The market analysis of natural gas in the European Union
The
market analysis of natural gas in the European Union
:AngelinaOlgaDijk Max LouisAnna
December,
2012
TABLE OF CONTENTS
List of Figures & Tables IV
1. Natural Gas Market
Overview
.1 Market Definition
1.2 Market Volume
1.2.1 Market Volume - EU
1.2.2 Outlook Market Volume -
EU
.2.3 Outlook Market Volume -
World
.3 Market Value
1.4 Market Segmentation
2. Cost Structure
3. Bargaining Power of
Suppliers
.1 Supply Factors of Natural
Gas
4. Bargaining Power of Buyers
.1 Demand Factors of Natural
Gas
5. Internal Rivalry &
Competitors' Overview
6. Threat of substitutes
7. Conclusions
ReferencesA: Natural Gas
Production per Country in the EUB: Major Natural Gas Trade MovementsC: EU
Natural Gas InfrastructureD: Five Forces Analysis
TABLE OF FIGURES & TABLES
1.1: Share of total energy
supply in 20091.2: Energy production in the EU from 1990 to 20091.3: Natural
gas production volume in billion cubic meters from 2006 to 20101.4: Outlook of
the EU's energy demand from 2007 to 20301.5: Outlook of EU's supply source of
natural gas from 2007 to 20301.6: Total natural gas production in the world1.7:
Natural gas market value of the EU from 2006 to 20101.8: Natural gas production
segmentation of the EU
Figure 1.9: Breakdown of the EU´s
natural gas supplies in 20111.10: Natural gas proves reserves per region3.1:
Drivers of supplier power in the EU natural gas market4.1: Drivers of buyer
power in the EU natural gas market1.1: Natural gas production & consumption
per country and region in 2010
1. NATURAL GAS MARKET OVERVIEW
natural gas market european
This chapter aims to provide a brief
description about the market definition and market developments of natural gas
in the European Union (hereinafter referred as the EU). First, the natural gas
market is defined in order to give a better understanding of which elements and
aspects are in scope and out of scope for further analysis in this market
analysis report. Subsequently, the market volume, market value and market
segmentation are tackled to elaborate the magnitude and size of the natural gas
market in the EU. Conclusively, this is compared with other significant
important and key countries in the natural gas market, which have a significant
influence in the natural gas market of the EU to provide an initial
understanding about the natural gas market and with the natural gas figures of
the world.
.1 MARKET DEFINITION
market definition supports to scope,
to narrow and to constraint the definition of the market analysis of natural
gas in the EU. The market definition of this market analysis report is
concentrated and focused on the natural gas market within the borders, territory
and sovereignty of Europe. Generally, the European Union, or EU-27, is used to
conduct market analysis, like for the natural gas market, because the European
Union treaty allows more transparent and equal data and comparisons without
tariffs and other differences in legislations and regulations between countries
in both collecting and reporting data. Therefore, the justification to analyze
the market of natural gas in the EU is based on the fact that the forces of
market mechanisms and managerial economics are relatively operating more
significantly than, for instance, in Russia, in which politics has a bigger
stamp on decision making than market mechanisms. Moreover, the essential and
required data and information availability is higher and more transparent in
the EU than in Russia. Henceforth, the natural gas market in the EU is a
profound and considered decision to map out and conduct the market analysis to
determine its economic and managerial mechanisms, the competitive intensity
and, therefore, its attractiveness. In addition, it is attempted to provide
information and analysis of countries that are in the future expansion plan of
the EU-27, where possible, to increase the incremental and applicability for
the future of this market analysis report., the characteristics and definition
of natural gas is mentioned to get a common and uniform understanding of this
market analysis report. According to the International Energy Agency (IEA),
natural gas can be described as follows:gas is a mixture of several hydrocarbon
gases, including methane (between 70% and 90%), ethane, propane, butane and
pentane, as well as carbon dioxide, nitrogen and hydrogen sulphide. The
composition of natural gas can vary widely, depending on the gas field. Natural
gas is referred to as “wet” when hydrocarbons other than methane are present,
“dry” when it is almost pure methane, and “sour” when it contains significant
amounts of hydrogen sulphide.gas is seen as a good source of electricity supply
for a number of economic, operational and environmental reasons:
· it is low-risk
(technically and financially)
· lower carbon
relative to other fossil fuels
· gas plants can be
built relatively quickly in around two years, unlike nuclear facilities, which
can take much longer., gas plants are flexible both in technical and economic
terms, so they can react quickly to demand peaks, and are ideally twinned with
intermittent renewable options such as wind power. Over the course of a month,
various spikes in demand have a sizeable knock-on effect on the cost of
delivering electricity, so having a source of energy in the form of gas, which
can cope with these spikes, is a significant advantage. aforementioned, for the
purpose of this market analysis report of natural gas, Europe, EU, or EU-27,
consists of Belgium, Bulgaria, Cyprus, Denmark, Germany, Estonia, Finland,
France, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Austria, Poland,
Portugal, Romania, Slovenia, Slovakia, Czech Republic, United Kingdom, Sweden
and Croatia.five candidate countries that are included in the future expansion
plan of the EU-27 consist of Iceland, Macedonia, Serbia, Montenegro and
Turkey.significant and important key countries that play pivotal roles in the
natural gas market for the EU consists of Ukraine and Russia and are included
in the analysis where possible to get a better understanding of the dependency
and developments of these key countries by the EU for their supply of natural
gas.
