THE DYNAMICS of LNG

INDUSTRY

Prof. Valeria Termini

AEEGSI Commissioner - MEDREG Vice President

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I. NEW GLOBAL TRENDS

II. LNG INDUSTRY: the game changers

III. IN EUROPE

IV. THE MEDITERRANEAN CONTEXT

INDEX

I. GLOBAL TREND: new elements

In the “energy transition” gas will remain a crucial

resource for a long time

• Technology (volumes and costs)

• Shipping (versus pipelines)

• Importing - Exporting Regions

• New uses of LNG (eg “small scale”)

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Gas supply: the top 5 + Australia

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Global Liquefaction Plants (as of January 2017)

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Fonte: BP Statistics 2016

Global gas trade – shipping vs pipeline

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LNG trade volumes (2016)

Source: IGU 2017

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Changes: incremental LNG exports (2015)

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Source: IGU 2017

10 Source: IGU 2017

Changes: incremental LNG imports (2015)

GLOBAL TREND: new elements

• Technology

• Shipping Vs Pipeline

• Importing Exporting Regions

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II. LNG GAME CHANGERS

FLEXIBILITY OF SUPPLY (shipping):

portfolio traders (following prices)

flexibility of destination (ships)

shorter terms

EVOLUTION of PRICE FORMATION

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Non long term trade, 1995-2016

Types of Price Formation Mechanisms (PFM)

• Oil Price Escalation (OPE)

• Gas-on-Gas Competition (GOG)

• Bilateral Monopoly (BIM)

• Netback from Final Product (NET)

• Regulation: Cost of Service (RCS)

• Regulation: Social and Political (RSP)

• Regulation: Below Cost (RBC)

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Wholesale Price Levels 2005 to 2015 by Price Formation Mechanism

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Wholesale Price Levels 2005 to 2015 by Region

Average Regional Gas Prices

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Source: IGU 2017

World Price Formation 2015

LNG Imports

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Europe Price Formation 2005 to 2015

Europe Price Formation 2015

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III. LNG in EUROPE : «market of last resort»

EUROPE…

…& THE MEDITERRANEAN REGION:

• EU policy

• EU Regulation - Medreg

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Existing & Planned LNG Terminals in Europe

EU Energy Union

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Policy

Levant Basin

10 tcm

Reverse flow projects along existing pipelines

New infrastructure projects for North-South

corridors

EU strategy for liquefied natural gas and gas

storage

o Competition

o Increased security of supply

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EU Energy Union

Regulation

Southern corridor: main projects

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IGI-EASTMED

TAP-TANAP

TURKISH STREAM

IV. Mediterranean Energy Context

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European Union

•Energy Demand Growth ≈ 1 % •RES Integration •Energy Market Integration

North Africa •Energy Demand Growth ≈ 5,4%/y up to 2030 •RES Objectives 30-50% •Huge Oil & Gas Resources

Turkey •Energy Demand Growth ≈ 5,4%/y (2004-2014) •RES objectives 30% (al 2023) •Relevant Infrastructural Projects

Israel • Limited Growth • Huge Gas reserves (1Tmc)

Source: BP Statistical Review

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Gas Context : Discoveries

Barriers and challenges to energy

investments

Diversity

Independence Regulation

Subsidization

Legal Framework

Information

Access

Political Influence

Source: MEDREG 28

Regulatory contributions to integrate Mediterranean

gas markets

• In respect of the different gas segments of the value chain, the regulatory function is

substantial:

– 1. It has to secure an independent management of the regulated systems;

– 2. It has to organize regulated or negotiated access to the networks (Third

Party Access), including a system of access conditions and tariffs;

– 3. It has to develop procedures to evaluate the need for capacity

expansions in the regulated market segments.

• To an increasing extent, gas systems stretch out over different countries and

world regions, which display different traditions in terms of their institutional and

structural characteristics. This begs for some degree of coordination between

bodies regulating the gas industry, to arrive at a coherent combinations of regulatory

approaches along the value chain.

