Creation of gas marketEuropean perspective

Jean-Marc LeroyGIE President

Gas Infrastructure Europe (GIE) is a European non-profit lobbying association established in 2005. GIE represents the sole interest of the infrastructure industry in the natural gas business.

GIE voices the views of its members vis-à-vis the European institutions, regulators and other stakeholders.

Characteristics of the European Gas Market Majority of production is located outside European Union

vs. around 40% in Brazil

Many large interconnectors (10-50.000 MW) can deliver (in many countries) all of the demand

vs. 1 main interconnector (10.000 MW) in Brazil Less than 20% of yearly demand covered by domestic production

vs. around 60% in Brazil

Minimum 90% of consumption crosses at least 1 bordervs. sole market area in Brazil

Many large consumers know their actual producervs. currently one main market actor in Brazil

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RES growth will alter the role of gas in EuropeUK model 2035 - based on January 2010 weather conditions

Significant fluctuations in power generation from wind due to weather influences

Volumes will decrease significantly while required capacity/ flexibility will double

Volatile prices, especially during extreme weather conditions

Source: Pöyry Energy Consulting Adapted by RAG

120h

(GW

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W)

(GW

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W)

20 GW

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Third Party Access

Transparency

Independent regulator

Emergence of hubs: key tomarket development

Prerequisites for hub development

Entry-exit tariffs and balancing

zones as the basis

Development of interconnection

capacity to link markets

Congestion management rules to

free up unused capacity

European Gas Target Model: liquidity and price convergence

Hub AHub B

Hub CHub D

Hub AHub B

Hub CHub D

Wholesale market development through diversification,

short-term products.

Merger of market zones to foster hub development

Supply side situation in Europe

Estimated diversity of origins of gas supply in EU MSs (2015)

• Decreasing domestic production is further increasing dependence on external imports• MSs with higher sourcing diversification tend to have better-functioning hubs

Source: Agency for the Cooperation of Energy Regulators (ACER)

Supply sourcing costs in 2014

3 euro/MWhPrice levels higher in regions with:

• Weaker interconnection

• Less competitive market frames

• Less developed hubs

2014 Calculated gas sourcing cost compared to TTF (= 23.7 € /MWh)

Note: Suppliers’ sourcing costs assessment based on a weighted basket of border import and diverse hub product prices. For some countries sourcing of own production occurs at lower cost than the imports (e.g. HR, RO)

Source: Agency for the Cooperation of Energy Regulators (ACER)

Supply sourcing costs in 2015

3 euro/MWh

2015 Calculated gas sourcing cost compared to TTF (= 21.0 € /MWh)

• Influence of lower oil price and gas oversupply

• Impact of reverse-flows

• Hub functioning

• Improved LNG competitiveness

Source: Agency for the Cooperation of Energy Regulators (ACER)

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In Europe the maturity of hubs is heterogeneous

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Established hubs

Broad liquidity

Sizeable forward markets which contribute to supply hedging

Price reference for other EU hubs and for long-term contracts indexation

Advanced hubs

High liquidity

More reliant on spot products and balancing operations

Progress on supply hedging role but relatively lower longer-term products liquidity levels results in weaker price risk management role

Emerging hubs Illiquid hubs

Improving liquidity from a lower base taking advantage of enhanced interconnectivity

Liquidity partially driven by market obligations imposed on incumbents

Still significant reliance on long-term contracts

Reliance chiefly on long-term contracts

Embryonic organised market places

Absence of an entry-exit system in some markets

A ranking of EU hubs based on 2015 monitoring results

Henry Hub of the USA is the most liquid gas hub in the world

Source: Agency for the Cooperation of Energy Regulators (ACER)

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New gas uses will support theEuropean gas market: zoom on SSLNG

Image by CryoStar

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Thank you

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Creation of gas market European perspectiveSlide Number 2Characteristics of the European Gas MarketSlide Number 4Emergence of hubs: key to market development European Gas Target Model: liquidity and price convergenceSupply side situation in EuropeSupply sourcing costs in 2014Supply sourcing costs in 2015In Europe the maturity of hubs is heterogeneous Slide Number 11Thank you