.2 MARKET VOLUME
get a better feeling about the
relative market volume of natural gas in the EU, the share of natural gas in
comparison with the other energy sources in the total primary energy supply in
2009 is provided in the underneath figure 1.1.
1.1: Share of total
energy supply in 2009
on figure 1.1, it can be concluded
and stated that a quarter (25%) of the share of total energy supply in 2009 was
natural gas. After oil (35%) this was the second largest energy supply. The
third largest energy supply in 2009 was coil & peat. Thus, natural gas is a
significant important energy source for the EU and this is very unlikely to
change in the near future, however, the production will probably decline in the
long-term future, as described in the following sub-paragraph in 1.2.1. In addition,
natural gas is an attractive source of energy from an environmental perspective
since it emits far less CO2 than coal and oil.
.2.1 MARKET VOLUME - EU, the total
energy production of the EU is also an important metric and measurement to
understand how natural gas production complies with respect to the other energy
sources over the course of time. The total energy production within the EU is
graphically displayed in figure 1.2.
1.2: Energy
production in the EU from 1990 to 2009
seen from the above figure 1.2, the
natural gas production within the EU from 1990 to 2009 kept more or less a
continuous trend. However, it seems to be that in 2008 and 2009 the domestic
natural gas production was declining. It is also noticeable that the total
energy production for all the energy sources is declining since 2004. The above
declining trend of natural gas production is supported by figure 1.3, which
shows natural gas production volume in billion cubic meters from 2006 to 2010.
There is a sharp decline of natural gas production in 2009 and 2010,
respectively, -10.9% and -10.4%. Overall, it can be stated that the natural gas
production in the EU declined in average from 2006 to 2009 and significantly in
2009 and 2010.
1.3: Natural gas
production volume in billion cubic meters from 2006 to 2010
, the market volume of natural gas
production in the EU is declining since 1998 ever since with some minor
exceptions. Natural gas in the EU contains about a quarter in the total share
of energy supply in 2009. This is the second largest energy supply in the EU
after oil. Furthermore, the total energy production of the EU is declining from
1990 to 2009 despite some marginal exceptions. The composition of natural gas
production in the total energy production of the EU will most likely decline in
the long-term future. However, in the near future the natural gas demand will
most likely rise due to the economic recovery. In the long-term it is projected
that natural gas will be an increasingly attractive commodity for the energy
demand of the EU. According to the IEA’s world energy outlook 2009, the growth
in gas demand is expected to rise 0.8% per year. The demand for natural gas of
the EU will rise per year incrementally while the production of natural gas
will be decrease. The outlook of the EU’s energy demand composition is shown in
figure 1.4.
1.2.2 OUTLOOK MARKET VOLUME - EUon
figure 1.4, it can be derived that the demand for natural gas is expected to
increase from 544 bcm in 2007 to 651 bcm in 2030. Other mentionable
developments of the EU's energy demand, is the increase in demand for renewable
energy, the decrease in demand for nuclear energy and coil, and a constant demand
for oil. If the EU's energy demand outlook for the future is off-set to EU’s
supply source of natural gas to meet EU’s demand for natural gas, it can be
concluded that the predicted traditional natural gas and possible future
natural gas resources are not sufficient to meet the outlook of the demand. The
expected supply source of natural gas for the EU to meet the expected demand
for the future is provided in figure 1.5 on the next page. As shown and
indicated in the previous analysis, the natural gas production of the EU is
expected to decline in the future while the total demand of natural gas is
expected to increase. A large part of the growth in gas consumption in the
period, more than 60%, is expected to come from the electricity sector.UK was for
a long time the second largest producer of natural gas in the EU after Russia.
However, it is expected that the UK could be dependent on imports for
approximately 80% of its gas requirements already in 2016. Based on the growing
natural gas infrastructure, Norway is well positioned to supply part of the
UK's additional demand for imported natural gas and continue to be a key player
in the UK market, which is the EU’s largest and most liberalized natural gas
market. Other major gas suppliers in the EU are Gazprom in Russia, Algeria and
the Netherlands. The key EU markets which import the most natural gas to meet
their demand are the UK, Germany and France.
