bain - structural changes in the european gas market

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 This information is confidential and was prepared by Bain & Company solely for the use of our cl ient; it is not t o be relied on by any 3rd party without Bain's prior written consent  and recent dynamics in gas pricing Ni cosia, Cyprus – 7/8 June 2012 Bain & Company presentation at Cyprus Natural Gas Conference

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  • Structural changes in the European gas market

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent

    Structural changes in the European gas marketand recent dynamics in gas pricing

    Nicosia, Cyprus 7/8 June 2012

    Bain & Company presentation at Cyprus Natural Gas Conference

  • Objective of the document

    Give a brief overview of the European Gas Market, taking into account the recent dynamic in supply and demand

    Illustrate how the drivers of gas demand have been affected by recent regulatory evolution, with particular focus on renewable energy

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 2

    focus on renewable energy

    Share some insights on the future development of the market and the role of Take-or-Pay contracts

  • Agenda

    International gas market overview

    Recent evolution of European gas market dynamics

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 3

    Key issues for future market evolution

  • International gas market overviewInternational natural gas flows in 2010

    92.4

    20.9

    9.4

    5.4

    6.2

    44.1

    20.1

    4.15.5

    12.1

    17.3

    36.5

    55.9

    16.6

    6.5

    32.0 21.0

    18.8

    14.9

    6.3

    5.2

    17.7

    8.2

    LNG Gas

    Pipeline Gas

    Import350 Bcm

    Import200 Bcm

    16.0

    113.9

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 4

    Source: BP Statistical Review of World Energy June 2011 www.bp.com/statisticalreview

    5.4

    10.9 8.8

    7.0

    5.8

    9.8

    Continental Europe (mainly by pipe) and Far East (LNG)heavily rely on natural gas imports

  • 23

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    International gas market overview US increased production of unconventional gas

    Shale gas production in the US EIA LNG import forecasts

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 5

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    Forecast 2005 Forecast 2007 Forecast 2010

    Sources: EIAs Shale Gas and the Outlook for U.S. Natural Gas Markets and Global Gas Resources for Shale gas production in the US; EIAs Annual Energy Outlook 2005, 2007, 2010 for EIA LNG import forecasts

    Significant downward revision of LNG import forecast in the USA, mainly as a consequence unconventional gas production

  • International gas market overview Pricing polarization

    40

    60

    Oil

    equivalent

    APAC

    Ger (BAFA)

    Large scale exploitationof unconventional gas

    Price gap APAC RoWfurther increased in 2011

    for Fukushimas aftermath

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 6

    0

    20

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    USA (HH)

    Source: BP Statistical Review of World Energy June 2011 www.bp.com/statisticalreview;

    The three main gas consumption areas (US, EU, APAC) have experienced divergent price evolution, with US price independent from oil price trends

  • International gas market overview Continental reach of the different gas supplies ILLUSTRATIVE

    Russia220 Bcm

    North sea250 Bcm

    Continental production70 Bcm

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 7

    Increased presence in the market of a diversified range of gas producers

    North Africa80 Bcm

    Atlantic basin10 Bcm

    Middle-East40 Bcm

  • Agenda

    International gas market overview

    Recent evolution of European gas market dynamics

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 8

    Key issues for future market evolution

  • 910

    13

    18

    17

    CAGR ~22%

    Recent evolution of European gas market dynamics Gas demand in Europe and increase in import spot volumes

    Gas demand in the main European countries Spot LNG imports to Europe

    Appearance of the WW gas glut related to the US unconventional gas

    Availability of new Qatari LNG trains

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 9

    '00

    2

    '01

    4

    '02

    5

    '03

    4

    '04

    7

    '05

    9

    '06 '07

    7

    '08

    6

    '09 '10 '11

    With stagnating demand and impressive increase of spot LNG imports, gas importer struggled to fulfill their minimum Take obligations

    Sources: Eurostat for Gas demand in the main European countries; GIIGNL for Spot LNG import to Europe

