**7. LNG in South America: Markets, prices and security of supply**

Markets, prices and security of supply of LNG in South America is now reviewed. Latin America has been in recent years one of the most intensive regions for natural gas and electricity development [24]. The region is very hydropower dependent (about 57% of the region's installed capacity is hydro) and the need to diversify away from heavy investments in hydropower and oil is driving many South American countries to promote use of natural gas, especially for power generation. Examples of these developments are in Brazil, Chile and Colombia. Countries of the region have great diversity in size, electrical installed capacity, electrical power demand, and electrical transmission/natural gas network characteristics (level of meshing and geographical extension). Figure 11 shows the share of hydro and thermal power and the installed capacity in some countries of the region (2003 data).

Fig. 11. South American Electricity Markets

Economic reforms have opened important sectors to private investors that were previously reserved to the State. This reform boosted the development of an infrastructure of electricity and natural gas pipelines in the region, both in each country separately and in cross-border electricity-gas interconnections.

The introduction of natural gas (NG) in the energy matrix of the countries took place in a more aggressive manner at the end of the 1990s, with construction of cross-border gas pipelines (Bolivia-Brazil, Argentina-Chile, etc) and the development of local gas production fields [24]. NG consumption for industrial and automotive use grew at quite significant rates and, in the electrical sector, the installation of gas-fired thermal generation also increased fast, representing the biggest potential market for the NG sector. Figure 12 presents an outlook of the potential demand and current gas reserves in the region.

Markets, prices and security of supply of LNG in South America is now reviewed. Latin America has been in recent years one of the most intensive regions for natural gas and electricity development [24]. The region is very hydropower dependent (about 57% of the region's installed capacity is hydro) and the need to diversify away from heavy investments in hydropower and oil is driving many South American countries to promote use of natural gas, especially for power generation. Examples of these developments are in Brazil, Chile and Colombia. Countries of the region have great diversity in size, electrical installed capacity, electrical power demand, and electrical transmission/natural gas network characteristics (level of meshing and geographical extension). Figure 11 shows the share of hydro and thermal power and the installed capacity in some countries of the region (2003

Economic reforms have opened important sectors to private investors that were previously reserved to the State. This reform boosted the development of an infrastructure of electricity and natural gas pipelines in the region, both in each country separately and in cross-border

The introduction of natural gas (NG) in the energy matrix of the countries took place in a more aggressive manner at the end of the 1990s, with construction of cross-border gas pipelines (Bolivia-Brazil, Argentina-Chile, etc) and the development of local gas production fields [24]. NG consumption for industrial and automotive use grew at quite significant rates and, in the electrical sector, the installation of gas-fired thermal generation also increased fast, representing the biggest potential market for the NG sector. Figure 12

presents an outlook of the potential demand and current gas reserves in the region.

**7. LNG in South America: Markets, prices and security of supply** 

data).

Fig. 11. South American Electricity Markets

electricity-gas interconnections.

Fig. 12. Outlook of Potential Demand and Current Natural Gas Reserves in the South America Region.

While the "non-power" consumption of NG is practically constant (firm), gas consumption for thermal power plants is variable and strongly dependent on hydrological conditions. Hydro plants are able, during most of the time, to displace thermal energy production, which are then operated in complementation mode. This is achieved through hydrothermal coordination [25].

Over the period 2004-2008, Chile and Brazil decided to implement re-gasification plants to start importing LNG from 2009. Motivation for the two countries is quite similar: (i) to diversify the gas supply for the country (in case of Chile, to diversify from Argentina and in case of Brazil to diversify from Bolivia) and (ii) to create a flexible supply able to accommodate the use of gas to power generation.

Globalization of the Natural Gas Market on

**7.1.3 The prices** 

LNG projects.

supply.

**7.1.4 The security of supply** 

natural gas supplies and markets.

**7.2 Main challenges for LNG in Chile** 

**7.3 Main challenges for LNG in Brazil 7.3.1 Natural gas market in Brazil** 

Natural Gas Prices in Electric Power Generation and Energy Development 227

The introduction of LNG will have several implications for the region's gas and energy markets, particularly in price benchmarks, energy security, and pipeline infrastructure.

LNG has an opportunity cost. Imported LNG could be more expensive than any regional gas supply and is likely to set a new price benchmark in almost all markets into which it is introduced. As LNG becomes more prominent in the energy mix, its link to global prices will create an inexorable pull on gas prices in previously isolated South American markets. LNG import prices in Latin America will also depend crucially on the timing of the different

The first reason for importing or exporting LNG is related to the region's natural gas balance: there are countries or sub regions with gas surpluses and others with deficits. The second reason is geopolitical and is related to energy security and the diversification of

Chile has no significant local gas supply resources. The existing ones are located in the Southern part of the country, about 3,000km away from the main demand centers. Chile started to import gas from Argentina in 1997. The Argentinean gas is responsible for the development of the Chilean gas industry and imports were responsible until 2004 for more than 70% of the country's gas supply, which is mostly concentrated in the central part of the country. The northern part of the country depends entirely on Argentina for their gas

However, as discussed in [26], since 2004 Argentina has struggled to meet its own domestic gas needs and has started cutting exports to Chile. The total annual exports to Chile have been falling since 2005 and cuts started to be frequent and recently (2007) have reached as

Ingress of NG in the Brazil energy matrix took place in a more aggressive manner at the end of the 1990s, with construction of the Bolivia-Brazil gas pipeline and development of local production fields. NG consumption for industrial and automotive use grew at quite significant rates (induced by tax benefit policies, by increase in supply and by prices) and, in the electrical sector, the installed gas thermal generation capacity also had a fast growth, so that in Brazil it accounts today for some 8000 MW. The question of natural gas supply for thermal generation has been the object of concern by the authorities ever since the conception of the new model for the Electrical Sector [27]. A recent (2006) "dispatch test" performed by Aneel (power sector regulator) in the gas thermal power plants disclosed that such concern is actually legitimate, because about 50% of the tested capacity in the South/ Southeast-Center West Regions did not manage to produce energy due to fuel deficiency.

high as 95 percent of committed volumes on several occasions

## **7.1 LNG in South America: Markets, prices and security of supply**

#### **7.1.1 Why LNG?**

There are three main drivers behind LNG import and export in South America.


