Gas Insecurity: A Figment of the Imagination?

Peter Davies. Chief Economist, BPEPRG. Cambridge. 19 May, 2006

© BP 2006 2

Gas Security

• What is it?

• Does the UK have it?

• What is going to change?

• What can we do about it?

© BP 2006 3

Energy Security

Available

Reliable

Price

Markets

Fair

Resources

Affordable

Sustainable

Clean Climate Footprint

Consumers Producers

© BP 2006 4

Gas Security

Gas security is the availability of reliable supplies at a reasonable price – in a sustainable manner

© BP 2006 5

Reliability

Gas DayUpdate

Timestamp Description24-Mar-2006 23/03/2006 13:10 NONE23-Mar-2006 22/03/2006 13:17 NONE22-Mar-2006 21/03/2006 13:08 NONE21-Mar-2006 20/03/2006 13:15 NONE20-Mar-2006 19/03/2006 13:18 NONE19-Mar-2006 18/03/2006 13:22 NONE18-Mar-2006 17/03/2006 14:10 NONE17-Mar-2006 16/03/2006 13:20 NONE16-Mar-2006 15/03/2006 13:45 NONE15-Mar-2006 14/03/2006 13:15 NONE14-Mar-2006 13/03/2006 13:14 NONE13-Mar-2006 13/03/2006 00:08 ALERT13-Mar-2006 12/03/2006 13:32 NONE12-Mar-2006 11/03/2006 13:15 NONE11-Mar-2006 10/03/2006 13:14 NONE10-Mar-2006 09/03/2006 13:17 NONE09-Mar-2006 08/03/2006 14:09 NONE08-Mar-2006 07/03/2006 14:02 NONE07-Mar-2006 06/03/2006 16:06 NONE06-Mar-2006 05/03/2006 13:12 NONE05-Mar-2006 04/03/2006 13:20 NONE

National Grid Gas Balancing Alert History

Source: National Grid

© BP 2006 6

Reasonable Prices?

020406080

100120140160180200

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

p/th

erm

NBP Platts 24hr/Day Ahead

© BP 2006 7

Reasonable Prices?

0

5

10

15

2025

30

35

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

US$

/mm

btu

NBPHH

UK NBP vs. US Henry Hub

© BP 2006 8

Sustainability

• Clean

• Low CO2

• No significant production or transportation externalities

© BP 2006 9

Future Gas Security

• What does the market think?

© BP 2006 10

Natural Gas: Henry Hub vs NBP

0

2

4

6

8

10

12

14

16

18

20

22

24

26

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

NBP

Henry Hub

Actual

$/mmbtu

Jun-

06

Jul-0

6

Aug-

06

Sep

-06

Oct

-06

Nov

-06

Dec

-06

Jan-

07

Feb-

07

Mar

-07

Futures

© BP 2006 11

Future Gas Security

• What does the market think?

• What is changing?

© BP 2006 12

UK Gas Supply and Demand

-20

0

20

40

60

80

100

120

1970 1976 1982 1988 1994 2000

ProductionConsumptionNet Exports

Source: BP Statistical Review of World Energy 2005

Consumption

Production

Net Exports

Bcm/y

© BP 2006 13

New Pipeline Import Capacity

Interconnector Expansions Balgzand-Bacton (BBL)

Ormen Lange

© BP 2006 14

LNG Import Terminals

Isle of Grain LNG Terminal in Kent Dragon & South Hook LNG Terminals Milford Haven

© BP 2006 15

0

100

200

300

400

500

600

2005 2007 2009 2011 2013 2015 2017 2019

RussiaNorwayPeruBoliviaVenezuelaTrinidadAngolaGuineaNigeriaAlgeriaLibyaEgyptYemenUAEOmanIranQatarMalaysiaIndonesiaBruneiAustraliaUS

Global LNG Growth

LNG volumes (mtpa) existing, in development, probable and speculative

Expected total LNG

© BP 2006 16

Future Gas Security

• What does the market think?

• What is changing?

• What could happen?