  • TTF

    UK: NBP (National Balancing Point)

    Netherlands: TTF (Title Transfer Facility)

    Austria: CEGH (Central European Gas Hub)

    Germany: NCG (Net Connect Germany)

    France: PEG (Points d'Echange de Gaz)

    Italy: PSV (Virtual Trading Point)

    Belgium: ZEE (Zeebrugge)

    Recent evolution of European gas market dynamics The development of European hubs and the increase in trading activity

    A Gas Hub is a platform that can be either physical or virtual (or both the things) where gas marketers

    exchange gas volumes

    Main European hubs Volumes traded in main hubs

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 10

    NBP

    PEG

    ZEE

    PSV

    CEGH

    NCG

    TTF

    Main European gas markets Main European hubs NCGGASPOOLCEGHPEGPSVTTF ZEE

    As a result of the oversupply situation and the increased liberalization, traded volumes in the European gas hubs experienced a rapid growth

    Source: IEA

  • Recent evolution of European gas market dynamics Decoupling of oil and hub-indexed gas prices

    Typical oil-indexed price formula(not accounting for any price reduction)

    Year-ahead gas traded price at TTF Hub(continental Europe reference hub price)

    Decoupling begins

    Low TTF prices as an effect of new pipelines and releases from storage

    facilities

    TTF prices stop follow oil trends as oversupply

    develops

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 11

    European spot prices have become increasingly decoupledfrom the upward moving oil price dynamics

    All European utilities have a supply portfolio mostly related to LT oil-indexed contracts...

    ...while end-user market is instead influences by lower spot prices...

    ...this is causing significant losses to European utilities which increasingly ask for a oil/hub indexation mix price to their suppliers

    Source: Bain elaboration

  • Recent evolution of European gas market dynamics Renegotiations triggered over the last years

    The likes of E.ON, GdF Suez, ENI, Econgas and BOTAS have renegotiated their LTCs with the major exporters to Europe, e.g. Russias Gazprom, Norways Statoil and Dutch GasTerra using standard price review clauses

    [...]

    some level of indexation to cheaper spot gas prices was introduced into mainly oil-indexed LTCs

    Oxford Energy Forum, August 2010

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 12

    Price renegotiations triggered by the Buyers have grantedthe introduction of a hub-indexation into the purchasing formulae

    Gazprom said in its report that as a result of talks in 2010, price agreements were reached with E.ON Ruhrgas, GDF Suez, Eni, GasTerra and others. In some cases, Gazprom has agreed to alter contracts for a three-year period to include a ratio of up to 15% spot prices and 85% oil-indexed prices

    Platts, 16 August 2011

  • Agenda

    International gas market overview

    Recent evolution of European gas market dynamics

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 13

    Key issues for future market evolution

  • 1) Transient or structural oversupply?

    Demand evolution

    Supplyevolution

    Displacement of gas power plants by renewables

    Delocalization of energy-intensive industrial cycles

    Increase in households heating efficiency

    Fossil and (in the long run) nuclear capacity substitution by CCGT

    Enduring impact of unconventional gas / new gas discoveries

    Gas thirst by Asia Pacific Countries

    Infrastructural development (e.g. US liquefaction capacity)

    Weak demand in the short term, potential recovery with power

    replacement

    International supply dynamics impacted by APAC evolution

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 14

    Very unlikely in the mid-term a return in a tight market; in the short term oversupply will persist

    evolution

    European Policy Directives

    Infrastructural development (e.g. US liquefaction capacity)

    European network integration

    Security of supply through increased diversification

    Promotion of gas competition

    by APAC evolution

    Promotion of a long market to boost competition

  • 1) Transient or structural oversupply?Impact of renewables example of Italy

    30

    40

    50

    2427

    3

    2

    30

    7

    13

    3

    41

    Fuel cost adjusted - Power price (/MWh)Gross Capacity (GW)