#### **7.1.2 The markets**

LNG in South America is divided into importing countries with LNG re-gasification plants under construction (Brazil & Chile), candidate importing countries (Argentina, Uruguay) and candidate exporting countries (Peru, Venezuela and Brazil in the future).

This means that LNG in South America is categorized into Brazil and Chile as importers. Figure 13 shows the LNG terminals. These countries are analyzed further.

Fig. 13. South America LNG terminals

#### **7.1.3 The prices**

226 Modeling and Optimization of Renewable Energy Systems

1. Gas imbalances: there are countries or sub regions with gas surpluses and others with deficits. Brazil, for example, has a growing potential natural gas market and still not

2. Security: in Brazil and Chile imports from neighboring countries have proven to be unreliable. and further dependence on supply from a single country is deemed to be

3. Flexibility of gas supply: because of the hydro predominance in the region, gas-fired

LNG in South America is divided into importing countries with LNG re-gasification plants under construction (Brazil & Chile), candidate importing countries (Argentina, Uruguay)

This means that LNG in South America is categorized into Brazil and Chile as importers.

**7.1 LNG in South America: Markets, prices and security of supply** 

There are three main drivers behind LNG import and export in South America.

dispatch is very much volatile and flexibility is an attractive attribute.

and candidate exporting countries (Peru, Venezuela and Brazil in the future).

Figure 13 shows the LNG terminals. These countries are analyzed further.

**BRAZIL**

Belo Horizonte

Brasília

São Paulo

Vitória Rio de Janeiro

Salvador

**LNG Regas**

**Existinggaspipelines Plannedgaspipelines**

Fortaleza

Porto Alegre

Buenos Aires

Montevideo

**PARAGUAY**

**BOLIVIA** Cuiabá

Porto Velho

**URUGUAY**

**ARGENTINA**

**COLOMBIA ECUADOR**

**VENEZUELA**

Bogotá Manaus

Caracas

La Paz

Urucu

Pisco

**PERU**

Lima

Santiago

Fig. 13. South America LNG terminals

**7.1.1 Why LNG?** 

undesirable.

**7.1.2 The markets** 

enough gas production.

The introduction of LNG will have several implications for the region's gas and energy markets, particularly in price benchmarks, energy security, and pipeline infrastructure.

LNG has an opportunity cost. Imported LNG could be more expensive than any regional gas supply and is likely to set a new price benchmark in almost all markets into which it is introduced. As LNG becomes more prominent in the energy mix, its link to global prices will create an inexorable pull on gas prices in previously isolated South American markets. LNG import prices in Latin America will also depend crucially on the timing of the different LNG projects.

#### **7.1.4 The security of supply**

The first reason for importing or exporting LNG is related to the region's natural gas balance: there are countries or sub regions with gas surpluses and others with deficits. The second reason is geopolitical and is related to energy security and the diversification of natural gas supplies and markets.

## **7.2 Main challenges for LNG in Chile**

Chile has no significant local gas supply resources. The existing ones are located in the Southern part of the country, about 3,000km away from the main demand centers. Chile started to import gas from Argentina in 1997. The Argentinean gas is responsible for the development of the Chilean gas industry and imports were responsible until 2004 for more than 70% of the country's gas supply, which is mostly concentrated in the central part of the country. The northern part of the country depends entirely on Argentina for their gas supply.

However, as discussed in [26], since 2004 Argentina has struggled to meet its own domestic gas needs and has started cutting exports to Chile. The total annual exports to Chile have been falling since 2005 and cuts started to be frequent and recently (2007) have reached as high as 95 percent of committed volumes on several occasions

## **7.3 Main challenges for LNG in Brazil**

#### **7.3.1 Natural gas market in Brazil**

Ingress of NG in the Brazil energy matrix took place in a more aggressive manner at the end of the 1990s, with construction of the Bolivia-Brazil gas pipeline and development of local production fields. NG consumption for industrial and automotive use grew at quite significant rates (induced by tax benefit policies, by increase in supply and by prices) and, in the electrical sector, the installed gas thermal generation capacity also had a fast growth, so that in Brazil it accounts today for some 8000 MW. The question of natural gas supply for thermal generation has been the object of concern by the authorities ever since the conception of the new model for the Electrical Sector [27]. A recent (2006) "dispatch test" performed by Aneel (power sector regulator) in the gas thermal power plants disclosed that such concern is actually legitimate, because about 50% of the tested capacity in the South/ Southeast-Center West Regions did not manage to produce energy due to fuel deficiency.

Globalization of the Natural Gas Market on

Venezuela to Brazil and Argentina.

**East Europe** 

Natural Gas Prices in Electric Power Generation and Energy Development 229

Another example is the use of LNG against the proposed "Southern Gas Pipeline", from

In summary, the primary challenge for South American countries is to ensure sufficient capacity and investment to serve reliably their growing economies. The region has emerged as one of the most dynamic areas for natural gas and electricity developments. More recently, LNG has emerged as an attractive option. However, South America is a latecomer to the LNG business. Other regions and countries have already incorporated this external natural gas supply source in their portfolios for many years. An example of gas-electricity integration is the so-called "gas exports from Brazil to Chile without gas or pipelines". Essentially, Chile would purchase 2000 MW of electricity from Brazil, for delivery to Argentina (via the existing 2,000 MW Brazil-Argentina DC link). The power from Brazil would displace 2000 MW of gas-fired thermal generation in Argentina, which would free up

10 mm3/day of natural gas supply, which would be (finally) shipped to Chile.

common market between the countries are also discussed.

