the evolution of gas markets: an upstream perspective...the evolution of gas markets: an upstream...
TRANSCRIPT
The evolution of gas markets: an upstream perspective Olav Aamlid Syversen, Head of Gas Regulatory Affairs, Statoil
Florence School of Regulation, 24March 2014
Content
• The organisation of the Norwegian gas industry and its regulation
• Perspectives on the European gas industry
• Contracting and pricing in the new European market: company view
The organisation of the Norwegian gas industry
and its regulation
The importance of the petroleum sector for the Norwegian economy
Figure 3.4 The net government cash flow from petroleum activities
(Source: Norwegian Public Accounts)
Figure 3.4 The net government cash flow from petroleum activities (Source: Norwegian Public Accounts)
Net government cash flow from petroleum
activities (Source: Norwegian Public Accounts)
Source: Norwegian Ministry of Petroleum and Energy
26%
26%
47%
Petroleum sector’s
share of GDP
Petroleum sector’s
share of state revenue
Petroleum sector’s
share of total investment Petroleum sector’s
share of total exports
21%
An export oriented market
0
20
40
60
80
100
120
2003 2005 2007 2009 2011
bcm
Total production Consumption
0
1000
2000
3000
4000
5000
6000
Totalconsumption
Power Heat Energyindustry
Total consumption Power
Heat Energy industry
Domestic natural gas consumption by use, mtoe
Source: OECD/IEA Source: OECD/IEA
History
The size of the Government Pension Fund
(Source: Statistics Norway, Norges Bank)
1962 • Phillips Petroleum applies for licence
1963 • Norwegian state proclaimed owner of NCS resources
1971 •Ten «oil commandements» produced by Storting
1972 •Creation of Statoil (50% rules, later changed by Storting)
1977 • First gas sales to Europe
1985 • State Direct Financial Interest (SDFI) established
1996 • Troll «gas machine» on stream
1997 • New Petroleum Act into force
2001 • Partial privatisation of Statoil; establishment of Petoro
2003 •Reorganisation of gas transportation system
2011 • Two new major discoveries in the North Sea
7
Key public institutions for petroleum activities
Parliament (Storting):
Law making and taxation
Major development projects
General policy guidelines
Ministry of
petroleum
and energy
(MPE)
Ministry of
labour and
social affairs
Ministry of
finance
Ministry of
trade, industry,
and fisheries
Ministry of
environment
Resource
management
Licence
awarding
Regulation
Ownership
Health
Work
environment
Safety
Taxation and
state
revenues
Spill
contingency
The external
environment
Directorate for
supervision:
Norwegian
Petroleum
Directorate (NPD)
Directorate for
supervision:
Petroleum
Safety Authority
Directorate for
supervision:
Coastal
Administration
Directorate for
supervision:
Pollution
Control Authority
Petroleum Tax
Office
8
Key petroleum sector players
Gassco Petoro Statoil International
companies
Gas transport
operator
Management of
the SDFI • 137 licences
• 40 fields
• Largest Gassled
owner
Listed
international
energy company
Largest operating
company on the
NCS
Companies that
are awarded
licences by
Ministry
State ownership:
100%
State ownership:
100%
State ownership:
67%
State ownership:
N.A
The legal and regulatory framework
• General
− Resolution 1/1963 – national sovereignty over NCS
− Law 21/1973 on exploration (national sovereignty over NCS)
− Law 35/1975 on taxation, last amended in 2005 (link)
− Law 72/1990 on CO2 tax on petroleum activities
− Law 72/1996 on petroleum activities (Petroleum Act), repealing Law 11/1985 (link)
− Regulation 653/1997 – on petroleum activities (link)
− Regulation 749/2001 – on resource management
− Regulation 1625/2005 – on third parties’ use of installations
• Natural gas specific
− Law 61/2002 on internal market for natural gas (Naturgass loven – link - amended)
− Regulation 1724/2002 – on tariffs for defined installations (Gassled-tariffs) (link)
− Regulation 1342/2003 – Common rules for the internal market for natural gas (link)
• White Papers (government reports to Storting) on oil & gas sector (latest in 2010-2011) and climate (2012)