1.4: Outlook of the
EU's energy demand from 2007 to 2030
1.5: Outlook of
EU's supply source of natural gas from 2007 to 2030
between Russia and Ukraine about gas
transit highlight the importance of Russian gas supplies to the EU. In the
years ahead, Russian supplies are expected to grow further, and, in the longer
term, the EU is set to import some 80% of its natural gas due to declining
domestic gas production. In order to diversify supplies, the EU countries and
companies are actively seeking to establish alternative supply solutions,
mainly through LNG, but also by establishing new pipeline infrastructure from
the Caspian region and from North Africa.EU will need additional sources of
natural gas, both because of growth in demand and because of declining domestic
production. The EU natural gas companies increase to attract and participate in
natural gas production in foreign countries secure their supply. Gas is already
exported from Azerbaijan to Georgia and Turkey via the South Caucasus Pipeline
(SCPSCPSouth Caucasus Pipeline System). However, the role of the EU’s
traditional gas suppliers such as Russia and Norway will not be challenged by
the prospect of new sources.the EU energy market undergoes deregulation and
structural changes, natural gas will play an increasingly important role. This
trend will be reinforced by further steps in the EU to restrain climate gas
emissions, in particular by the use of carbon pricing mechanisms such as the
European Union Emissions Trading Scheme. It is expected that the use of natural
gas as a source of electricity generation continues to grow, as it is necessary
to replace even more coal-based generation capacity with natural gas.
Deregulation creates new opportunities and business models in the gas sector,
both with regard to added values through efficiency gains and to building a
more substantial portfolio of sales directly aimed at large industrial
customers and local distribution companies. The integration of the gas and
power markets also presents new business opportunities in trading and as a means
of increasing the value of gas by upgrading through generation and improving
flexibility in market operations. Furthermore, the EU will concentrate to
import more liquefied natural gas (LNG) in the future. The aforementioned
traditional suppliers will mostly keep their position. The additional values
would replace indigenous gas resources. Currently, various pipeline projects
are competing for the opportunity to ship gas from Caspian to Europe in the
future when its own resources run out. The EU still produces approximately 35%
of its own gas requirements, but Russia has 22% and Norway 19% market share in
the EU. The leading LNG supplier Qatar accounts for 7% of EU's supplies.
Germany, EU’s biggest economy, relies the most part on Russia far more than other
countries, deriving 33% of its imports from it, followed by Norway and the
Netherlands.
.2.3 OUTLOOK MARKET VOLUME -
WORLDthat the total natural gas production in the EU is elaborated and
comprehensively analyzed by means of total energy of production over time and
the expected outlook of energy demand composition of the EU and the expected
supply of natural gas sources to meet this demand, the developments and
tendencies of natural gas production in the world is briefly examined to see
how it relates and compares with the developments in the EU. Figure 1.6 shows
the total natural gas production from 1990 to 2010.
1.6: Total natural
gas production in the world
figures of natural gas production in
the world shows and increasing trend. However, due to the credit and economic
crisis in 2009, the disposable income of households became lower, which on its
turn decreased the demand of goods. This resulted in a lower supply of goods
and a lower demand for natural gas in the industry and residential sector. In
figure 1.6 the total production of natural gas in 2010 already shows and indicates
an economic recovery. World natural gas production grew substantially in 2010,
by more than approximately 6%. To get better insight in the proportion of the
total natural gas production of the world, table 1.1 shows the division of the
total natural gas production and consumption per country in 2010.
Table 1.1: Natural gas production
& consumption per country and region in 2010
Rank
|
Country
|
Production (cbm)
|
Consumption (cbm)
|
Deficit or surplus
|
|
World
|
3359
|
3314
|
45
|
1
|
Russia
|
669
|
506
|
163
|
2
|
United States
|
651
|
689
|
-38
|
|
European Union
|
461
|
-294
|
3
|
Canada
|
160
|
103
|
57
|
4
|
Iran
|
146
|
144
|
2
|
5
|
Qatar
|
116
|
21
|
95
|
6
|
Norway
|
103
|
5
|
98
|
7
|
China
|
102
|
103
|
-1
|
8
|
Saudi Arabia
|
99
|
99
|
0
|
9
|
Algeria
|
84
|
29
|
55
|
10
|
Indonesia
|
82
|
41
|
41
|
11
|
Netherlands
|
81
|
49
|
32
|
12
|
Malaysia
|
66
|
35
|
31
|
13
|
Egypt
|
61
|
46
|
15
|
14
|
Uzbekistan
|
60
|
45
|
15
|
15
|
Mexico
|
55
|
59
|
-4
|
16
|
United Arab Emirates
|
51
|
-9
|
17
|
United Kingdom
|
47
|
82
|
-35
|
18
|
India
|
46
|
61
|
-15
|
19
|
Turkmenistan
|
45
|
20
|
25
|
20
|
Australia
|
44
|
27
|
17
|
21
|
Pakistan
|
42
|
42
|
0
|
22
|
Trinidad and Tobago
|
42
|
22
|
20
|
23
|
Argentina
|
40
|
43
|
-3
|
24
|
Thailand
|
36
|
45
|
-9
|
25
|
Venezuela
|
31
|
33
|
-2
|
26
|
Peru
|
31
|
5
|
26
|
27
|
Nigeria
|
29
|
5
|
24
|
28
|
Oman
|
27
|
17
|
10
|
29
|
Brazil
|
24
|
26
|
-2
|
30
|
Kazakhstan
|
20
|
10
|
Russia pushed in front of the United
States and became the world’s largest gas producer with the largest surplus in
2010, with production rising by 11%. Natural gas output rose 5.5% in Iran (the
world’s fourth largest gas producer) and continued to increase rapidly in China
(8.7%). Conversely, Canadian gas production fell slightly (-0.5%), while
Algerian output was scaled down by a further 12% in 2010. Gas production in the
EU countries grew 3% during the year, supported by increasing outputs in the
Netherlands (12.4%) and Norway (3.6%). Furthermore, the Netherlands have on the
highest surplus among the European countries. Other mentionable European
countries natural gas producers of the world in the top 30, besides, the
Netherlands, is United Kingdom and Norway, which is not part of the EU-27. More
detailed information about the natural gas market segmentation of the EU is
included in sub-paragraph 1.2.4. Conclusively, the natural gas consumption of
the EU is significantly higher than its total production. Therefore, the EU is
by far not able in its self-sufficiency for its natural gas demand.
