Global gas trends and their implications for Czech market

1. Global gas trends and their implications for Czech market Pavel Dočekal Head of Regulatory Affairs RWE Transgas, a.s.

2. Introduction: Golden age of natural gas… According to a recent report* by the International Energy Agency (IEA), we have entered the golden age of natural gas. Gas demand will grow nearly twice as fast as total energy demand. Gas will overtake coal before 2030 and will meet 25% of global energy demand by 2035. Non-OECD countries will account for 80% of demand growth. China alone will make up nearly 30% of global growth. Total electricity demand will increase 70% by 2035, underpinned by a near doubling of gas-fired generation. In addition to reduced growth of nuclear energy, lower gas prices, increased deployment of natural gas vehicles, and China’s energy policy targets, the increasing role of natural gas will be facilitated by: Widespread development of unconventional gas 1. 2. Development of Liquefied Natural Gas (LNG) *World Energy Outlook 2011, Are we entering a golden age of gas?, IEA 2011

3. Role of unconventional gas set to grow Conventional gas will continue to make up most global production until 2035, but its share of total gas production will decrease. Unconventional gas production will meet more than 40% of the increase in demand and is projected to reach 1,2 tcm in 2035, out of which shale gas will constitute the biggest share. Unconventional gas production is currently concentrated in the US and Canada. Unconventional gas is also expected to reach a significant scale in China, Russia, India and Australia.

4. Shale gas boom: Prospects around the world The development of shale gas has transformed the North American energy landscape and its supporters believe unconventional gas has the ability to revolutionize the European market, which is also home to vast resources. EU CANADA RUSSIA POLAND Significant production is not expected in Europe before 2020. Shale gas currently provides 23% of America’s natural gas, up from 4% in 2005. USA CHINA AUSTRALIA ARGENTINA SOUTH AFRICA Technically recoverable shale-gas resources 48 0,4 1,8 0,2 7,7 NA 3,1 3,0 2,1 Conventional gas reserves (tcm) 24 14 NA 14 11 11 5,3 22 36 Source: Energy Information Agency, April 2011

5. LNG development shows no signs of slowing The LNG industryis in the midst of rapid expansion, which is boosting significantly the share of LNG in global gas trade. Last year alone, total LNG trade grew 25%, to nearly 300 bcm. • Total liquefaction capacity is estimated at 370 bcm. • Since early 2009, 100 bcm per year of liquefaction capacity has come on-line, of which more than 60 bcm is located in Qatar; this country now accounts for more than a quarter of world liquefaction capacity. • European LNG import capacity has more than doubled since 2000(19 LNG terminals); the costs of building an import terminal have plunged. • Qatar, Iran and Russia are adding new liquefaction plants; other countries, with Australia leading the way, are also busily constructing export terminals. • China, India, and several countries in the Middle East and Latin America are set to become increasingly reliant on LNG imports. Global gas market fragmentation $9 $5 $13 International trade in natural gas is expected to play an increasingly important role in global energy supply, contributing to further globalization of the global gas markets.

6. Glut of global gas-supply capacity: a game changer? In 2009, a glut of global gas-supply capacity emerged in response to a combination of factors, leading to a bearish gas market. Boom in unconventional gas production in the US Wave of new global LNG liquefaction capacity Economic crisis (depressed gas demand) Bearish gas market • The glut reduced in 2010 in response to a sharp rebound in gas demand, primarily as a result of exceptionally cold weather across the Northern Hemisphere and robust economic recovery in Asia. • Excess supply capacity remains (albeit reduced) and some of the factors that have driven gas demand growth in 2010 may not necessarily recur in future years.

7. Gas prices Spot market prices, depressed due to the gas oversupply, have put pressure on incumbent gas suppliers and producers alike. • Incumbent suppliers have found themselves locked in long-term supply contracts with take-or-pay obligations. • Depressed spot market prices have presented an opportunity for alternative suppliers. • Pressure on incumbent suppliers to reconsider their product offer has intensified. • Traditional producers have found themselves under pressure to reflect recent price trends in their long-term contracts. • Depressed spot market prices and the supply over-capacity constitute a potential threat to the producers’ future revenue flow and stability. The market developments have re-opened the discussion whether in liberalized markets long-term supply contracts, with oil-indexed prices, can maintain their existing role.

8. Role of long-term supply contracts Although blamed for fragmenting the international gas market, long-term supply contracts play, together with well-developed gas infrastructure, an important role in ensuring security of supply. • Today, Czech Republic secures most of its gas from 2 main sources with the help of long-term supply contracts concluded between RWE Transgas, Russian and Norwegian suppliers. • For customers, long-term supply contracts reduce the risk that sudden demand spikes and price fluctuations in the spot markets will compromise their economic activity. • Long-term supply contracts allow the producers to optimize their production and plan investments, effectively contributing to long-term market stability. With gas being increasingly used in power generation, the role of oil-indexation has partially lost its justification. Long-term supply contracts, however,will continue to play an important role next to the spot markets.

9. Gas infrastructure development In addition to the actual gas supplies, modern and reliable gas infrastructure is key for ensuring energy security, as well as further integration of the regional gas markets. • The EU defines diversified portfolio of physical gas sources and routes and a fully interconnected and bi-directional gas network as one of the key priorities to be met by 2020. • The Southern Corridor should become the fourth biggest supply diversification route after the Northern Corridor from Norway, the Eastern corridor from Russia, the Mediterranean Corridor from Africa and besides LNG. • The Czech Republic currently boasts one of the best developed gas networks in Europe and one of highest storage capacities. • Further expansion of storage capacity and the enhancement of interconnection with the neighboring markets has been planned: 1 5 2 4 • (1) Gazelle pipeline • (2) Czech Rep. – Poland interconnection • (3) Czech Rep. – Austria interconnection • (4) Domestic west-east reverse-flow capacity • (5) Additional gas storage capacity 3 Nabucco RWE underground storages New interconnections/projects

10. Conclusion Natural gas, due to its abundance, affordability and relative environmental friendliness, constitutes a vital part of Europe’s energy future. Its role must therefore be properly reflected in the domestic energy mix. • Natural gas has an absolute advantage when compared to coal: • Gas power stations emit 50% less CO2 than modern coal plants, and 60-70% less CO2 than old ones • Gas power stations are more energy efficient (55-60% vs. 34-42%) • Gas has much lower capital costs per MW installed (50% of coal) • Gas can also quickly compensate for delay in renewables or nuclear. • In the post-Fukushima world, where nuclear provides less electricity than had been expected, gas is favorite to make up the shortfall. • The domestic energy mix should, to a large extent, reflect the state and possibilities of the existing energy infrastructure; states should make sure that the energy targets are realistic and do not pose an undue financial burden for the economy and consumers.

11. Back-up: LNG Terminal in Poland New LNG terminal located in the Polish city of Świnoujście constitutes a major energy projectin the region. • Construction of the facility, designed to off-take and re-gasify liquefied gas, began in March 2011; it is hoped that the Polish terminal will be ready to begin functioning in July 2014. • According to the plans, the annual handling capacity of the terminal will vary from 2,5 to 7,5 bcm of gas. • The cost of the project is estimated at EUR 926 mln; the EU will cover a significant part of the cost (45%). • State owned company Polske LNG has cited the project as an opportunity to diversify the directions of natural gas supply, which for Poland shall mean an improvement of the country’s energy security. • Besides aiding Poland to diversify its supplies of gas, the project will also do so for the Czech Republic, Hungary and Slovakia.