A paper presented by Steven K. Welch Group Vice President, Gas & Power, BP Amoco at The European Summer Gas Conference, London.
23rd June 2000
First I want to thank Patrick Heren and his organisation for giving me this opportunity to address an area of the European gas scene in which our new Gas & Power business division in BP Amoco has considerable interests and positions.
I do not need to tell an audience of this sophistication that the world of gas and power is an extremely exciting and fast moving one at the moment. We all know about the advantages of combined cycle gas turbines, gas to liquids developments, the upward rise of demand for natural gas and its environmental advantages.
This, of course, is the reason why BP Amoco decided to create a new gas and power stream in the first place. We wanted to do things differently as my colleague David Fitzsimmons said, when outlining the purpose of the new stream last November and (I quote) “for BP Amoco ...standing still is not an option”.
Later this year our Group will adopt a single brand - BP- which will signify the unity of three major energy companies as one entity. I mention this not because we are reverting to the original BP brand but rather to denote the ambitions of a very new type of Group which seeks to go beyond the current boundaries of a major oil company and its traditional business activity.
Brand is of course far more than the identity at the top of the petrol station pole sign and in our new Gas & Power business, we will have the opportunity to take the BP business into a range of new market opportunities, broadening the scope and depth of our offer while building upon the brand and its values.
These values will manifest themselves in a number of ways. in performance delivery; in a radical, innovative and progressive approach; in the development and application of know-how; and the enhancement of our own, our partners and our customers environmental performance.
And it is our merger as BP and Amoco and subsequent acquisition of Arco which have transformed our position in gas and offers us in Gas & Power a unique opportunity to transform our business beyond its current boundaries.
The new BP has become the second largest gas producer in the world after Exxon Mobil (excluding state companies) with interests adjacent to many of the world’s major gas growth markets.
This has brought with it an exciting array of global gas and power opportunities to pursue from our No 1 supply position in the US and UK, No 1 position in the Atlantic Mediterranean and No 3 position (and growing) in Asia Pacific.
And in power we are no minor player, given that we now own or operate some 11 GW of generating capacity globally.
And of course gas in environmental terms represents a key bridge to a renewables future - something that sits well with our approach and position on environmental issues.
But what I want to address today is what we in BP Amoco call the Atlantic Mediterranean Basin. This may sound rather curious. Why link the two into one? After all the Atlantic and the Mediterranean are not in any geographical or geological sense “one basin”. In practice we use the term to remind ourselves that we look at the area as an interconnected one. A “gas web”, if you like.
On one side of the Atlantic we have our Trinidad gas assets with new low cost LNG capacity. On the other, we have booming markets in Spain on the western end of the Mediterranean and Italy in the centre.
On the southern side of this sea, we have assets in Algeria and Egypt, while on the eastern shoreline, there is the equally booming potential market of Turkey.
Further to the east, of course, lies the Caspian. In fact, if we were being true to our ‘gas web’ idea, we really should talk about the Atlantic, Mediterranean and Caspian basin, but this seems a little laboured.
Given this spread of interests, you will appreciate that my comments are very much through the eyes of a company actively involved in many aspects of the gas supply chain from wellhead to burner tip.
I will resist the temptation to be too partisan in my comments but I hope our enthusiasm as a company for this region together with our many partners shines through!
On that basis, the structure of my paper might be seen as a tour of the Atlantic Mediterranean Basin moving from east to west. Forgive me if I am tempted to depart from a strictly linear traverse of the region as I attempt to draw out the gas web to which I just referred.
But first, the obligatory context of supply and demand projections for this particular region.
If one is to consider overall supply vs demand, it is clear that gas supply continues to outstrip market demand and that technology and associated cost management will increasingly bring what was previously considered stranded gas within market reach.
As an example, our work with our partners Sonatrach in the In Salah field in Algeria saw the field development sanctioned earlier this year after a major programme of field seismic and appraisal drilling which brought the development costs down from $3.5 bn to $2.5bn.
This pattern of continuous improvement means that competition for markets in Europe has become fierce and that the securing of markets for gas will be the key obstacle to gas development.
The range and volume of sources pointing at Europe continues to grow from the Caspian, Russia, Turkemenistan, Iran, Egypt, Libya, Algeria, Nigeria, Trinidad and longer term even Angola.
So lets start in the Caspian:
As you know, BP Amoco is operator of the Shah Deniz consortium that has discovered a significant natural gas/condensate field. Equally, you will have read in the press numerous figures for the level of reserves in this field.
I am not going to go into those kind of details, however, through the successful testing of Shah Deniz #2, we have now proven 5 TCF of gas that will underpin the first stage of development. Additionally, we are extremely confident that we have substantial quantities of gas capable of delivering 16 - 20 Bcm a year for export.
Export to where? Well the obvious destination is Turkey. I will come back to that dynamic economy later, but the important point is that we know we have the capability to deliver to the Turkish border as soon as the winter of 2002-2003.