    Biomass

    Geothermal

    PV 80

    100

    120

    140

    160

    2009

    2012

    average hourly power price in April

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 15

    Source: GSE Data

    The growth of renewables (Photovoltaic) with priority of dispatch has displaced volumes from CCGTs and depressed peak power price

    0

    10

    20

    2008

    4

    18

    2009

    5

    18

    2010

    6

    18

    2011

    7

    18

    Wind

    Hydro

    0

    20

    40

    60

    0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23

    Note:adjusted with 2012 fuel costs

  • End-user

    Supplier

    Importer/Wholesaler

    End-user

    Retailer

    Gas hub

    LT contracts

    Spot contractsSupplier/Importer

    Wholesaler/Retailer

    Gas hub

    Spot contracts

    Continental EuropeUS/UK

    2) There will be a recoupling to oil-indexed prices?Hub-based supply difficult to implement in a low-production market

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 16

    Captivemarket

    End-usermarket

    End-usermarket

    Captivemarket

    Transparent gas market

    Prices determined by demand/supply balance

    Large share of internal production and a large number of players

    Prices historically linked to LT oil-indexed contracts

    Currently showing a coexistence of LT and spot contracts with oil/hub-indexed prices

    Large share of imported volumes and few national players

    European market has a inherently different structure than US: long term ToP contracts will continue to be the staple of supply portfolios...

  • 2) There will be a recoupling to oil-indexed prices?Pricing depends on complex interactions

    PRICE

    Demand

    Supply

    European and

    National Policies

    Gas oil substitution for domestic demand Process industry delocalization Renewable source Fossil/nuclear plants replacement CO2 emission concerns ...

    Diversification needsSecurity of supply...

    Infrastructure development WW demand/supply imbalances LNG arbitrage opportunities Technological breakthroughs in

    E&P ...

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 17

    ..however, how ToP contracts will be priced would depend by several contrasting factors

    PRICE FORMATION MECHANISM

    Strategy of main players

    Regulatory framework

    Policies

    Antitrust measuresRegulations on end-user prices

    Hub liquidityDegree of liberalization...

    Long vs short portfolio Commercial strategy (mkt share

    defence vs margin defence) Downstream/upstream integration ...

  • Conclusions

    The European gas market will be in oversupply for few years to come, but in the mid-long term gas is required to replace declining internal production and aging fossil/nuclear generation fleet

    The extent of this long term demand recovery will depend on renewable energy sources integration in the electricity grid

    Long-term, ToP gas contracts will still maintain a strategic

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 18

    Long-term, ToP gas contracts will still maintain a strategic relevance in terms of security of supply and volatility mitigation, especially in Countries with low level of domestic production

    Worldwide gas offer, boosted by new discoveries and enhanced infrastructures may imply increase in competition among suppliers and a review of old pricing models; however, the extent of this will depend on the relative gas thirst of US, European and Asian markets

  • Bain & Company Italy contacts for gas business

    Alessandro CadeiPartner

    Luigi CorletoPrincipal

    Roberto PrioreschiDirector

    Position

    Strategy, cost efficiencies and re-

    Head of the Energy & Utilities Practice in Italy

    17- year consulting experience

    Strategy and business development

    Member of the European Practice Energy & Utilities

    12- year consulting experience

    Member of the Practice Energy & Utilities

    7 - year consulting experience

    Strategy and business development

    This information is confidential and was prepared by Bain & Company solely for the use of our client; it is not to be relied on by any 3rd party without Bain's prior written consent 19

    Main areas of expertise

    Selected clients served in Gas & Power market

    Strategy, cost efficiencies and re-organization

    Business planning, budgeting and reporting system/scorecard

    Operations rightsizing and cost reduction in manufacturing systems

    M&A and Post Merger Integration

    Strategy and business development Commercial strategy and business

    planning Organization and rightsizing M&A and Post Merger Integration

    Strategy and business development Performance improvement and cost

    reduction Operations streamlining M&A and Post Merger Integration

    Contacts: [email protected]+39 - 338.9381273

    [email protected]+39 - 335.7529747

    [email protected]+39 - 335.7615190