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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
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)
The importance of the petroleum sector for the
Norwegian economy
Petroleum sector’s
share of GDP
21%
Net government cash flow from petroleum
activities (Source: Norwegian Public Accounts)
Petroleum sector’s
share of total investment
Petroleum sector’s
share of state revenue
26%
Petroleum sector’s
share of total exports
26%
47%
Source: Norwegian Ministry of Petroleum and Energy
An export oriented market
120
Total production
Consumption
Domestic natural gas consumption by use, mtoe
100
Total consumption
Power
Heat
Energy industry
6000
bcm
80
5000
4000
60
3000
40
2000
1000
20
0
0
2003
Total
consumption
2005
2007
2009
Source: OECD/IEA
Power
Heat
Energy
industry
2011
Source: OECD/IEA
History
1962
1963
• Phillips Petroleum applies for licence
• 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
1985
1996
1997
2001
2003
2011
• First gas sales to Europe
• State Direct Financial Interest (SDFI) established
• Troll «gas machine» on stream
• New Petroleum Act into force
• Partial privatisation of Statoil; establishment of Petoro
•Reorganisation of gas transportation system
• Two new major discoveries in the North Sea
The size of the Government Pension Fund
(Source: Statistics Norway, Norges Bank)
Key public institutions for petroleum activities
Parliament (Storting):
Law making and taxation
Major development projects
General policy guidelines
Ministry of
petroleum
and energy
(MPE)
Resource
management
Licence
awarding
Regulation
Ownership
Directorate for
supervision:
Norwegian
Petroleum
Directorate (NPD)
Ministry of
labour and
social affairs
Health
Work
environment
Safety
Directorate for
supervision:
Petroleum
Safety Authority
Ministry of
finance
Taxation and
state
revenues
Petroleum Tax
Office
Ministry of
trade, industry,
and fisheries
Spill
contingency
Directorate for
supervision:
Coastal
Administration
7
Ministry of
environment
The external
environment
Directorate for
supervision:
Pollution
Control Authority
Key petroleum sector players
Gassco
Gas transport
operator
Petoro
Statoil
Management of
the SDFI
Listed
international
energy company
Largest operating
company on the
NCS
•
•
•
State ownership:
100%
137 licences
40 fields
Largest Gassled
owner
State ownership:
100%
International
companies
Companies that
are awarded
licences by
Ministry
State ownership:
67%
State ownership:
N.A
8
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
• 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
11
Classification: Internal
2012-08-20
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
13
Classification: Internal
2012-08-20
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
14
Classification: Internal
2012-08-20
Gas transportation system
EEA
agreement
(1994)
Gas Directive
(1998)
Update of
Petroleum
Law (2003)
• The world’s largest subsea gas transport
network
• Export capacity is 120 bcm
• Upstream third-party access (TPA) system
• Developed in conjunction with production
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
Key figures
Regularity 1
99.17 %
Quality 2
99.99 %
Total volume of gas delivered to receiving
terminals
• 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
Highest daily volume delivered
• Development of infrastructure
360.8 mill scm
3
Total volume of other products delivered from
the gas transport system
7.99 mill tonnes
Gross tariffs
NOK 25 236 mill
Operating costs
Operational investments
• Capacity administration: allocation and
distribution of transport capacity
94.2 bn scm
Major projects
NOK 5 105 mill
NOK 830 mill
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
A changing gas market
A “three speed” Europe
• 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
Liberalised
markets
Slow
liberalisation
Early phase of
liberalisation
Unbundling the traditional supply chain
Producer
National importer
Regional / Local
distribution company
End user
Aggregator
Towards the European Gas Target Model
Past
Present
TTF
NBP 🚢
🚢
🚢
• 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
The 2020 package has contributed to high EU
end-user prices, particularly in power
Retail electricity prices for industrial consumers in
2012
Breakdown of household electricity bill in Germany