.3 MARKET VALUE
that the natural gas market volume
is in detail described in the previous sub-paragraph, the natural gas market
value is examined which has a reciprocity relationship with the natural gas
market volume. The EU's natural gas production grew by 1.8% in 2010 to reach a
value of €94.8 billion. The developments of the natural gas market value from
2006 to 2010 are graphically displayed in figure 1.7.
1.7: Natural gas
market value of the EU from 2006 to 2010natural gas market value of the EU is
highly correlated to the state of the economy and has a relatively high
volatility. Figure 1.7 subscribes this The credit crisis and economic crisis
had a substantial impact on the market value. Natural gas prices, as with other
commodity prices, are mainly driven by supply and demand fundamentals. However,
natural gas prices are also linked to the price of crude oil and/or petroleum
products, especially in the EU. More about the key fundamental demand drivers
of natural gas in the EU is included in chapter 4 on page 19.
.4 MARKET SEGMENTATION
segmentation allows to zoom in the
natural gas production and to analyze the composition in the EU. Figure 1.8
shows the top natural gas producers in the EU. The figure shows that the
natural gas production of the EU is very fragmented and scattered. Henceforth,
the natural gas production in the EU has a low concentration ratio.
1.8: Natural gas
production segmentation of the EU
more detailed analyze of production,
total imports, total exports, gas demand and self-sufficiency of the European
countries and Russia and Ukraine are included in exhibit A on page 26. The
composition and breakdown of the EU's natural gas supplies is shown in figure
1.9.
1.9: Breakdown of the
EU´s natural gas supplies in 2011
shown in figure 1.9, the indigenous
natural gas production is 33% of the total EU´s
supplies. The most important import countries are Russia and Norway,
respectively 24% and 19%. Table 1.1 subscribes the gab and difference between
the production and consumption in the EU. Overall the natural gas supplies from
Norway and Russia sum up to 43% of the EU´s
total natural gas supplies. According to the outlooks and predicted future segmentation,
the dependency on foreign supplies of natural gas will increase in the future.
Figure 1.10 shows the proved natural gas reserves per region. The aforementioned
statement is supported with the fact that the EU has the lowest proved
reserves, as shown in figure 1.10. Furthermore, the most important indigenous
natural gas producers are within the EU are United Kingdom, the Netherlands,
Germany, Italy and France.
1.10: Natural gas
proves reserves per region
. COST STRUCTURE
The following points in the
structure of cost are in place for the gas industry. The factors are listed in
the decrease in the proportion of total costs. First, the costs are mentioned
which are directly related to the production and extraction of gas, due to
organization of production. Second, the important factors in structure of the
costs are expenses for mining, land reclamation costs, and the water fee,
payments for the maximum allowable emissions (discharges) of pollutants into
the environment. The following are of non-capital costs associated with the
improvement of technology and organization of production. Financing the costs
of new and improvement of the technologies, as well as to improve the quality
of products related to the research, development activities. The next cost
factor is maintenance costs of the production process. This includes materials,
fuel, energy, tools, appliances and other means. Evidentially, the structure of
cost also includes the cost to ensure good working conditions and safety for
workers: the device and maintaining fencing machines and moving parts, alarms,
other types of devices of non-capital nature for ensuring the safety. The costs
associated with production control, the costs associated with implementation of
the work in shifts.can be underlined that the following features of the gas
industry in respect of the cost structure
· The process of
production of the two products at the same time (oil and gas) as well as there
is a necessity of allocation of general expenses between them;
· The issuance of
only the finished product and the absence of work in progress and semi-finished
products;
· Consistent
implementation of the main production processes, pressure maintenance, removal
of production from wells, collection and transportation of oil and gas complex
oil (gas separation, dehydration, desalting and stabilization of oil),
preparation and disposal of commercial waste water, external transfer of oil
and gas.
3. BARGAINING POWER OF SUPPLIERS
in the gas production industry are
generally manufacturers of oil and gas field machinery and equipment. Globally,
suppliers to the natural gas production industry are large multinational and
transnational entities; although both medium and small firms are also active.
