Péter Kotek Senior Research Associate, REKK

1. Presentation of the methodology to assess gasinfrastructure candidate projects and preliminaryresults Péter Kotek Senior Research Associate, REKK EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

2. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Outline Background Methodology and inputs Modelling results Indicators Conclusions EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

3. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Scope of the project Development of questionnaires and eligibility check Verification of submitted project and market data Market modelling and socio-economic Cost-Benefit Analysis (CBA) Calculating additional Indicators Case by case evaluation of proposed projects EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

4. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Experiences of REKK with CBA EU Regulation 347/2013, and adapted and adopted Regulation by the Ministerial Council of the EnC ENTSOG CBA methodology ACER opinions REKK experience with PECI modelling for EnC Secretariat (2013, 2016, 2018) REKK experience with case-by-case CBA for gas infrastructure projects in CEE region EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

5. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Methodology Eligibility check: cross-border effect crossing two countries Investment cost verification and missing data imputation Case-by-case market modelling • Modelling normal scenario (Market integration) • Identification of SOS scenario (Security of supply) • CO2 emission effects (Sustainability) Sensitivity analysis • Demand • LNG supply • Project-specific sensitivities EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

6. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Gasmodel EGMM Whole Europe (35 countries) is modelled Competitive prices by countries; price modelled for each 12 months Trade is based on long term contracts and spot trade within the EU and with exogenous countries and global LNG market (NO, RU, DZ, LNG) Natural gas flows and congestions on interconnectors Physical constraints are interconnection capacities (transmission tariffs are also included) Trade constraints: TOP obligations with flexibility Domestic production and storage facilities are included Arrows: modelled gas flows LNG market representation is linked to Asian LNG prices Wholesale gas price, €/MWh EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

7. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS EGMM main inputs and outputs INPUT OUTPUT Demand by countries (annualquantity, monthlydistribution) Wholesale gas price by country • Social welfare: • Consumer surplus • Producer surplus • Storage operation profit • Storage arbitrage profit • Net profit from long-term contracts • TSO auction revenue • TSO operation profit • LNG terminal operator’s profit Domestic production (annualquantity, minimum and maximum production) Consumption by countries LTCcontracts (ACQ/DCQ), flexibility Gas flows on interconnectors Storage stock change Infrastructure: Interconnectors, storage, LNG, tariffs MODEL Import through long term contracts and spot trade External price: for LTC, LNG, DZ, NO, RU EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

8. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Net Present Value of Social Welfare Change Modelling results (95% Normal, 5% SOS) Welfare change in 2020 Welfare change in 2021 … … Welfare change in 2030 Welfare change in 2050 Assumed real discount rate: 4 % Welfare change discounted to 2018 Welfare change discounted to 2018 … Welfare change discounted to 2018 … Welfare change discounted to 2018 Year of commissioning + assessed period of 25 years Net present value of welfare change EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 8

9. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Modelled scenarios • Normal scenario (95%) • Security of supplyscenarios (5%) • 100% cut of Yamal to Belarus for 1 month in January (SOS1) (for Ukraine-Belarus reverse flow) • Likely affected: BY, PL • 100% cut of SCP (AZ-GE) for 1 month in January (SOS2) (for White Stream) • Likely affected: AZ, GE EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 9

10. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivities Common sensitivities D+10 10% higher demand in all modelled countries D-10 10% lower demand in all modelled countries LNG high LNG oversupply on global markets, increased supply to Europe LNG low LNG shortness on global markets, decreased supply to Europe Sensitivity for Ukraine-Belarus reverse flow Belarus elasticity Assuming higher demand elasticity (0.1 as opposed to 0.01) to reflect fuel switching in power sector Sensitivities for White Stream high cost TM, AZ gas Assuming higher cost of production for new Azeri and Turkmen gas RO offshore + 4.4 bcm/y Romanian offshore production Transbalcan reverse flow Allowing reverse flow on the Transbalcan pipeline up to Ukraine EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

11. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS CO2 effects in EaP countries Based on IEA Primary energy statistics 2009-2015 Unitary increase of gas consumption will crowd out other fossil fuels (coal, oil, etc) in their share at the primary energy consumption from power generation and heating RES and electricity can not be replaced with gas, ie. Increased gas consumption will always result in lower CO2 emissions CO2 benefit effects are negligible compared to gas market modelling results EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

12. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Evaluation criteria • All submitted projects were evaluated relative to a modelled reference scenario. • Net present value (NPV) • If NPV> 0 – Beneficial projects (green) • If NPV < 0 – Not Beneficial project (red) • Profitability index • If PI > 1 – Beneficial projects (green) • If PI < 1 – Not beneficial project (red) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 12

13. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Assumptions and inputsforEaP Demand and supply outlooks based on ENTSOG and country submissions Network based on TYNDP and FID project expansion LTC contract pricing based on EUROSTAT Comext EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

14. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Production, consumption and pipelines Pipelines Production, TWh/year Consumption, TWh/year EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

15. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Storage facilities EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

16. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Input data on Belarus Production: 2.3 TWh/year 2020-2050 Demand: 185 TWh/year 2020-2050 Storages: Mozyrskoye, Osipovichskoye, Pribugskoye (total 15 TWh working gas) LTC with Russia at price 130 USD/tcm BY-LT 325 GWh/d RU-BY 1200 GWh/d BY-PL 1200 GWh/d BY-UA 956 GWh/d EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

17. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Input data on Armenia, Azerbaijan, Georgia RU-AZ 392 GWh/d RU-GE 140 GWh/d AZ-GE 1165 GWh/d GE-TR 1000 GWh/d GE-AR 119 GWh/d *note: UA, MD inputs can be found in the report EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

18. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Submitted projects - gas *SCP(F)-x and TCP assumed to be part of White Stream to provide sourcing as suggested by the Project Promoter. Wehavenotconsideredthe cost of theseinfrastructureelements. EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 18

19. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Investment cost verification • Cost of Ukraine-Belarus reverse flow is considerably higher if new compressor station or expansion is considered (340-540 M€) as opposed to submitted investment cost (4 M€) • Cost of White Stream is low compared to TS • Cost of onshore sections between TM, AZ, GE not included in modelling • Due justification and detailed cost assessment is needed from project promoter’s side – why the lower costs? EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 19

20. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Reference case, modelled prices €/MWh EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects

21. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Results – gas (modelled region) *Profitability index=Benefit/cost ratio • Both projects are beneficial • Results are robust for sensitivities • Ukraine-Belarus reverse flow (GAS_01) • UA-BY reverse flow has huge SOS impact in Belarus as it ends isolation. Project is beneficial even with low probability of SOS (0.003%) • UA-BY reverse flow is less useful when BY demand response is available (power sector gas substitution) • Very low cost of the UA-BY reverse flow ensures the profitability of this project • White Stream (GAS_02) • White Stream has huge market integration impact on a wider region • White Stream depends on the availability and pricing of TM gas and transport route via AZ (costs of these projects were not considered!) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 21

22. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivity – Ukraine-Belarus reverse flow • Project has welfare effect only in SOS1 case (complete cut of Yamal) • Investment cost is really low, compared to ACER benchmarks (4 M€ vs estimated 340-540 M€) • The project is not affected by LNG supply to Europe, being located in an isolated, land-locked country • Higher demand is beneficial while lower demand decreases the positive effects. Still, project is highly positive in all cases • Demand elasticity assumptions highly affect the NPV and PI • Still, Project Promoter was only referring to the UA side and no indication was given on the BY side EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 22

23. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Indicators Ukraine-Belarus reverse flow (BY) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 23

24. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Sensitivity – White stream • Project is positive in all sensitivity cases • The project is primarily a market oriented investment • Higher LNG supply has negative effect on the NPV, a tighter LNG market has positive effect • Without the upstream investments in AZ, TM, the sourcing of the project is not ensured • Cost of newly sourced gas affects the outcome highly • Romanian production has limited effect • Trans-Balcan reverse flow has no effect EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 24

25. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS White Stream with TCP and SCP(F)-x expansion benchmark costs included (sourceforcosts: ENTSOG TYNDP 2018 PROJECT-SPECIFICCOST-BENEFIT ANALYSIS, page 456. TRA-N-339 TRA-F-1138) • White Stream sourcing is not possible withoutfurtherthe expansion of SCP(F)-x* (not confirmed capacitites) and new TCP capacities • Investment cost benchmark increasesto nearly 8 Bn € EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 25

26. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Indicators White Stream (RO) EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 26

27. BACKGROUND METHODOLOGY INPUTS RESULTS CONCLUSIONS Conclusions • Both projects proved to be beneficial • Ukraine-Belarus reverse is a SOS investment • No-regretoption, smallinvestmentwithhuge SOS effect • Caveats: • Belarus involvement is missing • Cost of the project is exceptionally low • White Stream is beneficial on a market basis Caveats: Upstream investment SCP(F)-X and TCP are needed, enabling the project- the cost of this investment is not reported by the promoters Sensitive to global market, cost of gas and demand Hugeinvestment project withmultiplestakeholders and countriescrossed. Bythetimeit is realised, European gasdemandmayfallduetodeepdecarbonisationagendas EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects 27

28. Thank you for your attention! peter.kotek@rekk.hu EU4Energy Governance Workshop on Assessment of Energy Infrastructure Projects