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Quality Standards

Tariffs Competition

Cost Reflective

Data Collection

Licensing and permitting

The role of regulators

How regulation can incentivize investments

MEDREG - National Reforms Initiatives

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Structured plan with a tailor-made approach to support national

reforms and individual regulatory priorities to support and strengthen

energy regulators in Southern and Eastern Shore Countries

• Peer-review activities and support in the

drafting of secondary legislation

• Training and capacity building

• Institutional partnerships

• Ad hoc studies and benchmarking

• Support to EC twinning projects and TAIEX

missions between member regulators

• Need collection: Questionnaires and

Interviews to seek input and information on

national situations and main regulatory issues

• Planning: joint development of individual plan

for each member, including timelines, budget

and tools;

• Delivery: deployment of MEDREG expertise

(or if appropriate external experts)

Methodology Tools

MEDREG contribution on regulation

Main Output

– Guidelines on Third Party Access

– Interconnection Infrastructure Report

– Guidelines on Transparency

Ongoing work

– Competition and Market Price indicators

– Gas Infrastructure report

– Guidelines on Capacity Allocation

– Support to establish an Independent Gas Regulator in Egypt

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UfM Energy Platforms

• Gas: to reinforce the security of gas supply and the regional gas

exchanges.

• Electricity: to promote gradual establishment of regional and sub-regional

inter-connected electricity markets.

• Renewable Energy and Energy Efficiency: to assist in the deployment of

renewable energy and energy efficiency technologies and projects.

In November 2014, during the Italian Presidency of the Council of the EU in Rome the

“strategic importance of Euromed gas and electricity networks in the context of energy

security” was launched

“three thematic platforms to provide a permanent high level forum for discussing energy

policy objectives and measures, with a view to identify specific and concrete actions”

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Conclusions

• WORLD:

LNG will be a main actor in the next 20 years: major changes

• EUROPE:

Policy & Regulation => towards Med-south shore & LNG to

diversify gas resources & security of supply

• MEDITERRANEAN

Potentially, a new gas hub => rules and institution building to

pave the way to investment 34

vtermini@autorita.energia.it info@medreg-regulators.org

www.medreg-regulators.org

Thank you for your attention!

background

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LNG exports by region 1990-2016

37 Source: IGU 2017

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World wholesale Prices in 2015 by Price

Formation Mechanism

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World wholesale Prices in 2015 by Region

Wholesale prices in 2015

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• The highest wholesale prices at 8$/mmBTU were found in the largely LNG dependent

countries in Asia Pacific – South Korea, Japan and Taiwan

• China domestic prices – now largely OPE – did not fully reflecting declining oil prices

until November.

• Prices in India were also around $8.00 reflecting the pricing reforms and the high price

of the Qatar LNG contract before it was renegotiated.

• In Northwest Europe countries, where GOG dominates, prices are somewhat lower than

the rest of Europe, but still a lot higher than in the USA, Canada and Mexico

• Prices in Russia have fallen well below other countries, as a consequence of the large

rouble depreciation.

• At the bottom of the chart are generally countries where wholesale prices were subject

to some form of regulation and often below the cost of production and transportation –

Turkmenistan, Algeria and Venezuela.

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Regional Price Formation 2015 – Total

Consumption

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Changes in Market Prices 2014 To Date

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Northwest Europe Price Formation 2005

to 2015

Wholesale price formation in Europe

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• GOG remains the largest share in Europe, standing at 64%, totalling around 315 bcm,

– of which 73 bcm is domestic production, mainly Netherlands and UK,

– and 224 bcm is pipeline imports, of northwest European countries plus Italy, but also

increasingly the central European countries

– LNG imports account for 19 bcm, over half of which are into the UK, with the remaining

quantities being largely spot cargoes into the more traditional LNG importing countries.

• OPE is now down to 30%, totalling around 146 bcm,

– it is predominantly pipeline imports (114 bcm) into almost every European country, apart from

the UK, Netherlands, Denmark, Croatia, Sweden and Ireland,

– followed by LNG imports (28 bcm) into Spain, France, Italy, Turkey, Portugal and Greece, with

domestic production (4 bcm) in a variety of countries.

• BIM is some 8 bcm and is almost all pipeline imports into Turkey.

• RCS accounts for some 11 bcm and is domestic production in Romania,

• RSP also accounts for some 8 bcm and is also domestic production in Poland, Hungary

and Croatia.

LNG exports and market share by Country,

2016

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Source: IGU 2017

LNG imports and market share by Country,

2016

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Source: IGU 2017