Most large firms offer services such as construction and engineering for gas
companies as well as manufacturing equipment. These companies are very strong
in the area of advanced technology. Mid-size producerson equipment for two or
three systems such as pressure control equipment or separators. Some belong to
larger firms with operations unrelated to energy. Smaller producers offer
limited selections of specialized components, primarily tubing, valves,
pressure and flow control equipment and rig parts. Many also provide
reconditioning and rental services. The EU market for upstream gas equipment
rises and falls with the price of gas, with companies increasing and decreasing
their exploration and production activities accordingly. The price of gas falls
drastically as the equipment market declines and the oil and gas equipment
industry experiences bankruptcies and layoffs. Regulatory issues can affect
suppliers, as seen for example in Russia and Kazakhstan, which have lawsrequire
gas producers to purchase a certain percentage of their required equipment from
domestic manufacturers. Whilst this protects indigenous suppliers, it acts as a
trade barrier on a transnational and global level.regulatory issues also affect
oil and gas equipment manufacturers, with recent high prices for steel and
other metals, which are primary inputs. Some manufacturers have reportedly been
unable to purchase the metals that they need. Suppliers are not likely to
forward integrate into the player’s industry place and equally industry players
are not likely to backward integrate due to the differing expertise required in
both industries. Supplier power in the natural gas industry is moderate
overall.
3.1 SUPPLY FACTORS OF NATURAL GAS
supply for natural gas is mainly
driven by the following factors:
· Pipeline capacity
· Storage
· Gas drilling rates
· Technical issues
· Imports
The ability to transport natural gas
from the well heads of the producing regions to the consuming regions affects
the availability of supply in the marketplace. The interstate and intrastate
pipeline infrastructure has limited capacity and can only transport so much
natural gas at any one time. This has the effect of limiting the maximum amount
of natural gas that can reach the market. However, natural gas pipeline
companies should continue to expand the pipeline infrastructure in order to
meet growing future demand. The current pipeline natural gas infrastructure in
the EU is included in Exhibit B on page 27. The amount of natural gas produced
both from associated and non-associated sources can be controlled to some
extent by the natural gas producers.
3.1: Drivers of
supplier power in the EU natural gas market
The drilling rates and gas prices
form a feedback loop. When supply is low relative to demand, prices rise; this
gives a market signal to the producer to increase the number of rigs drilling
for natural gas. The increased supply will then lead to a decrease in the
price.above figure show the drivers of supplier power in the EU natural gas
market based on bargaining power and supply factors. The complete five forces
analysis of the natural gas market in the EU is included in exhibit D on page
29.
4. BARGAINING POWER OF BUYERS
from the gas production industry are
gas retailers who make up the gas utilities and energy. Typically these
companies are large national and multinational entities which increases buyer
power as losing a major conglomerate can be a major setback. However,
counteracting this is the fact that many major gas producers are able to
forward integrate and become major players in the retail gas industry. The extent
of such forward integration is widespread throughout the industry so in many
cases buyer power can become somewhat irrelevant. Backward integration is
possible but is more likely in less liberalized markets. The immense capital
costs and expertise required is a significant hurdle to set up as a gas
producer as well as competing against global giants whose reputations and
experience allow for a jump start for contracts to develop potential gas
fields. Switching costs for buyers are low with gas being an undifferentiated
commodity. This allows, especially in competitive upstream markets, for
retailers to buy from any wholesaler (or other upstream source) on the basis of
price alone. Because of the undifferentiated nature of gas and relatively
standard price as a worldwide commodity, customer loyalty is not particularly
potent and only contractual obligations will keep buyers from switching. Buyer
power varies from region to region with wholesale market fragmentation. The
existence of wholesale exchanges found in some, though not all, the EU
increases buyer power. Buyer power in the natural gas industry is moderate
overall.
.1 DEMAND FACTORS
demand for natural gas of the buyers
is mainly driven by the following factors:
· Weather
· Demographics
· Economic growth
· Fuel competition
· Storage
· Exports
Weather conditions can have a major
impact on natural gas demand and supply. Cold temperatures in the winter
increase the demand for space heating with natural gas in commercial and
residential buildings. Alternatively, hot temperatures in the summer increase
the demand for space cooling with air conditioning, which also increase the
demand for natural gas at electrical utilities because the utilities provide
the electric power that fuels most residential air conditioners.
4.1: Drivers of
buyer power in the EU natural gas market
demographics also affects the demand
for natural gas, especially for core residential customers. As electricity
currently supplies most of the cooling energy requirements, and natural gas
supplies most of the energy used for heating, population movement may decrease
the demand for natural gas for these customers. However, as more power plants
are fueled by natural gas, natural gas demand could in fact increase. The state
of the economy can also have a considerable effect on the demand for natural
gas in the short term. This is particularly true for industrial and to a lesser
extent the commercial customers. When the economy is booming, output from the
industrial sectors generally increases. On the other hand, when the economy is
experiencing a recession, output from industrial sectors dropsabove figure show
the drivers of buyer power in the EU natural gas market based on bargaining
power and demand factors. The complete five forces analysis of the natural gas market
in the EU is included in exhibit D on page 29.
