© OECD/IEA 2013

Small Scale LNG in the Baltics

Rodrigo Pinto Scholtbach

Gas Market Analyst

Gas, Coal and Power division,

International Energy Agency

© OECD/IEA 2013

The drivers: a perfect combination

The golden

age of gas

Increasing

production

gas

Gas the most

competitive

transport fuel

Eca

regulation

Regulation Price

formation Supply

© OECD/IEA 2013

Emission Control Areas (ECA’s) set up

by the International Maritime Organisation

The Baltic Sea 2005, the North Sea and English channel 2006, North America

and Hawaii 2012

• The need to control maritime emissions

• Data from maritime industry insiders showed that just 15 of the

world's biggest ships may emit as much sulphur and nitrogen

pollution as the world's car fleet.

Limitation of maximum sulphur content of fuel

oils used on board in sensitive high-volume

shipping zones.

© OECD/IEA 2013

The International Convention for the

Prevention of Pollution from Ships (MARPOL)

1973

•Fuel costs represent an increasing share of vessel operating costs

• Use of LNG: 30 % costs savings based on case studies

•Scrubbers are a temporary solution for vessels

0

2

4

6

8

10

12

14

16

18

20

Oil prices

'70s

US Henry

Hub '70s

Oil prices

today

US HH

prices

today

Europe

prices

today

Asia

prices

today

USD /Mbtu

Today oil & gas prices compared

with the '70

© OECD/IEA 2013

Historical Crude Oil Prices 1970 -2014

0

20

40

60

80

100

120

140

160

1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012

USD/bbl

Iranian

revolution

Iraq-

Iran

war

Gulf

war

Iraq

war

Fear of

supply

storage

Arab

Spring

Economic

Recession

Arab oil

embargo

Early

80’s

recession

© OECD/IEA 2013

Stable gas prices in Europe and

strong decline in the US

© OECD/IEA 2013

Natural gas one of the few competitive

options with petroleum fuels

0

20

40

60

80

100

60 80 100 120 140

Co

st

per

GJ

(U

SD

2010/G

JL

HV)

Cost per Barrel (USD2010/Barrel)

Hydrogen from natural gas, centralised prod.

Electricity (biomass)

Lignocellulosic ethanol

BTL

Electricity (natural gas)

Gasoline

Corn ethanol

Sugar cane ethanol

CTL

Natural gas

• Much lower cost per gigajoule based

on current US dollar price per barrel

© OECD/IEA 2013

Even at a price of

USD 60/bbl

0

20

40

60

80

100

US

D/G

J o

f fu

el

USD60/bbl Current USD60/bbl Mature

Gasoline

© OECD/IEA 2013

More competitive at a

price of USD 150/bbl

0

20

40

60

80

100

US

D/G

J o

f fu

el

USD150/bbl Current USD150/bbl Mature

Gasoline

© OECD/IEA 2013

The use of natural gas and LNG in

the transportation sector

Hundreds

of

Initiatives

Railways

Public

transport

Inland

shipping

Maritime

sector

Public

Authorities Gas producers

Transport

sector

Engine

industry Green NGO’s

© OECD/IEA 2013

A really small niche market

for the gas retailers!

Only 1,5 % share in global

gas consumption in 2012

Transport sector

Gas use in other

sectors

2,5 % in 2018

Transport sector

Gas use in other

sectors

© OECD/IEA 2013

The main supply trends:

an unpleasant message

Shale gas

revolution

Increasing

imports

dependency

Europe

Increasing

role Russia

© OECD/IEA 2013

0

1 000

2 000

3 000

4 000

5 000

6 000

bcm

Global Natural Gas Production by IEA- scenario (bcm)

Historical

New Policy Scenario

Current Scenario

450 Scenario

In all scenario’s natural gas

production will grow…

• The future for natural gas is bright

© OECD/IEA 2013

Increasing supplies of gas

2010 2012 2014 2016 2018

2018/12

Annual

Growth Rate

(%)

Europe 300 277 271 264 253 -1.5

Americas 816 885 895 942 994 2.0

Asia Oceania 60 66 81 115 159 15.7

Africa 209 206 230 243 252 3.4

Asia 326 315 323 351 367 2.6

China 95 109 126 148 173 7.9

FSU/Non-OECD

Europe 842 865 884 927 954 1.7

Latin America 163 173 179 188 200 2.3

Middle East 462 537 558 578 607 2.0

Total 3 274 3 433 3 547 3 756 3 959 2.4

Domestic gas production by region, 2010-18 (bcm)