**8.1.1 Common market concept – The gas forum in Istanbul** 

define the energy map for the years to come.

and will continue to be lignite based.

**8.1 Context and status** 

**8. Natural gas market dynamics and infrastructure development in South** 

The status and outlook of the market dynamics and its related infrastructure in the South East Europe (SEE) is now discussed [29-32]. An important emphasis is given in the actual coalitions that will assist in the faster and more robust development of the gas sector in SEE, the existing infrastructure, the future projects that are under development or under study and the regulation that is needed in order to guide the above. The ultimate goal of these developments is the creation of a common financial market in the SEE region. Some of the most sensitive factors that have to be taken into consideration to smoothly accomplish the

SEE, during the last 5 years has demonstrated significant potential for development in the field of energy. More specifically, important projects and studies both in the electricity and gas sector have taken place. Since 2005, strategic developments in the sectors have entered a significant period where infrastructure and regulatory decisions from the SEE countries will

The countries of SEE are characterized by a low-level gas penetration. The use of power for heating is widespread in many of the region's urban areas. This has been identified as a problem in the "Framework for Development of Energy Trade in South East Europe " as power is a relatively inefficient means of providing heat, and the use of power for heat in South East Europe exacerbates energy affordability problems. From an environmental perspective, substituting gas for power for purposes of heating would result in lower greenhouse gas emissions given that the dominant form of power generation in the region is

One obstacle to increased gas penetration is lack of a gas market in the region. The prevailing Russian gas monopoly has implications both for gas pricing and security of supply. Introducing competition to Russian gas through development of a gas market in the

### **7.3.2 The business model: LNG flexible supply**

The introduction of LNG is observed with interest by the electrical sector, for three main reasons: (i) to diversify gas supply sources, (ii) a contract market with shorter ranges and greater flexibility, and (iii) it is possible to build thermoelectric plants located relatively close to the major LNG delivery ports, thus avoiding investment (fixed costs) in gas pipelines.

In this manner, the final cost to the consumer of thermal energy produced from LNG may become more attractive. This is because the flexible supply of gas provided by LNG permits thermal power plants to be operated in the mode of complementing hydroelectric production and, therefore, fossil fuel is saved. As discussed in [28], the final consequence of this operation is the reduction of energy cost to the consumer2. Petrobras has announced its intention of contracting LNG to supply the Brazilian market in a flexible manner.

#### **7.3.3 Challenges for LNG supply**

LNG has one important characteristic: its price (*as a commodity*) strongly depends on how much in advance its order is placed. A LNG order placed one year in advance can normally have a fixed price, since the vendor has the possibility of contracting adequate hedges against the oscillations of the strongly uncertain and volatile international prices. On the other hand, a LNG order placed just a few weeks in advance has a price above that of usual references, associated to the opportunity cost of displacing this gas with respect to its destination market, and increased by an "urgency rate".

#### **7.3.4 Virtual gas storage: gas stored in hydro reservoirs**

The expectation of a LNG order for gas to be used in thermal dispatch may be frustrated by the occurrence of a more favorable hydrology than that expected. In this case, the requested natural gas would not be needed after the arrival of the liquefied gas carrier ships at the regasification stations.

#### **7.4 Virtual gas storage and smart electricity-gas swaps**

The introduction of flexible LNG supplies in the region can bring up several opportunities to integrate the electricity and gas markets in the region. This is because energy swaps with LNG are much more economical than the proposed point-to-point pipelines. An example of gas-electricity integration is the so-called "gas exports from Brazil to Chile without gas or pipelines". Essentially, Chile purchases 2000 MW of electricity from Brazil, for delivery to Argentina (via the Brazil-Argentina DC link). The power from Brazil now displaces 2000 MW of gas-fired thermal generation in Argentina, which frees up 10 mm3/day of natural gas supply, which is (finally) shipped to Chile.

<sup>2</sup> Thermal insertion in Brazil took place based on contracts for supply of *inflexible* gas, with 'take or pay' and 'ship or pay' clauses, which correspond to fixed payments, respectively to gas producer and to transporter. This way, the benefit of the operation and of the hydro-thermal synergy is not exploited, and the final cost of this technology becomes higher.

Another example is the use of LNG against the proposed "Southern Gas Pipeline", from Venezuela to Brazil and Argentina.

In summary, the primary challenge for South American countries is to ensure sufficient capacity and investment to serve reliably their growing economies. The region has emerged as one of the most dynamic areas for natural gas and electricity developments. More recently, LNG has emerged as an attractive option. However, South America is a latecomer to the LNG business. Other regions and countries have already incorporated this external natural gas supply source in their portfolios for many years. An example of gas-electricity integration is the so-called "gas exports from Brazil to Chile without gas or pipelines". Essentially, Chile would purchase 2000 MW of electricity from Brazil, for delivery to Argentina (via the existing 2,000 MW Brazil-Argentina DC link). The power from Brazil would displace 2000 MW of gas-fired thermal generation in Argentina, which would free up 10 mm3/day of natural gas supply, which would be (finally) shipped to Chile.