5. INTERNAL RIVALRY &
COMPETITORS' OVERVIEW
from Russia and its energy giants
such as Gazprom and Rosneft, the nucleus of the industry could be mainly
characterized by the countries of the EU and their dominant companies such as
BP (British Petroleum), BG (British Gas) Group, Royal Dutch Shell. There are
also hundreds of other quite significant national and multinational companies
and gas associations which are active in the industry as well, for instance,
Gasterra.is a region with less and less domestic production, which implies that
the dependency of gas market players on imports is gradually increasing. The UK
was for a long time the second largest producer of natural gas in the EU after
Russia. However, it is expected that the UK could be dependent on imports for
approximately 80% of its gas requirements already in 2016. Based on the growing
natural gas infrastructure, Norway is well positioned to supply part of the
UK's additional demand for imported natural gas and continue to be a key player
in the UK market, which is the EU’s largest and most liberalized natural gas
market. Other major gas suppliers in the EU are Gazprom in Russia, Algeria and
the Netherlands. The key EU markets which import the most natural gas to meet
their demand are the UK, Germany and France. The EU still produces
approximately 35% of its own gas requirements, but Russia has 22% and Norway
19% market share in the EU. The leading LNG supplier Qatar accounts for 7% of
EU's supplies. Germany, EU’s biggest economy, relies the most part on Russia
far more than other countries, deriving 33% of its imports from it, followed by
Norway and the Netherlands.dependency is not a short-term issue for Europe: in
fact, it will rise continuously to more than two-thirds by 2030 year. External
import dependency is not problematic in itself, although from a policy
perspective, it does bring a major foreign policy element to the evolution and
changes of European gas markets.recent years, the gas industry has experienced
consolidation, as well as increased deregulation and integration in strategic
markets. Liberalization has changed the legal and economic framework of the gas
industry a lot. In the EU, the gas sector has restructured from national monopolies
to an EU oligopoly, and there is still no real healthy competition. There
should be some huge investments made in networks and gas storage capacities in
order to deal with potential supply disruptions, which supports the case for an
oligopoly organization., there is an intense competition between large
integrated oil and gas companies and independent and government-owned companies
for the acquisition of assets and licenses for the exploration, development and
production of gas, and for the refining, marketing and trading of natural gas
and related products. Key factors affecting competition in the oil and gas
industry are oil and gas prices and demand, exploration and production costs,
global production levels, alternative fuels and government (including
environmental) regulations such as, for example, Kyoto Protocol.
6. THREAT OF SUBSTITUTES
from such obvious substitutes as oil
and coal, nowadays large investments are being poured into development of
biomass, hydro-, solar, wind, tidal power and shale gas. Many researches are
being conducted in order to create a perfect renewable energy source, as
environmental concern gradually becomes a bigger problem in a modern world.will
continue to play a significant role due to its availability, secure supply and
competitiveness and it is still a leading fuel for power generation.
Nevertheless, coal appears to be a weak substitute because of high CO2
emissions. It is also quite inefficient in the production of gasoline.power is
in a very strong position because it provides energy without causing any
emissions, but it is believed to be very dangerous and many nuclear plants were
shut down after a catastrophe in Fukushima, Japan. Moreover, there has not been
developed any safe way to deal with nuclear waste. For example, Germany decided
to refuse from nuclear power.early development of solar technologies starting
in the 1860s was driven by an expectation that coal would soon become scarce.
However, development of solar technologies stagnated in the early 20th century
in the face of the increasing availability, economy, and utility of coal and
petroleum. Despite the overwhelming availability of environmentally-friendly
solar power, little was installed before 2012, compared to other power
generation due to the high installation cost. Recently the prices have fallen
and the solar power has become quite competitive with gas power generation.wind
power has become quite a popular form of power generation as well, especially
in the EU. The wind industry was affected by the crisis in the 2009-2010, but
many analysts have forecasted recently a sustainable growth trend.is referred
to as the fuel of the future: it is non-polluting and inexhaustible. However,
it is difficult to store and transport and requires big amounts of electricity
from water and fossil fuels.is a renewable energy source which is a biological
material from living organisms. The adoption of biomass-based energy plants has
been a slow but steady process. Biomass mass derived energy also holds the
promise of reducing carbon dioxide emissions which contribute to global warming
significantly: carbon dioxide acts as a “greenhouse” gas by trapping heat
absorbed by the earth from the sun. Although the burning of biomass energy
releases as much carbon dioxide as fossil fuels, biomass burning does not
release “new carbon” into the atmosphere while burning fossil fuels does.shale
gas development in the US, Canada and China may lower the demand for
conventional natural gas. Some studies even claim that the extraction of shale
gas results in the release of fewer emissions than that of the natural gas. It
might be expected that increased shale gas production in the US and Canada will
lead to lowering the market power of main exporters of gas to Europe.the fact
that now lots of efforts are being made to develop substitutes for gas, it is
believed that the demand for gas will continue to grow. In fact, gas may
substitute oil completely in 20-30 years. We can safely state that substitutes
available today are still not perfect and need a lot of improvements which will
take years to implement even considering the constant development of modern
technology. However, there may be quite intense competition with wind and solar
power which become more and more attractive due to recently reduced costs and
minor effects on environment. Consequently, the conclusion is that the threat
of substitutes is moderate.