© BP 2006 17

Continental European Gas Liberalisation

Albania

Andorra

Austria

Belgium

Bosnia and Hercegovina Bulgaria

Croatia

Cyprus

Czech Republic

Denmark

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Luxembourg

Macedonia

Malta

Netherlands

Norway

Poland

Portugal

Romania

Slovak Republic

Slovania

Spain

Sweden

Switzerland

UnitedKingdom

Yugoslavia

© BP 2006 18

Catastrophic Risks

Russia

Ukraine

RussiaRussia

Ukraine

RussiaRussia

Accident

Terrorism

Interruption

Nature

© BP 2006 19

UK Natural Gas Storage

0500

1,0001,5002,0002,5003,0003,5004,0004,500

May-05

Jun-05Ju

l-05

Aug-05Sep-05Oct-

05Nov

-05Dec

-05Ja

n-06Feb-06Mar-0

6Apr-0

6

Rough Medium Range Storage Short Range Storage

Mcm

© BP 2006 20

Policy Options

• Fuel choice interventionism – nuclear, renewables

• EU policy

• Storage:

− Mandatory storage

− Capacity market

• Long term contracts

© BP 2006 21

Conclusions

• The UK has had gas security

• Imports will rise but import capacity will rise even more

• International gas market developments to support UK security even though the depth of EU liberalisation remains uncertain

• UK gas security should be maintained – but catastrophic interruptions pose a risk, as they do to all energy markets

• Gas storage can provide some insurance, at a cost. Debate over strategic storage is valid.

© BP 2006 22

UK net exports and gas in storage

-4,000-3,000-2,000-1,000

01,0002,0003,0004,0005,000

1Q00

3Q00

1Q01

3Q01

1Q02

3Q02

1Q03

3Q03

1Q04

3Q04

1Q05

3Q05

Net exports (MCM)Gas in Storage

Mcm

© BP 2006 23

UK Interconnector Flows

-40

-20

0

20

40

60

Oct-01

Feb-02

Jun-02

Oct-02

Feb-03

Jun-03

Oct-03

Feb-04

Jun-04

Oct-04

Feb-05

Jun-05

Oct-05

Feb-06

Monthly maximum export capacity

Monthly maximum import capacity (expanded in December 2005)

Million cubic meters/d

© BP 2006 24

0

4

8

12

16

20

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

McM/d

Isle of Grain send-out

© BP 2006 25

Total UK gas in storage

0500

1,0001,5002,0002,5003,0003,5004,0004,500

Janu

aryFebru

aryMarc

hApri

lMayJu

ne July

August

Septembe

rOcto

ber

Novembe

rDec

ember

2000200120022003200420052006

Mcm

© BP 2006 26

UK future gas prices 2006

30

40

50

60

70

80

90

100

Jan Feb Mar Apr May Jun July Aug Sep Oct Nov Dec Fan Feb

2 Jan 1 Feb 1 Mar 3 Apr 1 May April

May

March

February

January

p/therm

© BP 2006 27

UK gas import capacity expansion

Project CapacityAs % 2005

consumptionDate status

Isle of Grain phase II Increase from 12 to 38Mcm/d 9.1%

6.6%

9.4%

5.8%

10.1%

24.4%

4.9%

61%

2008Planning

permission granted

Interconnector import capacity (phase II)

Increase to 66Mcm/d

Dec. 2006 Under construction

Bacton – Balgzandinterconnector

27Mcm/d Dec.2006 Under construction

Milford Haven – South Hook 29Mcm/d 2007 Under construction

Milford Haven – Dragon LNG 16.5Mcm/d 4Q2007 Under construction

Langeled – Ormen Lange gas Up to 70Mcm/d 2007/08 Under construction

Statfjord late life gas project –via FLAGS pipeline

14Mcm/d 2007/08 Under construction

Total 202.5Mcm/d

Source: DTI, PIRA, Norsk Hydro and Statoil.

© BP 2006 28

UK planned gas storage capacity expansion

Project Capacity Date status

Humbly Grove 280Mcm Nov. 2005 complete

Byley storage facility 170Mcm 2008 Planning permission approved

Aldbrough storage 420Mcm 2007 Under construction

Welton storage facility 435Mcm 2007/08 Planning application submitted

Total 1,305 Mcm

Source: DTI, Star energy.