The market analysis of natural gas in the European Union

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The market analysis of natural gas in the European Union

Authors:

Abdullaeva Angelina

Balysheva Olga

Van Dijk Max Louis

Efimova Anna

December, 2012

TABLE OF CONTENTS

List of Figures & Tables IV

1. Natural Gas Market Overview

1.1 Market Definition

1.2 Market Volume

1.2.1 Market Volume - EU

1.2.2 Outlook Market Volume - EU

1.2.3 Outlook Market Volume - World

1.3 Market Value

1.4 Market Segmentation

2. Cost Structure

3. Bargaining Power of Suppliers

3.1 Supply Factors of Natural Gas

4. Bargaining Power of Buyers

4.1 Demand Factors of Natural Gas

5. Internal Rivalry & Competitors' Overview

6. Threat of substitutes

7. Conclusions

References

Exhibit A: Natural Gas Production per Country in the EU

Exhibit B: Major Natural Gas Trade Movements

Exhibit C: EU Natural Gas Infrastructure

Exhibit D: Five Forces Analysis

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TABLE OF FIGURES & TABLES

Figure 1.1: Share of total energy supply in 2009

Figure 1.2: Energy production in the EU from 1990 to 2009

Figure 1.3: Natural gas production volume in billion cubic meters from 2006 to 2010

Figure 1.4: Outlook of the EU's energy demand from 2007 to 2030

Figure 1.5: Outlook of EU's supply source of natural gas from 2007 to 2030

Figure 1.6: Total natural gas production in the world

Figure 1.7: Natural gas market value of the EU from 2006 to 2010

Figure 1.8: Natural gas production segmentation of the EU

Figure 1.9: Breakdown of the EUґs natural gas supplies in 2011

Figure 1.10: Natural gas proves reserves per region

Figure 3.1: Drivers of supplier power in the EU natural gas market

Figure 4.1: Drivers of buyer power in the EU natural gas market

Table 1.1: 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.

1.1 MARKET DEFINITION

The 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.

Furthermore, 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:

Natural 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.

Natural 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.

Also, 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. http://www.iea.org/topics/naturalgas/

As 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.

The five candidate countries that are included in the future expansion plan of the EU-27 consist of Iceland, Macedonia, Serbia, Montenegro and Turkey.

The 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.

1.2 MARKET VOLUME

To 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.

Figure 1.1: Share of total energy supply in 2009

Based 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.

1.2.1 MARKET VOLUME - EU

Furthermore, 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.

Figure 1.2: Energy production in the EU from 1990 to 2009 http://www.iea.org/stats/graphresults.asp?COUNTRY_CODE=30

As 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.

Figure 1.3: Natural gas production volume in billion cubic meters from 2006 to 2010

Conclusively, 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 - EU

Based on 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.

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.

Figure 1.4: Outlook of the EU's energy demand from 2007 to 2030http://www.statoil.com/annualreport2009/en/ouroperations/businessareas/naturalgas/pages/europeangasmarket.aspx

Figure 1.5: Outlook of EU's supply source of natural gas from 2007 to 2030http://www.statoil.com/annualreport2009/en/ouroperations/businessareas/naturalgas/pages/europeangasmarket.aspx

Disputes 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.

The 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.

As 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.

1.2.3 OUTLOOK MARKET VOLUME - WORLD

Now that 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.

Figure 1.6: Total natural gas production in the world http://yearbook.enerdata.net/2010/world-natural-gas-production-in-2010.html#/2010-energy-primary-production.html

The 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	167	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	60	-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	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.

1.3 MARKET VALUE

After 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.

Figure 1.7: Natural gas market value of the EU from 2006 to 2010

The natural 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.

1.4 MARKET SEGMENTATION

Market 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.

Figure 1.8: Natural gas production segmentation of the EU

A 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.

Figure 1.9: Breakdown of the EUґs natural gas supplies in 2011

As shown in figure 1.9, the indigenous natural gas production is 33% of the total EUґs 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 EUґs 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.

Figure 1.10: Natural gas proves reserves per region http://www.eurogas.org/uploaded/Statistical%20Report%202012_final_211112.pdf

2. 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.

It 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

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 producers

focus on 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 laws

which require 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.

Non-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

The 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.

Figure 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.

The 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

Buyers from the gas production industry are gas retailers who make up the gas utilities and energy

markets. 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.

4.1 DEMAND FACTORS

The 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.

Figure 4.1: Drivers of buyer power in the EU natural gas market

Changing 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 drops

The above 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

Apart 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.

Europe 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.

Import 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 http://ec.europa.eu/competition/sectors/energy/inquiry/index.html.

In 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 http://ec.europa.eu/energy/observatory/gas/gas_en.htm. 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.

However, 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

Apart 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.

Coal 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.

Nuclear 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.

The 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 http://www.solarpowerinternational.com/2012/public/enter.aspx. 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.

The wind power has become quite a popular form of power generation as well, especially in the EU http://www.thewindpower.net/country_europe_en.php. The wind industry was affected by the crisis in the 2009-2010, but many analysts have forecasted recently a sustainable growth trend.

Hydrogen 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.

Biomass 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.

Increased 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 http://www.shalegasinfo.eu/index.php/en/info/issues-a-policy.html. 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.

