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Article Excerpt
1. INTRODUCTION: THE EUROPEAN NATURAL GAS MARKET
The European natural gas market lends itself particularly to the EMF 23 study design. It is in the middle of a deep structural change that comprises both, restructuring and vertical unbundling, as well as changing supply relations. Contrary to the reform process in the U.S., restructuring in continental Europe has only started seriously with the second European Gas Directive (2003/55/EC, so-called "Acceleration Directive") whereas the UK had started the reform of its natural gas sector in the early 1990s already. In continental Europe, a small number of players still dominate the national wholesale markets; vertical unbundling is pursued by most member states, though with varying degrees of success. The individual countries are poorly interconnected, and the limited access to pipeline capacity prevents liquid hubs from emerging.
The second aspect, supply structures, also plays an important role in the energy policy debate, and it is the focus of this paper. Europe is a relatively mature pipeline market, with a significant increase in LNG regasification capacity and imports over the last years (IEA, 2004, 2007). In the next decades, the demand for natural gas is generally expected to rise, albeit with some uncertainty on the extent given new developments that may reduce the relative benefit of natural gas in environmental or cost terms (e.g. competition with coal with CCS for power production). In institutional terms, European natural gas supplies are also undergoing the global trend from long-term contracts towards shorter-term trading and a more important role for spot markets. "Energy supply security" is a particularly sensitive issue in European natural gas, especially with a view to the dominant supplier, Russia.
These issues have been studied in the previous literature. Several models have indicated that market power is indeed an issue in the European natural gas market, amongst them Boots et al. (2004), Egging and Gabriel (2006), and Egging et al. (2008). Smeers (2008) summarized and discussed the papers that develop strategic models of European natural gas supply. Hubert and Ikonnikova (2003) and Hubert and Suleymanova (2006) have focused on the specific role of Russia as a supplier to Europe, and the strategic role of transit countries such as Ukraine or Poland. OME (2001, 2005) have provided in-depth numbers of potential prices and quantities of gas supply options for the EU. Stern (2007) provides a balanced discussion of the true "supply security" issues.
In this paper, we report simulation results for European natural gas supplies to 2025, following the EMF 23 study design (EMF, 2007). We apply a strategic model of European gas supply, called GASMOD, that was developed in the early phase of the EMF 23 study, and then slightly adopted to suit the requirements of the EMF 23 study design. The GASMOD model is described in detail in Holz et al. (2008), and therefore will not be presented in detail in this paper. Instead, we focus on the results of GASMOD with regard to the EMF 23 Reference case, and most of the EMF 23 scenarios (see EMF, 2007, p. 30). The next section provides a non-technical model description and discusses data sources and assumptions. Section 3 then summarizes the model results for the EMF Reference case, and five scenarios: higher demand growth, Russian exports constrained, Middle East exports constrained, Middle East & Russian exports constrained, and liquefaction constrained. We put particular emphasis on the future role of Russia, potential alternative supply sources, and model results for the UK market in transition.
In general, our results suggest rather modest changes in the overall supply situation of natural gas to Europe. This also indicates that current worries about energy supply security issues may be overrated:
* LNG will likely increase its share of European natural gas imports in the future, but stay relatively stable beyond 2015;
* Russia will continue to play an important role as a supplier to Europe (~ 1/3 of imports), but it will not play the dominant role that many studies (and politicians) suggest it might play;
* In the time frame of our analysis (2025), the Middle East will continue to be a rather modest supplier, and its exports are more likely to be directed to the Asian and the North American markets;
* the UK is in the process of successfully converting from being a natural gas exporter to become an importer and a transit...
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