7. CONCLUSIONS
rising demand for gas in the EU
along with a decrease in its production due to a lack of gas in Europe lead to
greater competition for the demand between producers and sellers. It gets more
difficult for new companies to enter the market not only because of high
initial investments in extraction and transportation, but also due to the fact
that the gas reserves are owned by the individual regions and countries which
strongly fight for their share in the market. Developed gas fields are
distributed among the major companies that create problems for newcomers to
enter the market. Concentration of sellers is very high, while there are lots
of buyers on the market. Barriers to entry are high and costly, while the
barriers to exit from the market is extremely high and will continue to grow as
the demand is rising, production is falling, and the competition will grow; and
more and more companies will fight for their place in the gas market, for the
acquisition of assets and licenses for the exploration, development and
production of gas, and for the processing, marketing and distribution of
natural gas and related products. The main factors affecting competition in the
oil and gas industries are oil and gas prices and demand, exploration and
production costs, global production of alternative fuels and the government
(including environmental) regulations.order to reduce the impact of large firms
on prices and the market in general, the government of the EU is committed to
market liberalization and diversification of sellers. At the moment, the EU
still produces about 33% of its gas needs, but Russia has 24%, Norway 19%,
Algeria 9% market share in the EU. A leading supplier of LNG in Qatar is 8% of
the EU supply. Key EU markets which import most of the natural gas to meet its
demand, are the UK, Germany and France. In order to diversify the supply side,
the EU actively seek for alternative solutions, mainly through the LNG, but
also through the creation of new pipeline infrastructure from the Caspian
region and North Africa.is impossible to respond quickly to the increase in
demand and reduction of gas production with the use of substitute resources.
From one side, it may be cheaper, but more costly as there are issues about the
problems of the environment (in the case of coal). On the other hand, the
transition to the use of other sources is financially costly and time consuming
(biomass, hydro-). Shale gas, according to some sources, could be a replacement
for conventional natural gas, which would also reduce the ability to influence
the market by some companies. But, despite this, though it is expected that the
demand for gas will increase and reserves will not be getting bigger,
therefore, the costs of developing new fields and further means of
transportation lead to higher gas prices. Therefore more and more investments
are made for the development of substitutes for gas.
REFERENCES
1. The following references
have been used to write this report.
2. <#"663964.files/image013.gif">
EXHIBIT C: EU NATURAL GAS
INFRASTRUCTURE
EXHIBIT D: FIVE FORCES ANALYSIS
rivalry
Characteristics
|
Current situation
|
Future trend
|
Degree of seller concentration
|
High concentration
|
Same
|
Rate of industry growth
|
7-10% growth rate
|
Expected to rise due to increased
development of shale gas
|
Significant cost differences among firms
|
Each pipeline terminal has its own
gas price
|
Same
|
Excess capacity
|
The world is facing a deficit of
energy resources due to constant growth of demand and consumption while the
amount of resources is limited. Therefore, we are more likely to observe
shortage of capacity than excess of capacity.
|
In the nearest future any changes
in the current situation are not expected.
|
Sensitivity of costs to capacity
utilization
|
It will be possible only if
scientist would be able to create an artificial gas from the air. As long as
gas is extracted from the ground, the situation will remain the same.
|
Product differentiation among
sellers. Brand loyalty. Cross-price elasticity
|
Low, customers choose seller who
offers the lowest price
|
Same
|
Buyer’s cost of switching
|
Substituting gas with new sources
of energy involves quite high switching costs
|
The popularity and availability of
new sources of energy are expected to rise, hence the switching costs will
decrease
|
Are prices and terms of trade
transaction observable?
|
Yes
|
Same
|
Can firm adjust prices quickly?
|
A trend of gas-on-gas competition
setting the price (now sets the price for approximately half of the market)
|
The trend is expected to go upward
|
Large or infrequent sales orders?
|
No
|
No
|
Cooperative pricing
|
No
|
Same
|
Exit barriers
|
There are very high exit barriers
because of high initial investment which are required for transportation of
gas in its natural form or liquefied gas to the consumers in the EU. As far
as the projects are very money consuming it is not so easy to exit this
market.
|
The situation with exit barriers
will deteriorate because the competition in the European gas market will
increase because new players will come to the market.
|
rivalry is large for integrated oil
and gas companies and independent and government-owned companies for the
acquisition of assets and licenses for the exploration, development and
production of gas, and for the refining, marketing and trading of natural gas
and related products.