But not in Europe

© OECD/IEA 2013

The United States represents 21%

of global gas production growth

• US production growth is largely supported by shale gas

• In 2012 shale gas 39% of total gas production

(3% in 2002)

• Looking for new markets

© OECD/IEA 2013

Middle East’s gas supply

constraints

• Most ME Countries face gas shortages and have to import

pipeline gas or LNG to meet rapidly growing demand

• Qatar is the only country able to meet its growing demand

© OECD/IEA 2013

Africa’s demand to gain 41 bcm in 2018

• Africa’s gas demand remains largely dominated by Algeria and

Egypt, both facing supply constraints

© OECD/IEA 2013

Algeria’s production on a slow

growing path

• Algeria’s production has been declining since its peak in 2005

• Despite many recent discoveries, the investments are not

increasing

© OECD/IEA 2013

Russia is able to supply more gas,

but ….

Russia’s historical and forecasted supply-demand balance

0

50

100

150

200

250

300

0

200

400

600

800

1000

1200

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Export BcmBcm

FSU export FSU total gas supply FSU domestic gas demand

• Russia can quickly and massively raise gas production in

response to domestic and external demand

• Russia’s priorities are shifting towards Asia and LNG

© OECD/IEA 2013

Natural gas demand growth in

selected regions 2010-2035

0

100

200

300

400

500

600

700

800

United

States

Middle

East

European

Union

Russia China India Japan

bcm

Demand growth

2020-2035

Demand growth

2010-2020

2010

%

0.5%

2.1%

0.6%

0.7% 6.6%

4.2%

0.7%

compound

average annual

growth rate

2010-2035

• Explosive use of natural gas in Asia,

especially in China

© OECD/IEA 2013

Europe will need more gas imports, despite

stable demand and weak position gas in

energy mix

150

200

250

300

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Bcm European import dependency

(Europe includes Norway)

• Because of decline domestic production in the Netherlands and

UK

• Europe wants to decrease dependency on Russian gas. One of the

options is to attract more LNG .

© OECD/IEA 2013

Is LNG really to play a substantial

role in Europe?

Competition

from Asia

and Latin

America

Long term

contracts

New

distribution

of LNG via

re-exports

© OECD/IEA 2013

LNG moves towards the

Asian market

LNG flows in 2012 (bcm)

• Asia’s share in global LNG imports reached 70%

• China’s LNG imports increased by 22% to 20 bcm, driven by

economic growth and expansion of LNG import capacity

• LNG imports in Europe fell by 26%.

© OECD/IEA 2013

Price differentials determine

the LNG flows

• Asian LNG prices +150% over last 3 years , driving by

rising oil prices and a tight short-term LNG market

• Differentials determine also the use of natural gas as

transport fuel.

© OECD/IEA 2013

In all IEA scenarios (WEO)

price differentials are here to stay

0

5

10

15

20

2015 2020 2025 2030 2035

$/Mbtu

Gas Prices in the New Policies Scenario

(4°C)

United States Europe imports

Japan imports

0

2

4

6

8

10

12

14

16

2015 2020 2025 2030 2035

S/MbTu

Gas Prices in the 450 Scenario (2°C)

United States Europe Imports Japan

0

5

10

15

20

2015 2020 2025 2030 2035

$/MbTu

Gas Prices in the Current Policies Scenario

(6°C)

United States Europe Imports

Japan Imports

© OECD/IEA 2013

0

20

40

60

80

100

120

140

2013 2014 2015 2016 2017 2018

Portfolio LNG Mexico Singapore MalaysiaIndia China Taiwan KoreaJapan Capacity

bcm

From tightness to a comfortable

LNG market

Till 2015-2016

period of tightness

From 2016 on, more LNG plants

online

(Australian plants)

• 80% of global new LNG volumes already contracted on long-

term basis

• After 2016/2017 price is expected to remain around USD 13 to

15/Mbtu

© OECD/IEA 2013

The United States will start

exporting LNG by 2016

0

10

20

30

40

50

60

Projects with DOE approval or signed export contracts

LNG from other countries

DOE Approved Sabine

Freeport

To Japan

Cove Point

Oman

Yemen

Egypt

Russia Cameron

Algeria

Contract signed

BCM

• US could become the number 3 LNG exporter (after

Qatar and Australia)

• US government: LNG exports improve the welfare

of the US

© OECD/IEA 2013

Is Europe ever going to cook or navigate

on North American shale gas?

