide maximum import at Passo Gries

So gas is needed from France at higher transport cost to get Transitgas pipeline to maximum (PEG prices have been slight premium to TTF) so cost =TTF + PEG premium +

Transport to Italy Passo Gries

0.0

0.5

1.0

1.5

2.0

2.5

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3.5

VTP NCG TTF PEG

Exit from Oltingue

Exit from Wallbach

Exit Bocholz

Exit from Arnoldstein

Transitgas

Entry Passo Gries

Entry Tarvisio

Commodity to PSV

53 mmcm/d21 mmcm/d

59 mmcm/d

Transportation costs for day ahead capacity assuming full utilisation and

Transitgas at Eni long term rate (€/MWh)

TTF

But FluxSwiss sells interruptible when Eni not at max

TTF-NCG capacity was available at 0.2 €/MWh or less in the past…

As national incumbent, Eni optimises portfolio, not Transitgas capacity in isolation

90% of transit capacity through Switzerland is booked by Eni under long term contract

PSV

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20

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60German exitcapacity atWallbachmmcm (left axis)

Passo Gries Flowmmcm (left axis)

Spot PSV/TTF spread €/MWh (right axis)

Transport-1

0

1

2

3

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10

20

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60German exitcapacity atWallbachmmcm (left axis)

Passo Gries Flowmmcm (left axis)

Spot PSV/TTF spread €/MWh (right axis)

Transport

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Spot spreads are correlated to volume needed2015 and 2016 2017 to 2019

Exit capacity from Germany to Switzerland has been reduced since April 2017 due to corrosion defects on one of the two TENP pipeline strings

So max Passo Gries import capacity = 30 +21 (Oltingue) – Swiss demandAnd PG demand above 30 mmcm/d – Swiss demand comes from France

Increased TTF-NCG cost pushes overall TTF-PSV transport higher on 1 Oct 2018 and again on 1 Jan 2019 – but spread goes negative in November/December?

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Forward import capacity auctions also impactEni offered Wallbach to Passo Gries capacity for GY18 and Q418 last summer when PSV/NCG spread > 1.90 €/.MWh, so about 11 mmcm/d should have been sold – and hedged – but storage withdrawals and mild weather led to no need for Passo Gries supply – hedged importers took value from unwinding

Oltingue/PEG to Passo Gries probably not sold due to French exit/ higher floor price

Strong flow was needed in Q1 and Q2 so no need to unwind hedged capacity

Q3 capacity offered on 19 April when spread was 2.60 €/MWh

Oct-18 Nov-18 Dec-18 Jan-19 Feb-19 Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19

From Oued es Saf-Saf

to Mazara del Vallo

From Wallbach

to Passo Gries

From Oltingue

to Passo Gries

From PEG

to Passo Gries

2920

1987

149

447

736 720 728 736

576 570563

63 61 62

188 184 186

0

10

20

30

40

50

60

70

80

90

100

Mazara delVallo

Tarvisio Passo Gries Gela LNG NationalProduction

Win13-Win17 Win18

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Market importsPasso Gries flow similar to W17 but average PSV/TTF spread down despite higher transport costs

Due to low spreads required for turn down during November and Christmas period

And low spread when Passo Gries supply brought to replace Tarvisio gas on contract optimisation

Winter Average daily supply to end Feb (mmcm/d)and PSV premium over neighbours in €/MWh

Pre-contracted flow was higher due to hedging of capacity sold by Eni

PSV/TTF spread in €/MWh

Transitgas flow in mmcm

Win-13 1.5 24.2Win-14 3.4 41.0Win-15 2.1 30.0Win-16 1.8 16.4Win-17 2.4 15.7Win-18 1.6 15.6

-5

0

5

10

15

20

25

30

LNG

Turkeyborder

Bulgariaborder

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The Greek marketIn 2018, Greek gas demand was around 5 bcm and Bulgarian demand around 3 bcm compared to about 72 bcm pa in Italy

Coal to gas switching in power generation could increase demand –already in Q119?

LNG capacity Increase in December 2018 andstrong supply after maintenance sawGreece export to Bulgaria in May

LNG is the only form of storage

Greek market supply by source in mmcm/d

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Greek balancing market pricesSince July 2018, the Greek balancing market reference price has been set equal to the TTF day ahead price

But marginal buyand sell prices are volatile

Average marginal buy is Reference + 10

Average marginal sell isReference – 4.4

With no storage, Potential market entrants who donot have flexible supply face significant balancing risk

0.00

10.00

20.00

30.00

40.00

50.00

60.00Greekbalancing price

PSV DA

TTF DA

Greek marginalbuy

Greek marginalsell

GR04

Greek balancing prices v hub and oil index (GR04) in €/MWh

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How will TAP connect the Italian and Greek markets?

Exit capacity to Greece - where – how much?

TAP exit and DESFA entry tariffs?

Sunk v variable costs of “Italian” gas buyers?

Will there be within day flexibility?

Enough to cap Greece at PSV + exit charge?

The TAP network code is not finalised and capacities not yet published

But if there is exit capacity above the 2 bcm intended for Greece and Bulgaria, buyers of gas intended for Italy will be able to sell into the Greek market if the value is higher

The price threshold will depend on PSV and additional or avoidable transport costs

If there is flexibility within day, this could provide supply for the balancing market

Destination Company bcm paDEPA 1Bulgargaz 1Sub-total 2Hera 0.3E.ON 1.6Gdf Suez 2.6Confirmed volume 4.5Enel NDAxpo NDShell NDNatural Gas Fenosa NDRemaining share 3.5Sub-total 8

Total 10

Southeast Europe

Italy and beyond

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TAP could also create additional demand?

If Greek and Bulgarian buyers can transport to Italy, they will do so if value higher is higher

So if Greek VTP falls below PSV less additional transport cost, demand willincrease

Is there capacityto bring Greek/Bulgarian purchases to Italy?

If so, support at = PSV - transport

TAP is not the only new pipeline - TurkStream

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Both offshore 16.5 bcm pa strings complete, on time for end of 2019 start

Onward transit projects are progressing rapidly:In January, Bulgartransgaz accepted binding offers from 3bidders for 17 bcm of entry capacity at the Turkish/Bulgaria border and 11 bcm of exit to Serbia border, now tendering for works

Serbia’s Gastrans holding open season for for 14 bcm of entry at the Bulgarian border and 9 bcm of exit to HungaryBoth Bulgarian and Serbian projects envisage start-up at 4 bcm pa from 1 January 2020 with ramp up to full rates and exit into Hungary by 1 October 2021

If Shah Deniz II not immediately at maximum, could TAP bring TurkStream gas to Greece and Italy?