Atlantic LNG trade: Atlantic LNG trade: What are the implications of What are the implications of

the Russiathe Russia--UkraineUkraine--EU EU trade row?trade row?

byby

Obindah WagbaraObindah WagbaraCEPMLPCEPMLP

University of DundeeUniversity of Dundee

IntroductionIntroductionChanging dynamics of LNG TradeChanging dynamics of LNG Trade

% of Int% of Int’’l Gas Trade: From 6% in 1970 to 22% l Gas Trade: From 6% in 1970 to 22%

Projected Tripling of Gas Trade by 2010Projected Tripling of Gas Trade by 2010(50% LNG)(50% LNG)

Technology; Technology; CostCost and Demandand Demand

Disputes over Natural Gas Pricing and Disputes over Natural Gas Pricing and ownership of pipeline infrastructure ownership of pipeline infrastructure

Resultant Consequences on Regional Resultant Consequences on Regional Markets and LNG Trade globally Markets and LNG Trade globally

Structure of PresentationStructure of PresentationINTRODUCTIONINTRODUCTION

Natural Gas Outlook and Atlantic LNG tradeNatural Gas Outlook and Atlantic LNG tradeRelevance:Relevance: Threats; implications on the future ofThreats; implications on the future of

LNG TradeLNG TradeEnergy SecurityEnergy Security

BRIEF ON ROWBRIEF ON ROWHighlight of dispute: IssuesHighlight of dispute: IssuesSolution:Solution: ‘‘AgreementAgreement’’ and latest developmentsand latest developmentsEU policy proposalsEU policy proposals

IMPLICATIONSIMPLICATIONS::Legal and Regulatory IssuesLegal and Regulatory IssuesSupplySupply--side Issuesside IssuesDemandDemand--side Issuesside Issues

CONCLUSIONCONCLUSION

Brief on RowBrief on RowRussiaRussia--Ukraine Price disputeUkraine Price dispute

Independent Supplier; Price Formula and different Independent Supplier; Price Formula and different sources of gas for Ukrainesources of gas for UkraineEuropean Impact and ResponseEuropean Impact and Response

LNG Supply option proposed/adopted by Belgium, Croatia, LNG Supply option proposed/adopted by Belgium, Croatia, Germany, Netherland and PolandGermany, Netherland and PolandUniform Policy effort and emphasis on ECTUniform Policy effort and emphasis on ECT

Latest DevelopmentsLatest DevelopmentsRussiaRussia’’s fears over insecurity of demand and s fears over insecurity of demand and interest in European markets interest in European markets TurkmenistanTurkmenistan’’s renegotiated gas price with s renegotiated gas price with GazpromGazpromEUEU--Russia: Russia: Threats and counter threatsThreats and counter threats

Brief on Row:Brief on Row: AgreementAgreementGazprom will pay Naftogaz $1.6/mcm/00km for Gazprom will pay Naftogaz $1.6/mcm/00km for transit in cashtransit in cashRosUkrEnergo (RUE) will deliver all gas to Ukraine RosUkrEnergo (RUE) will deliver all gas to Ukraine from Russia and Central Asia (no refrom Russia and Central Asia (no re--exports of Russian exports of Russian gas!)gas!)RUE/Naftogaz JV will market all gas in UkraineRUE/Naftogaz JV will market all gas in UkraineRUE gas availability: 41Bcm of Turkmen gas, up to 15 RUE gas availability: 41Bcm of Turkmen gas, up to 15 Bcm (8 Kazakh, 7 Uzbek) of Gazexport gas for Bcm (8 Kazakh, 7 Uzbek) of Gazexport gas for Caucasus, 17 Bcm of Russian gas at $230/mcmCaucasus, 17 Bcm of Russian gas at $230/mcmRUE/Naftogaz JV gas sales: do not allow reRUE/Naftogaz JV gas sales: do not allow re--exportexport15 Bcm to be exported in a 15 Bcm to be exported in a ““joint programmejoint programme”” with with GazexportGazexport