#### **8. Natural gas market dynamics and infrastructure development in South East Europe**

The status and outlook of the market dynamics and its related infrastructure in the South East Europe (SEE) is now discussed [29-32]. An important emphasis is given in the actual coalitions that will assist in the faster and more robust development of the gas sector in SEE, the existing infrastructure, the future projects that are under development or under study and the regulation that is needed in order to guide the above. The ultimate goal of these developments is the creation of a common financial market in the SEE region. Some of the most sensitive factors that have to be taken into consideration to smoothly accomplish the common market between the countries are also discussed.

SEE, during the last 5 years has demonstrated significant potential for development in the field of energy. More specifically, important projects and studies both in the electricity and gas sector have taken place. Since 2005, strategic developments in the sectors have entered a significant period where infrastructure and regulatory decisions from the SEE countries will define the energy map for the years to come.

#### **8.1 Context and status**

228 Modeling and Optimization of Renewable Energy Systems

The introduction of LNG is observed with interest by the electrical sector, for three main reasons: (i) to diversify gas supply sources, (ii) a contract market with shorter ranges and greater flexibility, and (iii) it is possible to build thermoelectric plants located relatively close to the major LNG delivery ports, thus avoiding investment (fixed costs) in gas

In this manner, the final cost to the consumer of thermal energy produced from LNG may become more attractive. This is because the flexible supply of gas provided by LNG permits thermal power plants to be operated in the mode of complementing hydroelectric production and, therefore, fossil fuel is saved. As discussed in [28], the final consequence of this operation is the reduction of energy cost to the consumer2. Petrobras has announced its intention of contracting LNG to supply the Brazilian market in a flexible

LNG has one important characteristic: its price (*as a commodity*) strongly depends on how much in advance its order is placed. A LNG order placed one year in advance can normally have a fixed price, since the vendor has the possibility of contracting adequate hedges against the oscillations of the strongly uncertain and volatile international prices. On the other hand, a LNG order placed just a few weeks in advance has a price above that of usual references, associated to the opportunity cost of displacing this gas with respect to its

The expectation of a LNG order for gas to be used in thermal dispatch may be frustrated by the occurrence of a more favorable hydrology than that expected. In this case, the requested natural gas would not be needed after the arrival of the liquefied gas carrier ships at the re-

The introduction of flexible LNG supplies in the region can bring up several opportunities to integrate the electricity and gas markets in the region. This is because energy swaps with LNG are much more economical than the proposed point-to-point pipelines. An example of gas-electricity integration is the so-called "gas exports from Brazil to Chile without gas or pipelines". Essentially, Chile purchases 2000 MW of electricity from Brazil, for delivery to Argentina (via the Brazil-Argentina DC link). The power from Brazil now displaces 2000 MW of gas-fired thermal generation in Argentina, which frees up 10 mm3/day of natural

Thermal insertion in Brazil took place based on contracts for supply of *inflexible* gas, with 'take or pay' and 'ship or pay' clauses, which correspond to fixed payments, respectively to gas producer and to transporter. This way, the benefit of the operation and of the hydro-thermal synergy is not exploited,

**7.3.2 The business model: LNG flexible supply** 

pipelines.

manner.

**7.3.3 Challenges for LNG supply** 

gasification stations.

 2

destination market, and increased by an "urgency rate".

**7.3.4 Virtual gas storage: gas stored in hydro reservoirs** 

**7.4 Virtual gas storage and smart electricity-gas swaps** 

gas supply, which is (finally) shipped to Chile.

and the final cost of this technology becomes higher.

#### **8.1.1 Common market concept – The gas forum in Istanbul**

The countries of SEE are characterized by a low-level gas penetration. The use of power for heating is widespread in many of the region's urban areas. This has been identified as a problem in the "Framework for Development of Energy Trade in South East Europe " as power is a relatively inefficient means of providing heat, and the use of power for heat in South East Europe exacerbates energy affordability problems. From an environmental perspective, substituting gas for power for purposes of heating would result in lower greenhouse gas emissions given that the dominant form of power generation in the region is and will continue to be lignite based.

One obstacle to increased gas penetration is lack of a gas market in the region. The prevailing Russian gas monopoly has implications both for gas pricing and security of supply. Introducing competition to Russian gas through development of a gas market in the

Globalization of the Natural Gas Market on

reserves.

terminals.

growth, stability and investment.

in UK, Holland and Belgium.

effective and policed transition dates.

Natural Gas Prices in Electric Power Generation and Energy Development 231

Most of the countries import natural gas only from Russia. Only Turkey has diversified their sources of supply, and only Romania, Croatia and Serbia have some domestic

In most Countries, postage stamp methodology is or is expected will be used for transmission. Tariffs are mostly determined and/or approved by Regulatory Authorities. However it is not yet clear whether such tariffs, as well as other features of third party access regimes in the region (with the exception of Romania) are suitable for the

While several pipelines physically link several countries, their transit rights are almost entirely attributed to long-term contracts for import from external sources. As a consequence, none of the countries has access to the other's market or facilities that may boost security of supply, like domestic production fields, storage plants and LNG

development of competition. In fact they are not used due to the lack of competitors.

**8.1.3 Final goal: Creation of a financial common market similar to the NW Europe** 

Firstly, improving the balance between energy supply and demand is crucial to improve and sustain economic development in SEE. This requires a strong legal commitment by the countries of the region towards market oriented reforms, regional integration and sustainable development, and investment security. This will offer significant advantages both in terms of improved utilization of existing supply and production capacities, but also in fostering more cooperation and integration in the region, which would result in economic

Secondly, the security of supply of the European Union is based on diversifying supply of gas and in being politically able to counter threats to energy disruption in the European Union. By connecting this strategic area with the internal energy market, this will assist in

The final goal is to achieve the fluidity level of the electricity and gas markets of NW Europe where many energy trading transactions occur each day promoting gas to gas competition and resulting to the lowest European gas prices in the wholesale gas markets such as those

i. The treaty will extend the application of the energy, environmental, renewable, competition and other parts of the acquis communautaire (legislation and rules decided at EU level). This will create a level playing field, though there will have to be credible,

ii. The treaty will create regional mechanisms that extend into the European Union to allow for deeper integration of local energy markets. This will for example mean enabling regulation allowing for accelerated infrastructure development, in particular for gas pipelines (especially new connections to the Caspian Sea and the Middle East). iii. Given that the idea of a common energy market is central to the Energy Community, there is agreement to work toward common policies for external trade, mutual

assuring both the European Union's security of supply and that of the region.

