1/5 10 March 2006
Informatie en consultatiedocument regulering en ontheffing LNG Comments from Gaz de France
Vraag 1 : Deelt u bovenstaande analyse ? Zo nee, op welke punten deelt u de analyse niet en waarom ?
Vraag 2 : Naast mogelijke positieve invloeden, welke negatieve bijwerkingen van LNG ziet u, op zowel de mededinging als de leveringszekerheid ?
What ensures security of supply is not LNG import by itself, but long-term supply agreements. Recent examples in the US and in the UK show that supply security issues may appear when spot contracts are predominantly relied on, particularly on peak days.
Globally speaking, the LNG spot market should remain limited as the financing of new liquefaction plants requires long-term agreements to secure the sale of most of their capacity. Spot market allows some optimisation but may also imply high price volatility.
Vraag 3 : Wat vindt u van de observatie dat er een beperkt aantal locaties is voor de bouw van LNG terminals ?
Vraag 4 : Wat vindt u van de observatie dat de totale import capaciteit van deze 4 locaties relatief groot is ten opzichte van het binnenlands gebruik ?
60 Bcm is a huge capacity for the Netherlands. It will probably not be built in totality before the expiry of an initial period of exemption to third party access, even if such period lasts 20- 25 years. In addition to that, offshore facilities – such as methane carriers equipped with regasifiers already operated in the USA – could easily increase the import capacity. There is in fact no physical limit to LNG import capacity.
Vraag 5 : Wat vindt u van de observatie dat bovengenoemde drie criteria bepalend zijn voor het reguleringsregime ?
Among the three criteria, our opinion is that the first one (level of competition) is the only one relevant to determine the regulatory regime to be put in place.
In that respect, among the four countries taken for sake of comparison, the situation of the UK, even if quite different, is the one which presents most similarities with the one of the Netherlands.
The key point is to put in place a proper regulatory regime ensuring initial shippers a long- term secured access to the market, so that they are able to take the market risk. It is the only way to have grassroot LNG projects launched.
It has to be noted that if a too stringent regulatory regime discourages the investments, it will not favour competition and will have an effect opposed to the objective.
Vraag 6 : Wat vindt u van de redenering dat het beperkt aantal locaties voor LNG terminals in Nederland aanleiding geeft tot de noodzaak tot regulering van derdentoegang ?
We do not think so (see question 4). The key point is to have a regulatory framework favouring the launching of new projects (see question 7).
Vraag 7 : Wat zou u ervan vinden als er geen uniforme methode van tariefberekening
wordt voorgeschreven ? Welke soorten tariefberekeningsmethodieken acht u geschikt
voor LNG terminals ?
2/5 Basically, the launching of new LNG projects is possible if enough initial shippers are ready to take the market risk. To take such risk, initial shippers need to secure a long-term access to the market through a long-term throughput agreement, and to have a long-term visibility on tariffs.
In the prevailing LNG market (sellers’ market), the shippers need to secure a long-term regasification capacity to be in a position to negotiate with LNG suppliers ; and the conditions attached to such regasification capacity must be attractive enough compared to other opportunities such LNG suppliers may find in Europe or in the US.
In a fully exempted terminal, the tariff will be discussed between the long-term shippers and the promoter of the LNG project.
Such tariff is the result of a compromise between being low enough to ensure a competitive access to the market, and high enough to ensure a satisfactory return on investment to the promoter. Benchmarking with other similar LNG terminals on neighbouring markets is a key element.
As the initial shippers are really those who make the launching of a new LNG project feasible, the following elements should be also allowed (during a limited time period : 25 years for instance) :
- mechanisms of incentives to share the value of excess capacities between the promoter and the initial shippers ;
- mechanisms to make initial shippers benefit preferentially from terminal expansions ; - possibility for an initial shipper to extend the initial duration of the throughput
agreement.
Vraag 8 : Wat windt u van de conclusie dat de regulering zodanig moet worden ingericht dat het oppotten van capaciteit wordt tegengegaan ?
We agree that the counterpart of allowing exemptions should be that some measures have to be taken to ensure that the capacity which is booked by the shippers is effectively used.