How do we know this? We are currently engineering an upstream concept utilizing unmanned wellhead towers and a midstream solution that uses a combination of refurbished pipelines in Azerbaijan at modest cost and a new line of 300 km through Georgia and on into Turkey.
There are, of course, alternative projects destined for the Turkish market: Russia’s Blue Stream line under the Black Sea and the trans-Caspian line from Turkmenistan.
Both of these ambitious projects have their respective challenges, but the geographical location of Shah Deniz, and the ability to stage the development of the field consistent with the growth in the market gives Shah Deniz, we believe, a competitive edge.
And there is little doubt that Turkey will need this gas supplementing its existing supplies from Russia, Iran, and LNG from Nigeria and other sources.
Issues of power shortages and outtages are an impediment to that country’s economic growth. Of course, forecasting Turkey’s energy needs is not easy, due to the volatility of its macro economic environment.
However, few would disagree that this nation of 65 million people is going to need a lot more energy. Its GDP is growing at the rate of 4.5 percent per annum, but a major constraint to this growth lies in its power capacity.
Most projections suggest that energy demand growth as a whole over the next ten years is likely to be as high as 7.4 percent, but this is dwarfed by the potential increase in demand for power, which could be as high as 11 percent.
Currently the country has 24.5 GW of capacity. To meet its projected demand for electricity, it is suggested that installed power capacity will have to double to 49 GW by 2010.
More significantly, current Turkish electricity generation is dominated by hydropower and lignite burning, but natural gas is rapidly catching up. This year should see it become the most used fuel in the sector. By 2010, the expected expansion in gas-for-power is put at 237 percent.
Of the five build-and -operate plants now being advanced, four are gas fired, or 79 percent of the new capacity.
Yet Shah Deniz gas is not the only potential source of gas for Turkey from our portfolio. As you may have noticed, earlier in this month (June) we announced that the company had signed an agreement with the Egyptian General Petroleum Corporation to build two new gas plants on Egypt’s Mediterranean coast.
One, an NGL plant, which is important for the local market and petrochemical industry in Egypt, need not concern us here. More relevant is the plan to build a two-train LNG plant. Our plan is to have this ready for the export of Egyptian gas by 2004.
Just as we can serve the eastern Turkish markets from our resources in the Caspian, by pipeline, we can also serve Western Turkey from Egypt with competitive LNG.
Egypt has considerable reserves of gas - 40 TCF - with potential of 100 TCF and after careful evaluation of its domestic needs, the Government has supported us in our efforts to develop and secure export markets for Egyptian LNG.
The two train project is at an early stage but initial estimates suggest a new export source for European markets with first gas send out in 2004.
What gives us the confidence to set such ambitious targets for the bringing on of new LNG facilities in the Mediterranean - a period of only 4 years compared to typical industry schemes taking 10-15 years to bring to fruition.
Well firstly, our track record in bringing on Trinidadian gas in only 6.5 years. Second, our own early gas reserves are advantaged being located in shallow water. Third, we are able to act as an “anchor” buyer for the Egyptian LNG output through our access to gas market networks.
Fourth, our regassification options in Europe and North America. Fifth, our recent tender to purchase LNG ships for which supply and customer are as yet uncontracted
Why is this last point significant. Well, Egypt goes to the very heart of our approach to LNG which recognises the significant changes in the way LNG will be traded and delivered to customers.
A newspaper reported last week on our tender to purchase two new LNG ships with options on several more as “ a gamble”. This is to misunderstand the nature of the market changes underway.
These changes including the emergence of new commercial frameworks between supplier and customer, new technology application which enables new smaller scale, lower cost LNG re-gassification facilities to be constructed and the emergence of an increasingly liquid or fungible traded market.
They will combine to offer new opportunities to accelerate the monetisation of reserves and include the accessing of shorter term market opportunities and optimisation of delivery patterns and associated costs.
LNG customers are facing up to markets that are deregulating , there is great uncertainty , and so they want flexibility of supply. BPA has the ships and trading capability to manage the risks associated with providing these solutions for our customers.
It is true that the ships would represent the first ever purchase of shipping capacity by a major energy company where the gas source and market are yet to be contractually secured.
But that is not to say that we have increased the risk associated with our gas business or “taking a gamble”- it is more accurate to say that we are taking on different types of risk - which will be just as well managed as our leading positions in other traded markets.
The ships are a first step in the execution of this strategy and it is the very nature of our supply positions in the Atlantic Mediterranean Basin - not to mention Middle East/Asia Pacific - which enables us to take some bold steps which will change the way the gas market operates.
We can see this already in Spain where we have become the first foreign importer of LNG for sale into the recently deregulated Spanish market where after just three months we have secured sales which this year will represent a market share of some 7 percent. Our LNG ships arriving in 2002 will further underpin this market entry into Spain.
We could argue at length as to whether Italy falls into the East or West Mediterranean. No matter - what is certain is that the Italian market will undoubtedly be an exciting one over the next few years.
With demand this year expected to be around 70 bcm and growth to around 90 bcma expected by 2010 the market is material and is looking forward to significant absolute growth, driven by power demand.