The Petroleum Act
• Chapter 1 Introductory provisions
− Right to deposits, resource managment, lincence requirements, scope and definitions
• Chapter 2 Exploration licence
• Chapter 3 Production licence
− Opening of areas, granting, state participation, operator, work obligation, duration, right of others, relinquishment,
surrender
• Chapter 4 Production
− Prudent production, PDOs, licence to install and operate facilities, production schedule, joint petroleum activities, use
of facilities by others, fees
• Chapter 5 Cessation of activities
− Decommissioning, liability, takeover by the state
• Chapter 6 Registration and mortgaging
• Chapter 7 Liability for pollution damage
• Chapter 8 Special comepnstaion to Norwegian fishermen
• Chapter 9 Special requirements to safety
− Emergency preparedness, safety zones, suspension of activities, qualifications, documentation
• Chapter 10 General provisions
− Prudent activities, management of activities, information, penal provisions, …
• Chapter 11 Management of the SDFI
Regulation on petroleum activities
Classification: Internal 2012-08-20 11
• Chapter 1 Introductory provisions
− Scope and definitions
• Chapter 2 Exploration licence
• Chapter 2a Impact assessments relating to opening of new areas for petroleum activities
• Chapter 3 Production licence
− Public announcement, application, fee, criteria for granting, conditions and requirements, state participation, work
obligation
• Chapter 4 Production
− Evaluation of deposit, PDOs, environmental impact assessment(s), production schedule, field report, transport
facilities
• Chapter 5 Production fees and area fees
• Chapter 6 Cessation of activities
− Decommissioning, impact assessment, liability
• Chapter 7 Information and documentation
− Drilling and well activities, annual field status report, info on petroleum produced, sales, plans and budgets, R&D
• Chapter 8 Management systems for petroleum activities
• Chapter 9 Access to upstream pipeline networks
• Chapter 10 General provisions
− Transfer of a licence, insurance, audit, labour and trade unions, use of Norwegian language, naming of deposits,
training of civil servants, supervision, penal provision
The licensing system
Nomination Announcement Application Negotiation Award
• NCS
divided into
blocks
• NPD
gathers
geological
& scientific
data
• MPE
carries out
impact
assessment
• Industry
consulted
• MPE
proposes
blocks for
licencing
• Storting
makes final
decision
• Announcement
of blocks and
areas by MPE,
specifying:
- Who can apply
- List of blocks
and areas
- Conditions for
the award
- Negotiation
issues
- Award criteria
- Documents
requirements
- Fee for
handling of
application:
NOK 60,000
- Application
deadline and
time of award
• Companies
submit their
applications
for blocks,
including:
- Blocks
applied for
- Priority
- Participating
interest
- Operatorship
- Exploration
work
obligation
- Duration
- Company
structure
• Issues for
negotiation
with MPE:
- Extent and
content for
the work
commitment
- Seismic
- Number of
wells
• Award
criteria:
- Technical
expertise
- Financial
strength
- Geological
understanding
- Experience in
NCS or other
similar areas
Naturgassloven – Act on natural gas
• Para. 1: Scope – transmission, distribution, supply and sotrage of natural gas not
covered by the Petroleum Act
• Para. 2: Definitions – mirroring relevant EU internal market definitions
• Para. 3: Access to infrastructure (not upstream pipeline systems)
• Para. 4: Delegated acts
• Para. 5: Annulment or change of licence
• Para. 6: Administrative penalties
• Para. 7: Review
• Para.8: Entry into force
Classification: Internal 2012-08-20 13
Regulation 1342/2003
• Chapter 1: Introductory provisions (scope, definitions)
• Chapter 2: Impact assessment and licencing etc.
− Small scale transmission, distribution and LNG infrastructure does not require
licence
− Non-discrimination principle
− Lincence conditions
• Chapter 3: Accounting, information obligations, maintenance etc.