31%
48%
21%
Ge, energy
Ge, network
Ge, taxes and levies
… and yet wholesale electricity prices in the EU are close to those in the US
→ 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
Sources: Eurostat; Energy prices and costs report (European Commission, 2014), p. 177; Frontier Economics report on 2020 framework
Classif25
ication
2014
Multiple targets in the 2020 package have
weakened the ETS price signal
EUA Price
30
• EUA prices do not provide incentives for
− Low-emitting generation to run before
higher-emitting*
− New investments in low emitting or nonemitting generation
− Market based RES investments
• There is currently a considerable oversupply of
EUAs
25
20
15
10
5
0
Jan-08
Jan-09
Jan-10
Jan-12
Jan-13
Share of factors behind the oversupply of EUAs 20082020
− Oversupply is seen in the price level
Economic Recession
• Four factors explaining the oversupply, which is
expected to last into the 2020s
Overlapping
instruments
• National subsidies provide stronger incentives,
but are also unreliable due to possible regime
changes
International credits
Distribution of
allowances by member
states
Sources: GreenStream: Oversupply and structural measures in the EU ETS, September 24, 2013
Classif26
ication
Jan-11
2014
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
Classif27
ication
2013
Europe has no coherent energy policies
• Not fully integrated energy markets
UK
• Energy policy is a national prerogative,
creating diverging policies
• Adapting to national differences is
challenging for market players
Germany
Gas
Gas
Gas
Gas
Coal
Coal
Coal
Coal
Coal
Nuclear
Nuclear
Nuclear
Nuclear
Nuclear
Renewables
Renewables
Renewables
Renewables
Renewables
Shale gas
Shale gas
Shale gas
Shale gas
Shale gas
Very
Hostile
Hostile
Source: Lambert Energy Advisory Ltd
Classification: Internal Restricted
France
Gas
KEY
28
Italy
Poland
Neutral/
Mixed
Mild
support
Strong
support
Policies takes its toll on utilities
Classif29
ication
2014
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
European supply gap towards 2030
bcm
700
600
500
400
• Uncertainties
− US LNG supplies to Europe
200
− European shale gas
100
− Russian exports
30
300
Sources: IHS CERA, Statoil
0
Demand
2012
Decline
indigenous
production
Demand
growth
Supply gap
2030
Contracting and pricing in the new European market:
A company view
“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
Classif32
ication
2013-10-28
History of Long Term Agreements
• Financial backbone for infrastructure
development
• Security of supply
• New supply chain developments
Source: Wingas
Key provisions in traditional long term contracts
Typical customer off take flexibility
•
•
•
•
Duration typically 25 to 30 years
•
•
•
•
Force majeure rights
Build-up, plateau, tail-off periods
Delivery obligation
Annual
flexibility
Beach/border point deliveries
Volume, including daily and annual
customer off take flexibility
Annual Take or
Pay obligation
Daily
Daily
flexibility
Daily Take or
Pricing reference to alternative fuels
Regular price reviews
Conflict resolution mechanisms
Pay obligation
Illustrative customer
off take
Gas price formation in liberalised markets
Gas price development *
• In liberalising markets, gas prices will
gradually adapt to new market realities
[EUR/Mwh]
35
30
25
• New sales are mostly linked to hub gas price
20
15
10
5
• Other references available
0
2000
2002
2004
2006
2008
2010
2012
BAFA, German import prices
NBP, UK hub prices
*
Sources: Heren, BAFA.de
Evolution of price indexation
Relative change in sales channel
mix in Europe
• Adapting to new market realities
through commercial negotiations
− Increasing share of gas hub
pricing
− Structural changes
• Reducing future price review exposure
Diversity and
flexibility in future
gas sales
portfolio
Traded markets
Sales to end users
Sales through LTCs
Portfolios of tomorrow
Directional development of sales portfolio
- Long-term contracts will remain, in
different shape
Renewal
Current long term
contracts
- More sales at the hub
- Upstream players serving downstream
users directly
The evolution of gas markets: an
upstream perspective
Olav Aamlid Syversen
Gas Regulatory Affairs
[email protected]
www.statoil.com
38
Classification: Internal
2013-03-05

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