To achieve this goal the Energy Community Treaty has three operational parts:

assistance and the removal of internal energy market barriers.

region would bring both price and security benefits. There is then scope for increased competition / diversification through transporting of Caspian gas across Turkey to SEE.

Recognizing the above needs, an Energy Community Treaty was created to develop a regional gas market. This Treaty is organized by the European Commission and basically requires that SEE countries undertake gas sector reforms through development of regulatory frameworks and industry unbundling with a view to increased gasification in each state and establish an integrated regional energy market and progressively ensure its integration into the European Community's Internal Energy Market.

The Istanbul Gas Forum was established to support development of a SEE Gas market and follow the implementation of the Treaty. The Gas Forum in Istanbul is to the countries of SEE what the European Gas Regulatory Forum in Madrid is to the EU countries. The aim is to facilitate development of a regional gas market and bring Caspian gas into the Balkans region, the key element being to establish a surer supply of gas for the Union. This is not only because Europe will have access to new sources from the east but because the new market will operate according to the EU's own rules reflected in the newly created energy community in SEE.

The Gas Forum in Istanbul comprises representatives of the European Commission, governments, regulators and transmission system operators of the countries of SEE, the Council of European Energy Regulators (CEER), the European Transmission System Operators (ETSO), representatives of donors, gas producing companies, and consumers. The Forum is co-chaired by the European Commission and a representative of the president in office.

The Gas Forum has created a regional plan with the following objectives:


#### **8.1.2 Actual situation of the gas market in SEE**

The countries of SEE are neither major natural gas producers nor consumers. Although the region does hold some fossil fuel deposits, these resources are not significant on a world scale. The gas market in the region is relatively underdeveloped considered as a whole, but this masks wide difference between the Eastern Balkans through into Turkey, and the Western Balkans through into Albania. In the Eastern Balkans and Turkey, gas use is either mature (Romania) or rapidly developing (Turkey and Bulgaria). In the Western Balkans, gas supply to Albania, Bosnia and Herzegovina, Croatia, FYROM, Montenegro, Serbia and UNMIK Kosovo is either underdeveloped or non-existent or has fallen into disuse (Montenegro and UNMIK have no gas infrastructure at all).

Natural gas is mainly used in industry and partly in power generation in the region (except in Bosnia and Herzegovina in which it is used in residential and commercial sectors and in Turkey in which it is used mostly for power generation).

region would bring both price and security benefits. There is then scope for increased competition / diversification through transporting of Caspian gas across Turkey to SEE.

Recognizing the above needs, an Energy Community Treaty was created to develop a regional gas market. This Treaty is organized by the European Commission and basically requires that SEE countries undertake gas sector reforms through development of regulatory frameworks and industry unbundling with a view to increased gasification in each state and establish an integrated regional energy market and progressively ensure its

The Istanbul Gas Forum was established to support development of a SEE Gas market and follow the implementation of the Treaty. The Gas Forum in Istanbul is to the countries of SEE what the European Gas Regulatory Forum in Madrid is to the EU countries. The aim is to facilitate development of a regional gas market and bring Caspian gas into the Balkans region, the key element being to establish a surer supply of gas for the Union. This is not only because Europe will have access to new sources from the east but because the new market will operate according to the EU's own rules reflected in the newly created energy community in SEE.

The Gas Forum in Istanbul comprises representatives of the European Commission, governments, regulators and transmission system operators of the countries of SEE, the Council of European Energy Regulators (CEER), the European Transmission System Operators (ETSO), representatives of donors, gas producing companies, and consumers. The Forum is co-chaired

To implement international best practice in the wholesale gas markets and to facilitate

To create regional and national gas markets, in part to reduce the environmental impact

To secure supplies for the region and the EU through the creation of a seamless

The countries of SEE are neither major natural gas producers nor consumers. Although the region does hold some fossil fuel deposits, these resources are not significant on a world scale. The gas market in the region is relatively underdeveloped considered as a whole, but this masks wide difference between the Eastern Balkans through into Turkey, and the Western Balkans through into Albania. In the Eastern Balkans and Turkey, gas use is either mature (Romania) or rapidly developing (Turkey and Bulgaria). In the Western Balkans, gas supply to Albania, Bosnia and Herzegovina, Croatia, FYROM, Montenegro, Serbia and UNMIK Kosovo is either underdeveloped or non-existent or has fallen into disuse

Natural gas is mainly used in industry and partly in power generation in the region (except in Bosnia and Herzegovina in which it is used in residential and commercial sectors and in

integration into the European Community's Internal Energy Market.

by the European Commission and a representative of the president in office. The Gas Forum has created a regional plan with the following objectives: To implement national gas market reform in all signatory countries

cross-border trade

of existing thermal plants; and,

integrated market between Vienna and Ankara.

(Montenegro and UNMIK have no gas infrastructure at all).

Turkey in which it is used mostly for power generation).

**8.1.2 Actual situation of the gas market in SEE** 

Most of the countries import natural gas only from Russia. Only Turkey has diversified their sources of supply, and only Romania, Croatia and Serbia have some domestic reserves.