• LNG Contract

Centrica

Joint venture

GDF

• LNG Contract

E.ON

• Some European companies have signed contracts for delivery

of US gas

• Contracts without destination clauses

•Destination will be determined by the buyer who is willing to

pay the highest price Asia

© OECD/IEA 2013

Winter

Dry

season

Winter

Winter

From December to February:

the real game for suppliers

• Besides the spot price levels, freights costs are one of the

main determining factors

Spot cargo’s $ 18 – 20/Mbtu

Long term contract Take or Pay $ 10 -12/MBtu

Re-exporting $ 10 -20/MBtu

© OECD/IEA 2013

LNG is coming to Europe but is not

staying here

Spain re-export volumes from 2007-2013 (bcm)

Source: IEA 2014

Source : GIIGNL (LNG Industry 2012)

• 55 cargoes were re-exported from European terminals

• After 2016/2017 some European could expect spot price levels

around USD 10-13/Mbtu via re-exports from other European

countries like Spain

© OECD/IEA 2013

A difficult market and the

dominant position of Asia

Europe Asia

© OECD/IEA 2013

The distribution of LNG within

the Baltic Sea region

The initiatives

LNG to

increase

diversification

New

distribution of

LNG via

re-exports

© OECD/IEA 2013

Exploring the options

•Several LNG small scale bunkering infrastructure has been explored by the

partners of “LNG in Baltic Sea Ports” project.

•EU funding (through the TEN-T programme) to study where terminals should

be located, customer demands, how bunkering will proceed, etc.

•Additional single projects within the Baltic region with LNG initiatives (e.g.

Swinoujście (Poland 5 bcm/per year), Klaipeda (Lithuania 4 bcm/per year).

© OECD/IEA 2013

The Baltics: a long term

dependency?

•Using LNG to decrease dependency on Gazprom and as negotiating

point with Russia

•New LNG terminal in Finland or Estonia with 40 % aid from the EU

( Project for Common Interest (PCI), it would have to benefit two or

more EU member states)

2005 2010 2015 2020 2025 2030 2035

Estonia

Finland

Latvia

Lithuana

Long term gas contracts with

Gazprom linked to the price of oil

Klaipeda

4 bcm

© OECD/IEA 2013

The European Strategy (7 projects)

•LNG break bulk facility at the

Port of Rotterdam and the small-

scale satellite terminal in

Gothenburg

LNG Rotterdam

Gothenburg

€34,272,000

EC funding

•LNG bunkering infrastructure

solution and pilot actions for

ships operating on the Motorway

of the Baltic Sea:

•LNG bunker supply

infrastructure for the Port of

Brofjorden, Lysekil, on the west

coast of Sweden.

Port of

Brofjorden,

west coast of

Sweden

•LNG refuelling stations should be installed in all maritime ports

of European Union by 2020 and all large inland ports of EU by

2025

© OECD/IEA 2013

Competition and new business

model based on re-exporting

•The Gate terminal aims to become Europe's top ship-fuelling port.

•Gate received its first LNG shipment from Skangass' small-scale LNG plant

in Norway's Risavika in 2013.

•Reloading onto vessels and transport them to Sweden, where they are

broken into smaller parcels to power ferries, trucks and industrial

customers

© OECD/IEA 2013

Russian LNG?

•Gazprom plans to build a plant for LNG exports, also for bunkering

purposes.

•The ports of Primorsk and Ust-Luga are under consideration.

•Will Gazprom be able to offer competitive LNG prices in comparison

with LNG from other suppliers? Portfolio Strategy?

Ust-Luga

© OECD/IEA 2013

Increasing competition

and a realistic approach

New business

models

+

Long term

contracts

Fiscal Policy

Willingness to

pay a higher

price for LNG

•A slow but a growing niche market

•the need to pay more for LNG