Creation of gas market European perspective. Jean-Marc Leroy GIE President

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1 Creation of gas market European perspective Jean-Marc Leroy GIE President

Gas Infrastructure Europe (GIE) is a European non-profit lobbying association established in 2005.

2 Gas Infrastructure Europe (GIE) is a European non-profit lobbying association established in 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.

3 Characteristics of the European Gas Market Majority of production is located outside European Union vs. around 40% in Brazil Many large interconnectors ( MW) can deliver (in many countries) all of the demand vs. 1 main interconnector ( 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 border vs. sole market area in Brazil Many large consumers know their actual producer vs. currently one main market actor in Brazil 3

RES growth will alter the role of gas in Europe UK

conditions (GW) (GW) Significant fluctuations in

influences Volumes will decrease significantly

(GW) (GW) 120h 20 GW Volatile prices, especially

4 RES growth will alter the role of gas in Europe UK model based on January 2010 weather conditions (GW) (GW) Significant fluctuations in power generation from wind due to weather influences Volumes will decrease significantly while required capacity/ flexibility will double (GW) (GW) 120h 20 GW Volatile prices, especially during extreme weather conditions Source: Pöyry Energy Consulting Adapted by RAG 4

5 Emergence of hubs: key to market development Prerequisites for hub development Third Party Access Transparency Independent regulator

6 European Gas Target Model: liquidity and price convergence Entry-exit tariffs and balancing zones as the basis Development of interconnection Hub A Hub B capacity to link markets Congestion management rules to free up unused capacity Hub C Hub 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

7 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)

8 Supply sourcing costs in Calculated gas sourcing cost compared to TTF (= 23.7 /MWh) <=1 euro/mwh 1-3 euro/mwh >3 euro/mwh Price levels higher in regions with: Weaker interconnection Less competitive market frames Less developed hubs 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)

9 Supply sourcing costs in Calculated gas sourcing cost compared to TTF (= 21.0 /MWh) <=1 euro/mwh 1-3 euro/mwh >3 euro/mwh Influence of lower oil price and gas oversupply Impact of reverseflows Hub functioning Improved LNG competitiveness Source: Agency for the Cooperation of Energy Regulators (ACER)

In Europe the maturity of hubs is heterogeneous A ranking of EU hubs based on 2015 monitoring results Established hubs Advanced hubs Emerging hubs Illiquid hubs Henry Hub of the USA is the most

10 In Europe the maturity of hubs is heterogeneous A ranking of EU hubs based on 2015 monitoring results Established hubs Advanced hubs Emerging hubs Illiquid hubs Henry Hub of the USA is the most liquid gas hub in the world Broad liquidity Sizeable forward markets which contribute to supply hedging Price reference for other EU hubs and for long-term contracts indexation 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 Improving liquidity from a lower base taking advantage of enhanced interconnectivity Liquidity partially driven by market obligations imposed on incumbents m Still significant reliance on long-term contracts Reliance chiefly on long-term contracts Embryonic organised market places Absence of an entryexit system in some markets Source: Agency for the Cooperation of Energy Regulators (ACER)

11 New gas uses will support the European gas market: zoom on SSLNG m m by CryoStar

12 Thank you m m

The ever closer EU gas market and its monitoring by ACER

The ever closer EU gas market and its monitoring by ACER Dennis Hesseling Head of Gas Department EU-US Round Table, 26 April 2017, Arlington (VA) TITRE European and American gas hub prices are further