In most Countries, postage stamp methodology is or is expected will be used for transmission. Tariffs are mostly determined and/or approved by Regulatory Authorities. However it is not yet clear whether such tariffs, as well as other features of third party access regimes in the region (with the exception of Romania) are suitable for the development of competition. In fact they are not used due to the lack of competitors.

While several pipelines physically link several countries, their transit rights are almost entirely attributed to long-term contracts for import from external sources. As a consequence, none of the countries has access to the other's market or facilities that may boost security of supply, like domestic production fields, storage plants and LNG terminals.

#### **8.1.3 Final goal: Creation of a financial common market similar to the NW Europe**

Firstly, improving the balance between energy supply and demand is crucial to improve and sustain economic development in SEE. This requires a strong legal commitment by the countries of the region towards market oriented reforms, regional integration and sustainable development, and investment security. This will offer significant advantages both in terms of improved utilization of existing supply and production capacities, but also in fostering more cooperation and integration in the region, which would result in economic growth, stability and investment.

Secondly, the security of supply of the European Union is based on diversifying supply of gas and in being politically able to counter threats to energy disruption in the European Union. By connecting this strategic area with the internal energy market, this will assist in assuring both the European Union's security of supply and that of the region.

The final goal is to achieve the fluidity level of the electricity and gas markets of NW Europe where many energy trading transactions occur each day promoting gas to gas competition and resulting to the lowest European gas prices in the wholesale gas markets such as those in UK, Holland and Belgium.

To achieve this goal the Energy Community Treaty has three operational parts:


Globalization of the Natural Gas Market on

the region and is negotiated in others.

to the lack of competitors.

based on the following:

**8.3 Future development** 

**8.3.1 Gas projects development** 

plants and LNG Terminals,

by high mountain chains, and

Natural Gas Prices in Electric Power Generation and Energy Development 233

All the countries in the region have their respective independent Regulators. Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are in process of legal and managerial unbundling. Accounting unbundling is foreseen for almost all activities. Access to domestic pipelines is regulated in most of the countries in the region. However, as far as the transit network is concerned, access is in principle regulated in some countries of

In most Non-EU-ECSEE Countries, postage stamp methodology is being or is expected to be used for transmission. Tariffs are mostly determined and/or approved by Regulatory Authorities. However, it is not yet clear whether such tariffs, as well as other features of Third Party Access regimes in Non-EU ECSEE countries and in Greece (with the exception of Romania), are suitable for the development of competition. In fact they are not used due

The inadequate gas infrastructure in all domains (transmission, distribution and storage) is

 Non-EU ECSEE countries as well as Greece have no access to each other's markets or facilities that may boost security of supply, like domestic production fields, storage

The geology of the region where the major part of the territory in the region is covered

Poor experienced construction and manufacturer local companies in the gas industry

The energy industry, represented by the International Association of Oil and Gas Producers (OGP) believes that the Caspian Region holds 6% of the world's natural gas reserves, with 12,240 bcm, representing 178 years of gas supply at the current rate of production (148 bcm/year). Forecasts predict that production will double in 15 years. OGP also presented statistics and forecasts for Iran which possesses 27,500 bcm of natural gas but which consumes slightly more than 85.5 bcm annually which it produces. Together, Iran and Iraq could supply more than 100 bcm/year to the export potential of the Caspian Region. Currently the gas production from the Caspian Region is between 80 and 100 bcm/year. In comparison, the EU consumes approximately 500 bcm/year, 55% of which is imported.

Infrastructure feasibility studies until now have dealt with four projects. The first is the Nabucco project linking Turkey with Austria via Bulgaria, Romania and Hungary. A second project is to link Bulgaria with Serbia, and a third, piloted by Edison Gas is to link Turkey with Italy passing through Greece but not Albania. In competition with this is a fourth project, piloted by the Swiss utility EGL with the intention of linking the Greek network with Italy, but this time via Albania. A fifth project, the "West Balkan connector" still in the

**8.2.3 Actual technical problems for infrastructure development** 

(piping manufacturer, special machinery for construction etc.).

 The domestic resources are limited (except Romania), No diversification of external supplies, including LNG,

The Energy Community Treaty provides that the states will:


#### **8.2 Actual infrastructure**

#### **8.2.1 Transmission, storage and distribution capacity**

The Natural Gas (NG) Transmission network is relatively underdeveloped in the region. The NG Transmission infrastructures are owned and operated by state companies.

Bulgaria, Croatia, Romania, Serbia and Hungary have underground storage with a total working Gas capacity of 7,500 mcm from which only Romania and Hungary have 6,000 mcm of storage working gas capacity. Turkey and Greece have LNG Terminals. Turkey has 2 LNG Terminals and Greece 1.

NG Distribution networks are relatively underdeveloped in the region. The distribution lines per capita index are significantly high in Croatia and Serbia. In all other Non-EU ECSEE Countries the distribution network is under fast development. Infrastructure in Hungary only is very well developed.

Sizeable total market is 47.5 bcm/year in Non-EU ECSEE Countries and 103.4 bcm/year in EU-ECSEE Countries (Italy, Hungary, Austria and Greece).

In the Non-EU ECSEE Countries, the weighted average share of gas in primary energy supply is 23.8%, which is very close to that of EU Members average (24%). Gas markets in Austria, Hungary and Italy feature high levels of per capita consumption and low expected growth rates; hence they can be regarded as mature markets. Among Non-EU ECSEE Countries the only relatively mature gas market in the region is Romania

Greek, Turkish, Serbian, Bulgarian and Croatian gas markets are expected to develop rapidly. In the remaining countries of the region gas consumption has either just started recently or is very little developed. Turkey and Romania consume 83% of the total consumption.