Stern, OIES

Brief on Row:Brief on Row: AgreementAgreementNew JV UkrGazNew JV UkrGaz--Energo established, 50/50 Energo established, 50/50 RUE/NaftogazRUE/NaftogazUkrGazUkrGaz--Energo and Naftogaz will supply industrial Energo and Naftogaz will supply industrial market (Naftogaz will retain residential market)market (Naftogaz will retain residential market)RUE will supply UkrGazRUE will supply UkrGaz--Energo withEnergo with

32 Bcm in 2006 [at $95/mcm?] 32 Bcm in 2006 [at $95/mcm?] 58 Bcm in 200758 Bcm in 200760 Bcm during 200860 Bcm during 2008--10105 year transit agreement of $1.6/mcm/00km in cash remains 5 year transit agreement of $1.6/mcm/00km in cash remains in placein place

Pricing will depend on “trends in Central Asian gas industry”

Stern, OIES

Brief on RowBrief on RowRussiaRussia--Ukraine Price disputeUkraine Price dispute

Independent Supplier; Price Formula and different Independent Supplier; Price Formula and different sources of gas for Ukrainesources of gas for UkraineEuropean Impact and ResponseEuropean Impact and Response

LNG Supply option proposed/adopted by Belgium, Croatia, LNG Supply option proposed/adopted by Belgium, Croatia, Germany, Netherland and PolandGermany, Netherland and PolandUniform Policy effort and emphasis on ECTUniform Policy effort and emphasis on ECT

Latest DevelopmentsLatest DevelopmentsRussiaRussia’’s fears over insecurity of demand and s fears over insecurity of demand and interest in European markets interest in European markets TurkmenistanTurkmenistan’’s renegotiated gas price with s renegotiated gas price with GazpromGazpromEUEU--Russia: Russia: Threats and counter threatsThreats and counter threats

Implications of the RowImplications of the RowLegal and Regulatory IssuesLegal and Regulatory Issues

More Integration:More Integration:Within EuropeWithin Europe

Across the Atlantic (with North America)Across the Atlantic (with North America)

SupplySupply--side Issuesside IssuesInfrastructural CapacityInfrastructural Capacity

LiquefactionLiquefaction

TransportationTransportation

RegasificationRegasification

Resultant increase in Cost across the ChainResultant increase in Cost across the Chain

Implications of the Row (contd.)Implications of the Row (contd.)

SupplySupply--side Issues (contd.)side Issues (contd.)

Who bears the burden of Cost?Who bears the burden of Cost?Suppliers or Consumers (Chinese example)Suppliers or Consumers (Chinese example)

Increasing Market Share and Producers Increasing Market Share and Producers response:response:

Profit Sharing Mechanisms (PSMs)Profit Sharing Mechanisms (PSMs)

RussianRussian--Algerian MOUAlgerian MOU

The GECF (Cartel) QuestionThe GECF (Cartel) Question

China: The Burden of Cost/PriceChina: The Burden of Cost/Price

Source: Stern, OIES

Implications of the Row (contd.)Implications of the Row (contd.)

SupplySupply--side Issues (contd.)side Issues (contd.)

Who bears the burden of Cost?Who bears the burden of Cost?Suppliers or Consumers (Chinese and example)Suppliers or Consumers (Chinese and example)

Increasing Market Share and Producers Increasing Market Share and Producers response:response:

Profit Sharing Mechanisms (PSMs)Profit Sharing Mechanisms (PSMs)

RussianRussian--Algerian MOUAlgerian MOU

The GECF (Cartel) QuestionThe GECF (Cartel) Question

Would politics affect LNG Trade?Would politics affect LNG Trade?

ProducersProducers’’ Response Response : the GECF: the GECF

Implications of the Row (contd.)Implications of the Row (contd.)

