A paper presented by Steven K. Welch Group Vice President, Gas & Power, BP Amoco at The European Summer Gas Conference, London.
23rd June 2000
The market sits at the centre of its own pipeline web with imports contracted from Algeria, Nigeria via France, Russia, Norway and Holland and a planned new line from Libya, in addition to Italy's domestic gas reserves. Italy has one LNG terminal.
The recently published gas decree implementing the European gas directive takes a bold step on the demand side, with very low immediate eligibility threshold (200,000 cubic metres / year) and complete opening of the demand side by 2003.
The market-share or "anti-trust" limits on the supply side also go further than required by the directive, but without a formal release gas programme (or similar), would-be new entrants may find access to supply difficult in the near-term.
Of course, our In Salah Gas joint venture with Sonatrach already has exposure to the Italian market through the 4 bcma sale to Enel. And we are currently actively investigating opportunities in our own right in the liberalising Italian gas market.
Spain too sits at the centre of a pipeline and LNG axis. As I mentioned, in 1995, we signed an agreement to explore, develop and market gas from the In Salah region of Algeria with Sonatrach.
It was the first joint venture of its kind between Sonatrach and a foreign company. In total, seven fields in the region should be capable of producing between 9 and 11 Bcm a year at plateau.
Once the line to link these fields to the Hassi R’Mel field has been built, then markets in Spain and Italy can be accessed through existing infrastructure via the Gazoduc Maghreb-Europe (GME) pipeline, via Morocco to Spain or via the Trans-Med pipeline through Tunisia to Italy.
To date, our gas marketing joint venture with Sonatrach, In Salah Gas, has contracted to sell 4 bcma of the 9bcma initially on offer. The partners in the joint venture are extremely optimistic that we will be able to reach agreement on the sale of the additional volumes and we anticipate an announcement in the next few weeks.
Sonatrach has also indicated its aspiration to increase its gas exports significantly and recently announced its evaluation of a possible direct line from Algeria to Spain and BP Amoco has been invited to participate in that concept evaluation.
The Spanish market is a particularly intriguing one. Spain’s economy grew at nearly twice the speed of the European average in 1999 - although that is not viewed as sustainable year on year of course. While not marching ahead at quite the Turkish velocity, power demand is still going up at the rate of 5 percent a year.
Estimates suggest that this market of 40 million people is going to double its gas consumption from 16 Bcm to 30 Bcm a year before 2010. The demand will primarily be driven by new power capacity.
There are other entry points to southern Europe that are also about to get underway. First, I’m pleased to announce today that we have sanctioned our investment in the the Bilbao re-gassification project and associated gas fired power station.
With our partners Repsol, Iberdrola and EVE, this will be the development of the first integrated LNG regas and power project in the Atlantic Mediterranean region which will come on stream in 2003 (power) and 2004 (regas).
This will be a 2.9 billion cubic metres a year project with power generation capacity of 800 MW. Secondly, last month Sonatrach announced that they would cooperate with five Spanish partners in operating an LNG regasification terminal at Ferrol, in the Galicia region of northern Spain.
Of course, Spain is concerned for reasons of supply security to limit supplies from any one country to 60 percent of the total unswitcheable demand. Yet this is not a problem for us.
When both In Salah gas is available and the Egyptian LNG plant is in operation, we will have the ability to source gas into Spain from three different countries: Algeria, Egypt and Trinidad.
There is often talk of new pipelines to add interconnector capacity between the Spanish market and France. This would supplement the relatively small interconnection of 2bcma at present located to the west side of the border line.
A connection from Barcelona across the east side of the border with France may also have some commercial logic although are a number of inter-country issues to be resolved first.
This brings me to the last leg of my easy-west tour in Trinidad which naturally brings us back to the concept of the Atlantic-Mediterranean basin.
The Trinidad plant was not only developed in record time - roughly half the time of past LNG projects, it was benchmarked as the best-in-class in terms of cost, construction schedule and plant operations. Capable of producing 3.3 million tons of LNG per annum, it also shows another trait we are trying to produce in the gas and power stream; flexibility.
As well as supplying the needs of Spain it also supplies the needs of North America. After all, it is the first LNG liquefaction plant to be built in the Western hemisphere for over 20 years.
In financial terms, driving costs down has reduced the capital costs from over $300/te in the 1970s and 80s to $225/te now - and in the case of Trinidad that was achieved for a single train greenfield project.
The expansion of the project will bring average costs well below $200/te In short, the possibility of creating LNG projects much more quickly and cheaply now beckons us.
Elsewhere in the Atlantic, Nigerian LNG is set for further expansion. Naturally I cannot offer insights into the market targeting of that gas, but Nigeria’s gas has secured a number of market opportunities across Europe to date and we expect it to compete for new market opportunities alongside the other gas to which I have referred.
Further south, the discovery of gas with oil offshore Angola is outside the timeframe of this paper but it represents a significant albeit distant source of new gas longer term.
This has been a very rapid tour of our pre-occupations in the southern rim of Europe, where we have a strong position. The merger with Amoco and subsequent purchase of ARCO has given the combined company a huge boost in terms of gas.
In this particular area, we are now the biggest foreign investor in Algeria and have strong reserve positions in Azerbaijan, Egypt and Trinidad. (You may have noticed that we announced a further 60 billion cubic metres of reserves from a new discovery in Trinidad last month)
Our plan, put at its bluntest, is to monetise these reserves. We know we have the expertise in terms of LNG plant construction to supply these growing markets this way. Furthermore, we believe that a great deal of new flexibility will shortly come to the LNG supply business. Our strategy is fully compatible with the concept of increased trading in LNG
It once used to be said, with reference to the oil market and also with reference to the gas and power utility business that high competition and spot sales were dangerous to supply security.
History has proved this wrong. The potential to develop a large number of sources of supply has actually strengthened consumer supply security.
In BP Amoco gas and power stream, we welcome the concept of supply diversity, competition and liberalisation. We want to be quick on our feet. In 1998, BP sold 18bcm of gas.
This year we envisage selling 85bcm - an increase of nearly 500% in three years driven by acquisition and merger. That alone is a spur to action for our new business.
I will close at this point but in summary:
Potential supply greatly exceeds demand projections in East and West Mediterranean and as a result competition will be fierce
In this competitive environment, securing access to European markets with low cost supplies will be critical. Gaining first mover advantage to the growing markets of Spain and Turkey with supply and or infrastructure will be key to establishing credible (and attractive) positions in these markets.
The availability of gas from competing sources into deregulating markets will drive significant changes in supply flexibility. In turn this will herald new commercial frameworks between customer and supplier and coupled with reducing costs and technology application will encourage the emergence of a more liquid and flexible international market in LNG.
BP Amoco looks at this region as part of the Atlantic Mediterranean Basin. Through this lens we are seeking to optimise our low cost (or competitive) sources of supply with growth markets in the region. We have taken early, bold steps to position ourselves for a new international market in LNG.
Since establishing our G&P stream in October 1999, we have brought focus to this key region, achieved some early successes and are positioning ourselves to capture growth in the future.
© 2000 Mena Report (www.menareport.com)