of Entry
CharacteristicsCurrent
situationFuture trend
|
|
|
Importance of reputation and brand
loyalty in purchase decision
|
Medium, dependent on the source of
exploration and import
|
Higher due to political and
economic reasons; choice of a supply will mostly be determined by price
|
Entrants' access to distribution
channels
|
Low because of high initial
investments
|
Same
|
Entrants' access to raw materials
|
Very low due to the specificity of
the industry
|
Higher
|
Entrants' access to technology and
know-how
|
Medium but costly
|
Same
|
Entrants' access to favorable
locations
|
Low to medium because most of the
time incumbents have the biggest shares in gas projects in participation with
other gas companies by means of a tender competition; all gas fields are
occupied
|
Same or decrease
|
Experience-based advantage of
incumbents
|
Very high due to huge capital
investments and scope of activities
|
It will depend on how the
companies will react to the changes in regulation policies and how the
structure of the market and demand will be changing
|
Network externalities
|
Medium
|
Same
|
Government protection of
incumbents
|
Not high as government seeks for
lower prices and due the idea that countries who are dependent on gas and oil
production and sales, strive for bigger market share and therefore influence
on prices, and EU start more liberalizing and diversifying suppliers
|
Same
|
Perception of entrants about
expected retaliation of incumbents
|
Because of fierce completion now
and later, incumbents will behave proactively and defend their market shares
|
Higher as the demand for gas is
expected to lower in the future, the companies will compete for bigger part
of it
|
of entry is highand Complements
Characteristics
|
Current situation
|
Future trend
|
Availability of close substitutes
|
Yes (other sources of energy such
as coal, oil and renewable energy sources - biomass, shale gas etc.)
|
Taking into account the
environmental concern, we should expect a trend of switching to
environmentally-friendly energy sources. However, vast reserves of gas are
still available (especially shale gas) But it this context we will consider
shale gas as a substitute to the gas which we consider.
|
Price-value characteristics of substitutes
|
Varying from coal - the cheapest
and the most available substitute to quite expensive solar power plants
|
Installation costs of solar and
wind power plants are expected to fall, same for other sources of energy
being developed now
|
Price elasticity of industry demand
|
Low (the product is indispensable
for consumers, in this case we can state that the price elasticity of demand
is low)
|
Low
|
Availability of close complements
|
There are no complements due to
the specificity of the product
|
The same we can conclude about the
future trend (product complements will not appear)
|
Price-value characteristics of
close complements
|
Because of absence of complements
we cannot conclude anything about its price value characteristics
|
Threat of substitutes and
complements is low to moderate.
Characteristics
|
Current situation
|
Future trend
|
Is supplier industry more
concentrated than industry it sells to?
|
No, the supplier industry is not
more concentrated than the natural gas industry, because there are only a
small number of natural gas producers. in the EU
|
Same
|
Do firms in industry purchase
relatively small volumes relative to other customers of supplier? To
sales of typical supplier?
|
Purchase volume is usually large,
because the natural gas production stages of production, processing and
transporting require large volumes for the project
|
Same
|
Few substitutes for suppliers’
input?
|
Due to the expertise and
specialization there are not so many substitutes
|
The number of substitutes for
suppliers is expected to increase in the future
|
Relation-specific investments
|
Yes, mutual investments between
natural gas companies and suppliers for big gas drilling projects.
|
The relation specific investments
and cooperation with suppliers will increase
|
Credible threat of forward
integration
|
No. it very unlikely that the supplier
companies will forward integrate with the natural gas production suppliers
|
Same
|
Are suppliers able to price
discriminate?
|
Medium, suppliers are relatively
large companies which possess unique expertise in the area of advanced
technology
|
Same
|
Bargaining power of suppliers is
moderate overall
Characteristics
|
Current situation
|
Future trend
|
Is buyers’ industry more
concentrated than the industry it purchases from?
|
No, the buying industry is less
concentrated than the natural gas companies
|
Same
|
Do buyers purchase in large
volumes? Does a buyer’s purchase volume represent large fraction of typical
seller’s sales revenue?
|
Generally, buyers have contracts
with natural gas companies to secure supply, therefore, large volumes
|
Same
|
Can buyers find substitutes for
industry’s product?
|
Yes, it is possible to find other
energy sources, however, usually the infrastructure is not equipped for that.
|
Same
|
Do firms in industry make
relationship-specific investments with specific buyers?
|
Yes, gas retailers have
relationship/specific investment projects for gas projects and fields.
|
Same
|
Is price elasticity of demand of
buyer’s product high or low?
|
It’s low in the short run but it
is higher in the long run
|
Price elasticity may increase in
the long run
|
Do buyers pose credible threat of
backward integration?
|
Backward integration is possible
but is more likely in less liberalized markets. The immense capital costs and
expertise required is a significant hurdle to set up as a gas producer
|
Same
|
Does product represent significant
fraction of cost in buyer’s business?
|
Medium, due to the amount they
purchase over the course of time
|
In the future the natural gas
resources will shrink, which will lead to increased costs
|
Are prices in the market
negotiated between buyers and sellers on each individual transaction or do
sellers post a “take-it-or-leave-it” price that applies to all transactions?
|
Usually, contracts are made to
keep buyers from switching. One of the main objectives of the projected
single EU energy market is a common pricing structure for gas products.
|
Price discrimination and variation
will decrease in the future
|