EU Natural Gas: The Implications of Price on Demand Andrew Ellis Managing Director, European Energy Markets Sam Shoro Senior Consultant, European Natural Gas
Agenda European Natural Gas Prices and Demand Historical Context / Forward Curve Clear and Present Drivers Effect on EU Gas Prices IHS Global Insight s Forecasts Risks to the Forecast European Gas Supply and Demand Conclusion
Evolution of EU Gas Prices and Forward Curve /MWh /MWh Development of EU Gas Prices - Historic and Forward Curves $/mmbtu $/mmbtu 55 55 21 21 5 5 45 45 18 18 4 4 15 35 35 15 3 3 12 12 25 25 9 2 9 2 15 6 15 6 1 Forward Curves on 9th Dec'8 1 Forward Curves on 3rd 1st Nov'8 Jul'8 5-9 ($4) Differential 3-15/17 12 Moved ($5) ($6/8) into Differential Contango Differential 3 5 - Curves Moved into Backwardation Contango Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 Jan-4 Jan-5 Jan-6 Jan-7 Jan-8 Jan-9 Jan-1 Jan-11 Jan-12 Jan-13 NBP - Forward Curve (3/7/8) NBP - Forward Curve (1/11/8) NBP NBP - - Forward Forward Curve Curve (3/7/8) (1/11/8) (8/12/8) Oil-Indexed NBP - Forward Zeebrugge Curve (3/7/8) Troll Oil-Indexed Zeebrugge Troll Henry Hub - Forward Curve (3/7/8) Oil-Indexed Zeebrugge Troll Henry Hub - Forward Curve (1/11/8) Henry Hub - Forward Curve (8/12/8) Henry Hub - Forward Curve (1/11/8) Henry Henry Hub Hub - - Forward Forward Curve Curve (3/7/8) (3/7/8)
Clear and Present Drivers Key Drivers Softening crude prices Global recession Gas into power sector Falling coal prices ETS weak post Kyoto agreement Low EUA price dark/spark spreads LNG demand weaker in US/Pacific LNG infrastructure enhanced Development of wind/renewables Effect on Gas Market Weaker border prices from Q1 9 Reduced demand for gas Reduced demand for gas Reduced demand for gas Coal preferred to gas Increased LNG supply for Europe Link to Henry Hub Improved flexibility Reduced demand for gas Oversupply
Medium Term Forecast NBP v Zeebrugge Troll v Hhub (nominal) ( per MWh) 4 3 2 1 25 26 27 28 29 21 211 212 213 214 UK - NBP Zeebrugge Troll US Henry Hub NPB and Oil-Indexed prices converge towards Henry Hub in the short term NBP correlates with Henry Hub over the medium term
Short Term Forecast Could supply overhang in a deep recession kickstart gas-to-gas competition on the Continent? NBP v Oil-Indexed v Henry Hub v LNG (Far East) $/mmbtu 18 15 12 9 6 3 Jan 28 Apr Jul Oct Jan 29 Apr Jul Oct Jan 21 Source: ICE, ICIS Heren GLM /MWh 4 3 2 1 Apr Jul Oct N B P N B P F o rward C urve 14/ 11/ 8 HN HB ub P H H ub EU Oil EU Indexed Oil Indexed (T ro ll) (T ro ll) LN G F ar-east (D elivered) Suppliers forced to sell unused, contracted (oilindexed) gas on the spot market..