Natural Gas is mainly used in industry and partly in power generation in the Non-EU ECSEE and Greece. In more mature EU-ECSEE Countries consumption patterns are more mixed.

#### **8.2.2 Regulatory framework, market transaction and players**

Most of the countries in the region have opened theirs markets, and identifying at least some eligible threshold.

All the countries in the region have their respective independent Regulators. Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are in process of legal and managerial unbundling. Accounting unbundling is foreseen for almost all activities. Access to domestic pipelines is regulated in most of the countries in the region. However, as far as the transit network is concerned, access is in principle regulated in some countries of the region and is negotiated in others.

In most Non-EU-ECSEE Countries, postage stamp methodology is being or is expected to be used for transmission. Tariffs are mostly determined and/or approved by Regulatory Authorities. However, it is not yet clear whether such tariffs, as well as other features of Third Party Access regimes in Non-EU ECSEE countries and in Greece (with the exception of Romania), are suitable for the development of competition. In fact they are not used due to the lack of competitors.

#### **8.2.3 Actual technical problems for infrastructure development**

The inadequate gas infrastructure in all domains (transmission, distribution and storage) is based on the following:


## **8.3 Future development**

232 Modeling and Optimization of Renewable Energy Systems

implement all necessary technical standards, such as grid codes, accounting systems

develop local solutions to pressing problems of regulation, energy poverty and social

The Natural Gas (NG) Transmission network is relatively underdeveloped in the region.

Bulgaria, Croatia, Romania, Serbia and Hungary have underground storage with a total working Gas capacity of 7,500 mcm from which only Romania and Hungary have 6,000 mcm of storage working gas capacity. Turkey and Greece have LNG Terminals. Turkey has

NG Distribution networks are relatively underdeveloped in the region. The distribution lines per capita index are significantly high in Croatia and Serbia. In all other Non-EU ECSEE Countries the distribution network is under fast development. Infrastructure in

Sizeable total market is 47.5 bcm/year in Non-EU ECSEE Countries and 103.4 bcm/year in

In the Non-EU ECSEE Countries, the weighted average share of gas in primary energy supply is 23.8%, which is very close to that of EU Members average (24%). Gas markets in Austria, Hungary and Italy feature high levels of per capita consumption and low expected growth rates; hence they can be regarded as mature markets. Among Non-EU ECSEE

Greek, Turkish, Serbian, Bulgarian and Croatian gas markets are expected to develop rapidly. In the remaining countries of the region gas consumption has either just started recently or is very little developed. Turkey and Romania consume 83% of the total

Natural Gas is mainly used in industry and partly in power generation in the Non-EU ECSEE and Greece. In more mature EU-ECSEE Countries consumption patterns are more

Most of the countries in the region have opened theirs markets, and identifying at least

The NG Transmission infrastructures are owned and operated by state companies.

create National Regulatory Authorities and transmission system operators;

The Energy Community Treaty provides that the states will:

and information exchange for the operation of the grid; implement effective third party access to infrastructure;

implement electricity and gas tariff reform plans;

implement the gas and electricity directives.

**8.2.1 Transmission, storage and distribution capacity** 

EU-ECSEE Countries (Italy, Hungary, Austria and Greece).

Countries the only relatively mature gas market in the region is Romania

**8.2.2 Regulatory framework, market transaction and players** 

equity, and

**8.2 Actual infrastructure** 

2 LNG Terminals and Greece 1.

consumption.

some eligible threshold.

mixed.

Hungary only is very well developed.

#### **8.3.1 Gas projects development**

The energy industry, represented by the International Association of Oil and Gas Producers (OGP) believes that the Caspian Region holds 6% of the world's natural gas reserves, with 12,240 bcm, representing 178 years of gas supply at the current rate of production (148 bcm/year). Forecasts predict that production will double in 15 years. OGP also presented statistics and forecasts for Iran which possesses 27,500 bcm of natural gas but which consumes slightly more than 85.5 bcm annually which it produces. Together, Iran and Iraq could supply more than 100 bcm/year to the export potential of the Caspian Region. Currently the gas production from the Caspian Region is between 80 and 100 bcm/year. In comparison, the EU consumes approximately 500 bcm/year, 55% of which is imported.

Infrastructure feasibility studies until now have dealt with four projects. The first is the Nabucco project linking Turkey with Austria via Bulgaria, Romania and Hungary. A second project is to link Bulgaria with Serbia, and a third, piloted by Edison Gas is to link Turkey with Italy passing through Greece but not Albania. In competition with this is a fourth project, piloted by the Swiss utility EGL with the intention of linking the Greek network with Italy, but this time via Albania. A fifth project, the "West Balkan connector" still in the

Globalization of the Natural Gas Market on

markets in the region are too small.

 Negotiating for import supplies, Diversifying of gas sources,

compatibility for a common market:

the EASEE-gas process in the EU,

other commercial restrictions,

Some of these benefits are:

of each country,

infrastructure,

and LNG facilities,

transmission,

regulatory policies,

**8.3.2 Regulation and liberalized market development** 

Exploiting economies of scale in gas transportation,

Developing new long distance transmission infrastructure.

 Independence and responsibilities of national market regulators, Stability, predictability and accountability of the regulatory framework,

 Infrastructure capacity information and allocation criteria, Infrastructure financial viability under competitive conditions,

Criteria for release and availability of unused capacity,

development in the region has been identified.