Despite 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

The 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.

In 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.

It 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. http://www.statoil.com/annualreport2009/en/ouroperations/businessareas/naturalgas/pages/europeangasmarket.aspx

3. http://www.reuters.com/article/2012/05/15/us-energy-summit-eon-idUSBRE84E10720120515

4. http://www.euractiv.com/energy/russias-natural-gas-dilemma-analysis-512092

5. http://yearbook.enerdata.net/2010/world-natural-gas-production-in-2010.html#/2010-energy-primary-production.html

6. http://www.eia.gov/countries/

7. http://www.eurogas.org/uploaded/Statistical%20Report%202012_final_211112.pdf

8. http://en.wikipedia.org/wiki/Natural_gas_prices

9. http://ec.europa.eu/competition/sectors/energy/inquiry/index.html

10. http://www.energy-community.org/pls/portal/docs/708190.PDF

11. http://www.solarpowerinternational.com/2012/public/enter.aspx

12. http://www.thewindpower.net/country_europe_en.php

13. http://www.shalegasinfo.eu/index.php/en/info/issues-a-policy.html

14. Natural Gas Production in Europe, Industry Profile, Datamonitor

Summary

Analyzing the gas market, we concluded that the most important force is the risk appearance of substitute of a natural gas in the traditional sense. At present time, there are more and more talks about the dangers that can appear because of a shale gas. The shale gas and its production costs are much lower than cost of the gas in the traditional sense. According to the United States in the near future they will be able to provide ways of delivery and production levels to meet the growing demand for energy sources and U.S. plans to do this is by means of the shale gas

Long-term profitability and nature of competition in the market:

The Gas market as the whole energy industry indeed is extremely not stable. The gas price is directly influenced by the price of oil and the price of oil depends on the political situation in the world. In particular, it depends on the scope of the political interests of the United States. On the example of the recent wars, we could see how stupendous impact it can have on the world market mechanisms. We could see how the market itself can be an instrument of influence and a tool to achieve political goals. We can trace the connection by watching the actions of United States. The EU economy is integrated into the world economy and global market trends, and world economy has a huge impact on the European economy, and on the energy market of the European Union. In this context, speaking of long term profitability of this market I would like to quote the words of Darwin: "Survival is not the strongest, nor the most intelligent, but the ones who are best suited to change."

EXHIBIT A: NATURAL GAS PRODUCTION PER COUNTRY IN THE EU

Row Labels	Production	Gas demand	Total Imports	Total exports	Self sufficiency (%)
Austria	1,8	9,5	14,6	4,9	18,9%
Belarus	0,2	20,2	20	0	1,0%
Belgium	0	16,9	19,2	2,5	0,0%
Bosnia & Herzegovina	0	0,2	0,2	0	0,0%
Bulgaria	0,5	3,3	2,8	0	15,2%
Croatia	2,3	3,2	0,9	0,2	71,9%
Czech Republic	0,2	8,9	9,3	0,2	2,2%
Denmark	7,1	4,2	0,4	3,1	169,0%
Estonia	0	0,6	0,6	0	0,0%
Finland	0	4,1	4,1	0	0,0%
France	0,6	41,2	46,1	4,9	15,0%
Germany	11,9	77,6	87,4	19,7	15,3%
Greece	0	4,7	4,5	0	0,0%
Hungary	2,8	11,6	8	0,6	24,1%
Ireland	0,3	4,8	4,5	0	6,3%
Italy	8,4	77,9	70,4	0,1	10,8%
Latvia	0	1,6	1,7	0	0,0%
Lithuania	0	3,4	3,5	0	0,0%
Luxembourg	0	1,2	1,2	0	0,0%
Moldova	0	2,1	2,1	0	0,0%
Norway	106,2	5,9	0	99,1	1800,0%
Poland	6,2	17,2	11,8	0	36,0%
Portugal	0	5,2	5,2	0	0,0%
Romania	11	14,4	3,1	0	76,4%
Russia	677	474,3	0	195,7	142,7%
Serbia	0,4	2,4	2	0	16,7%
Slovak Republic	0,1	5,6	5,9	0	1,8%
Slovenia	0	0,9	0,9	0	0,0%
Spain	0,1	33,6	35,5	1,7	0,3%
Sweden	0	1,3	1,3	0	0,0%
Switzerland	0	3,3	3,3	0	0,0%
The Netherlands	80,6	47,9	23	55,9	168,3%
Ukraine	20,3	56,4	44	0	36,0%
United Kingdom	47,6	82,6	53,4	16,6	57,6%
Grand Total	985,6	1048,2	490,9	405,2	2686%

EXHIBIT B: MAJOR NATURAL GAS TRADE MOVEMENTS

EXHIBIT C: EU NATURAL GAS INFRASTRUCTURE

EXHIBIT D: FIVE FORCES ANALYSIS

Internal 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	The costs are not significantly dependent on the capacity utilization. The costs are more dependent on the distance from the place of gas extraction.	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.

Internal 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.

Threat of Entry

Characteristics	Current situation	Future 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

Threat of entry is high

Substitutes and 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	Because of absence of complements we cannot conclude anything about its price value characteristics

Threat of substitutes and complements is low to moderate.

Suppliers

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

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