Churn at Continental Hubs EU Gas Hubs - Average Churn Rates 8. 7. 6. 5. 4. 3. 2. 1.. Jan 26 Apr Jul Oct Jan 27 Apr Jul Oct Jan 28 Apr Jul Oct ZBG TTF BEB EGT PEGs Source: Huberator, GTS, Gasunie, E.ON, GRTgaz
Increasing Trade at Continental Hubs EU Gas Hubs/Exchanges - Volume Traded - VolsTraded (GWh/day) (GWh/day) 45, 2,5 4, 35, 2, 3, 1,5 25, 2, 1, 15, 1, 5 5, - Networks, Grids and Exchanges Merging Jan 26 Apr Jul Oct Jan 27 Apr Jul Oct Jan 28 ZBG TTF BEB Apr Jul Oct NBP ZBG EGT ZBGTTF TTF PEGsBEB BEB EGT EGT PEGs ICE (UK NBP) APX/Endex (NBP/TTF) EEX/Pwrnxt (EGT/BEB/PEG) Source: Huberator, GTS, Gasunie, E.ON, GRTgaz
Market Liberalisation and Gas-to-Gas Competition % of market set by gas-togas competition 1% 8% Global Recession 6% Short/Medium-Term Oversupply 4% LNG Increased Flexibility 2% % 22 25 28 211 214 217 22 223 226 229 232 235 238 Low Price Scenario Base Case High Price Scenario Real euros/mwh 4 3 2 1-1 -2 22 25 28 211 Global Insight - Long Term View 214 217 22 223 226 229 232 Differential Henry Hub price NBP NBP Drops Below Henry Hub (Real), Differential Returns Continental Prices Link to Spot Instead of Crude 235 238
Risks to the Price Outlook Supply cuts Producers take volume and price risk Recession is very mild and limited in scope Asian economies recover within the short-term Crude/Coal prices surge to pre-july 8 levels German market is still key to gas liberalisation in Europe E.On Ruhrgas new contracts (mix of spot and oil-indexed) Merger of zones delayed further Keep an eye on EC unbundling requirement
Not So Fast: Gas Demand Growth Slows European gas demand outlook Europe Commercial 4% Industry & feedstocks 18% Residential 9% 26-23 Other 1% BCM 8 7 6 5 4 3 2 1 Europe 3% 25% 2% 15% 1% 5% Gas' share of TPES Power 68% 199 1995 2 25 21 215 22 225 23 % 171.9 BCM Residential sector gas demand Industry & feedstocks Other Commercial sector gas demand Power sector gas demand Share of total primary energy supply Annual increment
Divided Continent: Incremental Demand Focused On the South Incremental demand focused on Mediterranean region Balkans, Iberia, Italy and Turkey = 12 bcm of additional gas (7% of total) 19bcm (33% of European total) Heartland European markets modest growth Benelux, Germany, France and UK = 27 bcm additional gas (16% of total) 35 bcm (53% of European total) Primary gas demand 26-23 Turkey 23% Southern Europe 13% Balkans Western Europe 16% 5% Northern Europe 5% 171.9 BCM Iberian Penisula 17% Baltic Sea 6% British Isles 6% Central Europe 9% Incremental annual gas demand
New Gas Arriving: European Gas Supplies bcm 8 7 6 5 4 3 2 1 199 1995 2 25 21 215 22 225 23 Domestic UK Netherlands Norway Other Europe Russia Algeria Egypt Nigeria Qatar Trinidad & Tobago Other external
Falling Prospects: Demand Revised Down 2 Europe bcm 1-1 -2-3 Power sector gas demand was forecast 6 bcm lower than last year s outlook for 23-4 -5-6 -7 Power Industry & feedstocks Commercial Residential. -1. 25 21 215 22 225 23-2. Total gas demand was forecast 7 bcm lower than last year s outlook for 23 High prices were responsible bcm -3. -4. -5. -6. -7. -8. Europe 25 21 215 22 225 23
Bubble Ahead: Revised European Gas Demand Projections No growth in gas demand from 28 to 212 66 64 62 Base-Mild Base-Deep Base Case Mild Recession Deep Recession 9 8 7 As much as 8 bcm lower than base case in 21 (13% of annual demand) bcm 6 58 56 54 52 6 5 4 3 2 Massive over contraction 58 bcm contracted for 21 5 48 28 29 21 211 212 1 66 bcm over contracted in base case (11%) 16 bcm over contracted in mild recession (18%) 146 bcm over contracted in deep recession (25%) GDP growth 12% 1% 8% 6% 4% 2% % -2% -4% -6% -8% -1% Base Case Mild Recession Deep Recession 28 29 21 211 212
Conclusions We have clear and present drivers posing a real threat to Oil-Indexation A sustained and deep global recession will significantly impact on European gas demand growth particularly in the power sector, causing a supply overhang The forced sale of over-contracted gas on the spot market could be sufficient to kick-start gasto-gas competition on the Continent
Thank you! Andrew Ellis Managing Director of European Energy Markets andrew.ellis@globalinsight.com Sam Shoro Senior Consultant, European Natural Gas sam.shoro@globalinsight.com