But some flexibility is necessary : no terminal in the world is used at 100% capacity. A shipper needs some excess capacity to be able to purchase additional LNG and to mitigate possible operational issues (such as ship delays). Having about 20% excess capacity in an LNG terminal is something normal for a shipper, but we agree that, above this level, capacity, if not used by the shipper, should be used by others through a proper secondary market.
Vraag 9 : Welke soort informatie acht u nodig voor de stimulering van de gasmarkt ? Welke publicatietermijn acht u redelijk ?
Data on the characteristics of available slots may be published in advance on a website. We think that one month in advance is a reasonable timing, being enough to schedule a spot cargo.
Vraag 10 : Bent u het mee eens dat er geen absolute restricties zullen gelden voor zowel de eigenaar van de terminal, als voor de shipper ?
Remark : our answers to questions 10 to 19 develop in fact some aspects of the interest and means to come to an exemption, since the questions related to chapter 7 are not so detailed;
the fundamentals of the LNG industry have to be taken into account for both regulated and exempted facilities.
Yes, we agree that there is no need to impose, at this stage, to the promoter or to the shipper, any limitation on maximum capacity to be set up or to be booked.
The key point at this stage is to favour the launching of the projects.
It is interesting to note that, for that reason, the US regulator has made the choice to exclude
LNG terminals from the field of third party access (“Hackberry decision”). This decision
resulted in an impressive number of new projects, and was the best incentive to competition.
3/5 Vraag 11 : Wat vindt u van het voorstel dat een investeerder mag beslissen of hij kiest voor een capaciteitsuitbreiding zodat hij aan de vraag kan voldoen, of kiest voor een pro-rata verdeling ? Welke manieren acht u geschikt om kunstmatig overboeken te voorkomen ?
As far as open seasons are concerned, we think that :
1) If technically feasible, the expansion of capacity is a good option as it implies economies of scale.
2) The pro rata allotment can be unworkable if too many companies are interested : if each company is only able to book a small capacity (e.g. less than 2 Bcm/year) with a very limited number of slots for unloading, it will be very difficult to manage the LNG chain in a proper way (operational problems to accommodate changes in scheduling due to the liquefaction plant or to shipping delays).
3) The door should be kept open to a third option : let the investor come to an agreement with some initial shippers through an auction procedure or by mutual agreement. It is acceptable since the number of sites or technical solutions is not limited.
To fight against overbooking (which is, up to a certain extent, necessary, as stated above), two measures may be implemented : process or pay agreements, and secondary market.
Vraag 12 : Wat vindt u van een maximale duur van lange termijn contracten ? Zo ja, wat vindt u een acceptabele termijn, en waarom ?
15 years is a too short duration. Our opinion is that 20 years is the minimal duration to allow an initial shipper to bear the risk of the market, as it is the normal duration of take or pay Sale and Purchase Agreements.
It can be observed that, in the UK and in Italy, whose situations are somewhat comparable to that of the Netherlands, the duration for exemptions is usually 20 years (even 25 years in the case of Rovigo LNG terminal in Italy).
Vraag 13 : Wat vindt u van het uitgangspunt dat een LNG terminal niet met bijzondere middelen gefinancierd wordt en dat een terminal een break-even periode heft van ongeveer 15 jaar ?
Investors in LNG terminals (not regulated ones) always consider a duration of 20-25 years, and not 15 years, for economic valuations. Considering 15 years would increase the tariff and make the project uncompetitive. It should be noted that, for regulated terminals, tariffs are based on assets with a lifetime which can reach 40 years (LNG tanks, etc…).
Vraag 14 : Wat vindt u van een systeem waarbij niet gebruikte capaciteit verplicht doorverhandeld moet worden ? Aan welke eisen zou een dergelijk systeem moeten voldoen ? Wat vindt u een redelijke periode voor het bevestigen van capaciteit ?
Yes, it is a normal counterpart to an exemption regime. One month at the latest seems a reasonable time period to confirm a slot, since :
- for the buyer of the slot, one month is enough to schedule a spot cargo, and
- for the seller of the slot, two months in advance would be too long to be sure that the slot would be unused.
Vraag 15 : Wat vindt u van de voorgestelde wijze waarop de secundaire markt vorm gegeven wordt ?
It is OK, but we think that the two-month period should be changed into one month to keep
the flexibility necessary to operate LNG chains.