DemandDemand--side Issuesside IssuesCompetition among Buyers (Slide)Competition among Buyers (Slide)

Arbitrage and diversionArbitrage and diversion

Interaction, Integration and MaturityInteraction, Integration and Maturity

Increased transparency and spot transactionsIncreased transparency and spot transactions

Price IssuesPrice IssuesVolatility of NG Prices and feedback loopVolatility of NG Prices and feedback loop

Convergence IssuesConvergence Issues

HighestHighest--priced Market and diversion effectspriced Market and diversion effects

Demand destructionDemand destruction

Competition for LNG in the Atlantic: Competition for LNG in the Atlantic: European PerspectiveEuropean Perspective

Source: Stern, OIES

Existing, onExisting, on--going and proposed liquefaction capacitygoing and proposed liquefaction capacity

Source: Cedigaz

Summary of LNG liquefaction and receiving capacities Summary of LNG liquefaction and receiving capacities (Mt/Year) in the Atlantic (Ab(Mt/Year) in the Atlantic (Ab--initio)initio)

LiquefactionLiquefaction::Existing: Five CountriesExisting: Five Countries = 62 Mt/year= 62 Mt/yearProposedProposed = 88 Mt/year= 88 Mt/yearTotalTotal = = 150 Mt/year150 Mt/year

ExistingExistingCapacityCapacity

Under Under construction & construction &

approvedapprovedPlannedPlanned

TotalTotal (existing (existing & potential)& potential)

N/AmericaN/America 33.833.8 +172+172 +280+280 485.8485.8

EuropeEurope 46.446.4 +42+42 +90+90 178.4178.4

TotalTotal 80.280.2 +214+214 +370+370 664.2664.2

Source: FERC and Cedigaz

Implications of the Row (contd.)Implications of the Row (contd.)

DemandDemand--side Issuesside IssuesCompetition among Buyers (Slide)Competition among Buyers (Slide)

Arbitrage and diversionArbitrage and diversion

Interaction, Integration and MaturityInteraction, Integration and Maturity

Increased transparency and spot transactionsIncreased transparency and spot transactions

Price IssuesPrice IssuesVolatility of NG Prices and feedback loopVolatility of NG Prices and feedback loop

HighestHighest--priced Market and diversion effectspriced Market and diversion effects

Demand destructionDemand destruction

Implications of the Row (contd.)Implications of the Row (contd.)Demand Demand destruction?destruction?

Short Term: Short Term: NoNoLong Term ContractsLong Term ContractsSpot deals are still low (number and volume)Spot deals are still low (number and volume)

Long Term: Long Term: It depends on:It depends on:Actual Shift to LNGActual Shift to LNGNorth American MarketNorth American Market

Mild Weather?Mild Weather?Industrial Sector DemandIndustrial Sector DemandAmerican unconventional gas and storageAmerican unconventional gas and storageLNG Capacity underutilization and LNG Capacity underutilization and European market influence on the Henry Hub: SizeEuropean market influence on the Henry Hub: SizeQatar: The swing producerQatar: The swing producer

T.T and Latin American optionsT.T and Latin American optionsReaction of Gas Producers Reaction of Gas Producers

In ConclusionIn ConclusionTHE THE SIZE AND NATURE SIZE AND NATURE OF THE NORTH OF THE NORTH AMERICAN MARKET IS VITAL TO ATLANTIC AMERICAN MARKET IS VITAL TO ATLANTIC TRADE BUT:TRADE BUT:

Developments in Europe could greatly determine the Developments in Europe could greatly determine the future trend in LNG trade dynamics future trend in LNG trade dynamics -- Price, Price, Demand, Contracts and Infrastructural Capacity Demand, Contracts and Infrastructural Capacity -- as as the Atlantic market evolves;the Atlantic market evolves;

In the short term, more shocks seem likely as In the short term, more shocks seem likely as Europe lacks viable alternatives to Russian supplies;Europe lacks viable alternatives to Russian supplies;

Implications of the row are complex; interwoven and Implications of the row are complex; interwoven and a function of market interaction within and across a function of market interaction within and across the Atlantic.the Atlantic.

Is longIs long--run supply glut likely?run supply glut likely?

Thanks for ListeningThanks for Listening