− Requirements for operation, maintenance and development of infrastructure
− System information to third parties, use of information by operator
− Obligatory contractual information for consumers
• Chapter 4: Concluding provisions
Classification: Internal 2012-08-20 14
Gas transportation system
• The world’s largest subsea gas transport
network
• Export capacity is 120 bcm
• Upstream third-party access (TPA) system
• Developed in conjunction with production
EEA agreement
(1994)
Gas Directive (1998)
Update of Petroleum Law (2003)
Gassled
• Owner of all pipelines, terminals and Kårstø process facility
• Established on 1 January 2003
• Joint-venture of main users of transportation system
• No employees, organised through various committee
Gassco
• Operator of gas transportation system owned by Gassled consortium
• State owned, neutral and independent
• Independence and equal treatment as guarantee of «efficient utilisation» of Norwegian gas resources
• System operation: planning, coordination and management of gas streams to the markets
• Capacity administration: allocation and distribution of transport capacity
• Development of infrastructure
Key figures
Regularity 1 99.17 %
Quality 2
99.99 %
Total volume of gas delivered to receiving
terminals 94.2 bn scm
Highest daily volume delivered
360.8 mill scm
Total volume of other products 3 delivered from
the gas transport system
7.99 mill tonnes
Gross tariffs NOK 25 236 mill
Operating costs NOK 5 105 mill
Operational investments NOK 830 mill
Major projects NOK 2 378 mill
1 Regularity is measured as the volume delivered from the transport system
(Gassled area D) in relation to shipper orders. 2 Quality standards are specified in Gassled’s terms and conditions, and are
measured in relation to the gas quality delivered from the transport system
(Gassled area D). 3 Ethane, propane, butanes, naphtha and condensate (light oil).
Source: Gassco
Capacity administration: access to pipelines
• Capacity available to all shippers provided that:
− spare capacity is available in the transportation
system;
− shipper’s need for transport capacity is
demonstrated;
− shipper’s gas complies with certain technical
specifications (quality and pressure);
− shippers demonstrates sufficient financial
strength or provides a guarantee.
• Access tariff set by Ministry; 9 tariff areas.
• Terms and Conditions for shippers (link)
− Booking, nominations, offtakes, monthly
invoicing similar to European TSOs Source: Gassco
Capacity administration: booking
• Long-term and medium-term products
− made available for long-term and medium term booking twice a year
− owners have preferential rights up to two times their ownership interest..
• Short term product
− made available on daily basis.
• Within day products (up to 4-5 weeks ahead)
− can be booked on a first come first served basis 24 hours a day.
• Right to use of capacity may be transferred in the secondary market on bilateral basis or through an open market
• Bids for and offer of capacity can be placed on the market place at any time for all capacity products (within day, short term, medium term, long term).
• Bids/Offers on the market are anonymous.
Infrastructure developments
• Gassco required to present recommendations and
investment proposals for Norwegian gas
transportation system
• Annual transport plan developed with shippers
based on capacity bookings
• Gassco ensures neutrality and comprehensive
assessment of alternative options and economies of
scales
Perspectives on the European gas industry
Slow
liberalisation
Early phase of
liberalisation
Liberalised
markets
• Development of liquid traded market
places
• Sales contracts and pricing based on
different market realities
• Market dynamics still create geographic
differences
• Liberalisation gives access to new
customers and sales channels
A “three speed” Europe
A changing gas market
Unbundling the traditional supply chain
Producer
National importer Regional / Local
distribution company Aggregator
End user
Towards the European Gas Target Model
• National markets – Local monopolies
• Long term supplies at beach/border
• Oil-indexed contract prices
A competitive pan-European market
Development of liquid traded market places
Diversified pricing: Oil or market indexed
TTF
NBP
Past Present
🚢
🚢
🚢
The 2020 package has contributed to high EU end-user prices, particularly in power
Retail electricity prices for industrial consumers in
2012
… and yet wholesale electricity prices in the EU are close to those in the US
31%
21%
48%
Ge, energy Ge, network Ge, taxes and levies
→ High cost impact of RES-promotion (net support from current schemes expected
to be €50bn/yr in 2020)
→ National policies are distorting pricing signals in the market
Breakdown of household electricity bill in Germany
2014
-03-
05
25 Classif
ication
:
Intern
al
Sources: Eurostat; Energy prices and costs report (European Commission, 2014), p. 177; Frontier Economics report on 2020 framework
Multiple targets in the 2020 package have weakened the ETS price signal
• EUA prices do not provide incentives for
− Low-emitting generation to run before higher-emitting*
− New investments in low emitting or non-emitting generation
− Market based RES investments
• There is currently a considerable oversupply of EUAs
− Oversupply is seen in the price level
• Four factors explaining the oversupply, which is expected to last into the 2020s
• National subsidies provide stronger incentives, but are also unreliable due to possible regime changes
Share of factors behind the oversupply of EUAs 2008-
2020
0
5
10
15
20
25
30
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13
EUA Price
Economic Recession
Overlappinginstruments
International credits
Distribution ofallowances by memberstates
2014
-03-
05
26 Classif
ication
:
Intern
al
Sources: GreenStream: Oversupply and structural measures in the EU ETS, September 24, 2013
EU energy policy framework
• EU 2050: Critical role for natural gas acknowledged
• EU 2030: Less targets, focus on affordability – slow process
• EU competition law may rein in subsidy spree (state aid guidelines)
• No functioning ETS anytime soon
• Fragmenting policies challenges market-functioning – towards re-nationalisation?
