This study Security of gas supply in open marketsis the successor of The IEA natural gas security studypublished in 1995. Since the 1995 publication, the gas industry in IEA countries has seen many impressive developments which call for a new look at the security issue: i)progress in the opening of gas and electricity markets, ii) the tremendous increase of gas-fired power generation worldwide as a new driver of gas demand, and iii)cost reductions in the LNG chain allowing more flexible LNG trade, more players on the supply and demand side creating closer links between the regional markets. While proven worldwide gas reserves increase faster than gas demand, OECD countries increasingly need to import gas, as finding of additional gas reserves in OECD countries do not keep pace with the depletion of gas reserves and the increase in gas demand. Even the US and UK are about to become substantial net importers of gas from non- OECD countries.
The impacts of gas market reforms on flexibility as an important element of security of gas supply were analysed in the IEA publication Flexibility in natural gas supply and demand, published in 2002, which is a main building block of the present study.
The main motivation for IEA to revisit the issue of gas security is – as expressed in the title – to assess the impact of opening of gas markets (and in parallel electricity markets) on security of gas supplies. Market reform in most IEA countries was still in its inception phase when the 1995 study was written. The judgment was rather cautious: “Liberalisation and competition are increasingly affecting gas markets throughout the IEA.
The implications for security depend both on the form of liberalisation and the characteristics of the gas market into which is it introduced, although it is difficult to find instances where liberalisation and competition have jeopardised security of supply. Nonetheless the evidence from particular markets where competition has been introduced does not suggest that competition need be incompatible with secure gas supplies. In general there is evidence of positive impacts on some elements of security such as development of production, transmission and storage capacity”.
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Even though gas market reform in North America and the UK were already advanced in the mid-1990s, major developments only occurred thereafter, such as the emergence of a main marketplace like the NBP in the UK, and important regulatory changes in the US. Now with almost ten additional years of real life experience with the opening of gas (and electricity) markets in North America, Australia and the UK and first experiences emerging also in other EU countries, it seems possible to be more affirmative regarding the role of markets. The experience since 1995 suggests that the markets for gas on a national, regional and even global level will play an even more prominent role. As stated in the publication on flexibility, “The opening of the gas sector has created a situation in which parts of supply and demand are balanced by the price mechanism.
It also led to the development of flexibility services, which are traded in a competitive environment and are therefore valued by the market. Yet, customers with no fuel-switching capabilities and whose demand is price inelastic still need secure, uninterrupted supply.”
The objective of this study is to look at security of gas supply in open markets (which are almost in OECD countries) and especially to review the role of markets in ensuring reliable and secure gas supply. Based on input by the various stakeholders, official information by member governments as well as publicly available information, the study presents a comprehensive overview of the recent status of the gas industry in IEA countries. It gives the analysis of the IEA secretariat on the most recent developments of security of gas supply in the three OECD regions under the framework of open markets and in view of the new demand and supply trends. In particular, it discusses whether markets will value by themselves security of gas supply and deliver timely signals for investment to guarantee secure supplies. As security challenges vary in the three OECD regions, due to their different characteristics in terms of gas reserves, production and imports, demand size and maturity of the market, the study analyses the issues related to each region.
The nature of external security of supply threats from gas suppliers from non-OECD can vary largely. Incidents experienced so far were: interference into export or transit of gas, based on political motivations or due to a lack of clear regulations, threats by illegal political groups, or incidents due to a
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lack of technical and commercial state-of-the-art performance. While it would be of great interest to identify such elements and ways for non- OECD Governments to address and mitigate such risks, they are not the subject of this IEA publication. Even if IEA member countries can try to influence non-OECD gas exporting countries to mitigate and minimise the risk of supply disruption, these threats are outside the control of IEA member countries. While past experience indicates a low probability of such events, there were serious examples of supply interruptions and in view of their potentially high impacts they are relevant for policy makers in IEA countries. This book therefore concentrates on ways to address the impacts of low-probability/high-impact events, like supply disruptions and extreme weather conditions, and not on ways to try to reduce their likelihood which is outside the control of IEA Governments. It gives policy recommendations on security of gas supply for IEA policy-makers and presents the regional and global challenges that governments and market players will face in the next 30 years.
This study responds to the requests of the IEA Ministers at the 2001 and 2003 IEA Ministerial meetings to strengthen IEA’s activities on energy security and gas issues. With market opening, more stakeholders play a role. Therefore the views of the different stakeholders were gathered during the past two years by organising conferences and meetings on the different aspects of security of gas supply:
■ IEA regulatory forum Competition in energy markets: implications for public service and security of supply goals in the electricity and gas industries, organised with the French Ministry of Economics, Finances and Industry, Paris, 7-8 February, 2002;
■ IEA workshop on Cross-border gas trade issues, Paris, 26-27 March, 2002, and related regional workshops on south-eastern Europe and South America;
■ IEA workshop and high-level meeting with IEA member governments and industry on Security of gas supply, Paris, 21 June 2002 and 23 October 2002;
■ IEA workshop with gas regulators on Security of gas supply in liberalised markets, Paris, 27 June, 2003.
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Through its consultation with IEA Governments, industry, regulators, consumers and other international organisations, the Agency has gathered information and viewpoints of these stakeholders. The views of the IEA Governments and other stakeholders are presented in the annex of this study in a CD-Rom.
IEA is going to continue do deal with security of gas supply by bringing together IEA Governments and other stakeholders to exchange views and best practices on security of gas supply in open markets.
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