Increased cooperation and trade among ECSEE countries, and

Natural Gas Prices in Electric Power Generation and Energy Development 235

Most benefits can only be achieved through a single common market, as most national

Ensuring security of supply through use of storage, interconnection and LNG facilities

Consistently with the experience of the EU market opening according to the Directives 98/30/EC and 2003/55/EC, further research and regulatory effort should in particular address the following issues, with a view to ensure their necessary harmonization and their

Authorization and licensing regimes for existing and new transportation

Technical standards and other obstacles to cross border exchanges, in comparison with

Legal, fiscal and tariff barriers to cross border trade including destination clauses and

Regulated access to transmission, distribution and (at least in the medium term) storage

Implementation of cost-reflective (preferably entry-exit) pricing mechanisms of

Promotion of gas consumption through environmentally consistent fiscal and

In summary, the actual status of the gas market in SEE has been reviewed. More specifically, emphasis on the actual coalition that assist the development of the gas market, the existing infrastructure, the future projects and the regulation that is currently set in place have been analyzed. The importance of existence of a common market to assist infrastructure

 Economically sound fair and non discriminatory public service obligation criteria, Legal and management unbundling of transmission and distribution operations,

Promotion of measures to ensure security of supply on a non-discriminatory basis.

Impact of existing and new long term contracts on competition in the region,

Matching excess supply with excess demand markets in the short and long run, and

study phase, will connect Greece with Slovenia via the FYROM, Serbia, Bosnia-Herzegovina and Croatia. All these projects will be examined by the World Bank and judged according to the benefits that they could offer the region

A recently announced project by the Russian Gas Giant Gazprom and ENI is the South Stream Pipeline. This pipeline will cross the Black Sea from the East (Russian Coast) to the West (Bulgarian Coast) bypassing Turkey and connect to the Bulgarian Gas Grid. From this grid it will be spit into two sub-streams: The south sub-stream will be connected to the gas grid and with use of the IGI Interconnector will bring Russian gas supplies to Italy and then to Europe. The north sub-stream will be routed to Austria via Serbia, Romania and Hungary. This last project will be in competition with the "Nabucco" project.


The List of the 10 major Gas Projects in SEE are indicated in Table 7:

Table 7. Major Projects in South East Europe

#### **8.3.2 Regulation and liberalized market development**

Most benefits can only be achieved through a single common market, as most national markets in the region are too small.

Some of these benefits are:

234 Modeling and Optimization of Renewable Energy Systems

study phase, will connect Greece with Slovenia via the FYROM, Serbia, Bosnia-Herzegovina and Croatia. All these projects will be examined by the World Bank and judged according to

A recently announced project by the Russian Gas Giant Gazprom and ENI is the South Stream Pipeline. This pipeline will cross the Black Sea from the East (Russian Coast) to the West (Bulgarian Coast) bypassing Turkey and connect to the Bulgarian Gas Grid. From this grid it will be spit into two sub-streams: The south sub-stream will be connected to the gas grid and with use of the IGI Interconnector will bring Russian gas supplies to Italy and then to Europe. The north sub-stream will be routed to Austria via Serbia, Romania and

**Capacity** 

Pipeline 960 7.1 - 22 BP-Statoil 900 \$ In

285 3.6 - 12 Botas-

804 8 - 12 Edison-

(BUL-M-AL-IT) EGL+ Study

(GR-AL-IT) 570 EGL Study

900 30 Gazprom-

3400 25 - 30

Interconnector 55 0.5-2 Trnasgaz 20\$

Interconnector 230 3 Bulgargaz

**(bcm/year) Sponsor Cost** 

**(mill) Stage** 

DEPA 280 \$ In

4400 €


Study

DEPA 1300 \$

Botas-Bulgargas -MOL-OMV

Relevant Countries TSO

ENI 1000 €

Operation

Operation

Advanced Study (exp2011)

Advanced Study (exp2012)

Hungary. This last project will be in competition with the "Nabucco" project.

The List of the 10 major Gas Projects in SEE are indicated in Table 7:

**Length (km)** 

the benefits that they could offer the region

**Planed/Proposed Gas Routes** 

Turkey-Greece Interconnector (TGI)

Greece-Italy Interconnector (IGI)

Nabucco (TR-BUL-ROM-HUN-AUS)

<sup>5</sup>Hungary-Romania

<sup>6</sup>Serbia-Bulgaria

<sup>7</sup>Trans Adriatic (N)

<sup>8</sup>Trans Adriatic (S)

<sup>9</sup>Western Balcan Corridor

> South Stream (RUS-BUL-GR-SER-HUN-AUS

Table 7. Major Projects in South East Europe

<sup>1</sup>South Caucasus

2

3

4

10


Consistently with the experience of the EU market opening according to the Directives 98/30/EC and 2003/55/EC, further research and regulatory effort should in particular address the following issues, with a view to ensure their necessary harmonization and their compatibility for a common market:


In summary, the actual status of the gas market in SEE has been reviewed. More specifically, emphasis on the actual coalition that assist the development of the gas market, the existing infrastructure, the future projects and the regulation that is currently set in place have been analyzed. The importance of existence of a common market to assist infrastructure development in the region has been identified.

Globalization of the Natural Gas Market on

**11. References** 

2006.

2005.

2005.

October 2007

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www.eia.doe.gov.

Natural Gas Prices in Electric Power Generation and Energy Development 237

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[5] M. Urbina and Z. Li, "A combined model for analyzing the interdependency of electrical

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There is a fine geopolitical balance defined by US and Russian interests that are directly depicted from the projects under construction or study. Moreover, the provenance of funds from very different sources such as international organizations, countries, investment funds and utilities define an uneven order of priorities that might have a negative effect on overall development of the projects. Hence, there is a very delicate task submitted to all commissions, forums and boards that govern and supervise the process of development where a set of technical specifications and plans defining the projects have to be combined with a tense geopolitical situation.