4/5 Vraag 16 : Kunt u zich vinden in de gedachte van een centrale secundaire markt, en waarom ?
We consider that, for operational reasons, it is more appropriate to have this secondary market process done separately in each LNG terminal.
Vraag 17 : Wat vindt u van het voorstel dat een deel van de capaciteit gereserveerd dient te worden voor kortetermijncontracten ? Zo ja, wat vindt u een redelijk percentage ? En bent u het eens dat korte termijn contracten worden gedefinieerd als contracten met een looptijd korter dan of gelijk aan een jaar ?
We do not think it is necessary to make the dedication of some capacity to short term use compulsory.
Taking into account the fact that the opening of the gas market in the Netherlands is already well engaged, we do not think that such process is necessary, provided that :
- the booking of long-term capacities is subject to an open season process (see question 11) ;
- a process of secondary market for unused capacities is put in place.
In addition, if, for instance, 10% or 20% of the capacity was devoted to short-term agreements, it is not sure that the investors would be ready to bear such risk, and, if borne by the long-term shippers, the resulting increase in the tariff may make the project unattractive (see also question 18).
For exemptions, we therefore recommend, for an initial period of 20-25 years, an exemption regime for 100% of the capacity (together with a secondary market mechanism) to favour the launching of the first projects.
A more fundamental remark is that it is an illusion to think that a newcomer starting from scratch could enter a market with LNG cargoes brought on a short-term basis, unless a very deep hub exists. Otherwise, he will have to bear heavy costs (possible stranded regasification costs if he does not succeed in contracting LNG cargoes, costs of storage in the country to ensure a continuity of delivery to the final customers,…) and will therefore not take the risk of booking capacity for one-year periods. It is a fact that available capacities in various terminals in the world (including France) remain empty even if there is a need for gas, when there is no long-term contract to fill them.
In that respect, we do not think that “long-term contracts are less favourable to the development of the market than short-term contracts”. The best option for the customer is to have various companies competing with the bulk of their supply coming under their own long- term contracts since it is the best option to get competitive and relatively stable prices from gas producers, and to have a real security of supply. The short-term market is then used to adjust marginally supply to demand.
Vraag 18 : Wat vindt u van de voorgestelde regulering, waarbij veilen een optie is voor de allocatie van korte termijn capaciteit ?
This option does not solve the problem of “who pays if this short term capacity is not booked at all ?”.
Would it be an option, as considered recently by the Italian regulator, to have the corresponding costs added to transportation costs, and then shared by all the gas shippers on the network (importing LNG or not) ?
Vraag 19 : Wat vindt u van de voorgestelde regelgeving ten aanzien van het publiek
maken van informatie omtrent voorwaarden, tarieven en capaciteitsplanning ?
5/5 We globally agree, but, as far as the secondary market is concerned, it should be kept in mind that capacities can be marketed either by the long-term shipper himself if it is far in advance, or by the terminal operator if such is the case in the framework of “Use-It-Or-Lose- It” provisions, or by mutual agreement.
The publication of tariffs is relevant only in the case of regulated regime
1.
Vraag 20 : Wat vindt u van het voorstel om criterium A op deze wijze te toetsen ?
See also questions 1, 17 and 24.
The key element to assess criterion A is : are the capacity owners dominant on the market?
Other elements to be considered are the existence of an open season process and of a secondary market for unused capacities ; the share of the gas outlet from the LNG terminal to be devoted to the Dutch market may also be considered.
Vraag 21 : Wat vindt u van het voorstel om criterium B op deze wijze te toetsen ?
See also questions 7 and 17.
It is a very important criterion to justify requesting an exemption.
Dutch authorities must put in place an attractive system to allow initial shippers to take the market risk in booking long-term capacities in LNG terminals in the Netherlands, taking into account that other opportunities may be found in neighbouring countries.
The potential investors must also be ensured that they will not have to bear the additional risks and costs of a part of the capacity which would be devoted to short-term agreements.
Vraag 24 : Wat vindt u van het voorstel om criterium E op deze wijze te toesten ?
This splitting of the market seems by far too sophisticated.
The link between gas export or gas production and the position on the final market is not direct. Our view is that the current market share of companies ready to book capacities (gas sales in the Netherlands compared to domestic demand) would very simply give an indication of the possible impact on competition.
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