• Lack of progress, continued uncertainty, complexity and inconsistency will continue
to hinder investments
2013
-10-
28
27 Classif
ication
:
Intern
al
Europe has no coherent energy policies
• Not fully integrated energy markets
• Energy policy is a national prerogative,
creating diverging policies
• Adapting to national differences is
challenging for market players
UK
Gas
Coal
Nuclear
Renewables
Shale gas
Poland
Gas
Coal
Nuclear
Renewables
Shale gas
Germany
Gas
Coal
Nuclear
Renewables
Shale gas
France
Gas
Coal
Nuclear
Renewables
Shale gas
Italy
Gas
Coal
Nuclear
Renewables
Shale gas
KEY Very
Hostile Hostile
Neutral/
Mixed
Mild
support
Strong
support
Source: Lambert Energy Advisory Ltd
Classification: Internal Restricted 28
Policies takes its toll on utilities
2014
-01-
28
29 Classif
ication
:
Restri
cted
0
100
200
300
400
500
600
700
Demand2012
Declineindigenousproduction
Demandgrowth
Supply gap2030
A European supply gap could emerge
• Europe will require new gas supplies
− Demand recovery?
− Falling indigenous production
− Strong competition for LNG
− Few low-cost options for new supply
• Uncertainties
− US LNG supplies to Europe
− European shale gas
− Russian exports
30 Sources: IHS CERA, Statoil
European supply gap towards 2030 bcm
Contracting and pricing in the new European market:
A company view
2013-10-28 32 Classif
ication
:
Intern
al
“Thanks to its flexible approach on gas prices Norway has become
the largest gas exporter to the EU.”
Tweet by Commissioner Oettinger on 22 November 2013
“Norway's flexible approach on gas prices gives it a competitive
advantage and Norway will be a long term key gas supplier for the
EU.”
Official statement by Commissioner Oettinger on 22 November 2013
Source: Wingas
History of Long Term Agreements
• Financial backbone for infrastructure development
• Security of supply
• New supply chain developments
Typical customer off take flexibility
• Duration typically 25 to 30 years
• Build-up, plateau, tail-off periods
• Beach/border point deliveries
• Volume, including daily and annual
customer off take flexibility
• Force majeure rights
• Pricing reference to alternative fuels
• Regular price reviews
• Conflict resolution mechanisms
Daily Take or
Pay obligation
Delivery obligation
Annual Take or
Pay obligation
Annual
flexibility
Daily
Illustrative customer
off take
Daily
flexibility
Key provisions in traditional long term contracts
Gas price formation in liberalised markets
• In liberalising markets, gas prices will
gradually adapt to new market realities
• New sales are mostly linked to hub gas price
• Other references available
Gas price development * [EUR/Mwh]
BAFA, German import prices
NBP, UK hub prices
* Sources: Heren, BAFA.de
0
5
10
15
20
25
30
35
2000 2002 2004 2006 2008 2010 2012
• Adapting to new market realities
through commercial negotiations
− Increasing share of gas hub
pricing
− Structural changes
• Reducing future price review exposure
Evolution of price indexation
Sales to end users
Traded markets
Relative change in sales channel
mix in Europe Sales through LTCs
Diversity and
flexibility in future
gas sales
portfolio
Portfolios of tomorrow
Directional development of sales portfolio
Current long term
contracts
Renewal
- Long-term contracts will remain, in
different shape
- More sales at the hub
- Upstream players serving downstream
users directly
38
The evolution of gas markets: an
upstream perspective
Olav Aamlid Syversen
Gas Regulatory Affairs
[email protected] www.statoil.com
Classification: Internal 2013-03-05