Utilities Policy 12 (2004) 291302

www.elsevier.com/locate/jup
Prospects of gas supplies to the European market until 2030results
from the simulation model EUGAS
J. Perner
a,1
, A. Seeliger
b,
a
RWE AG, Essen, Germany
b
Institute of Energy Economics, University of Cologne, Albertus-Magnus-Platz, 50923 Cologne, Germany
Received 25 October 2003; received in revised form 9 March 2004; accepted 5 April 2004
Abstract
Natural gas is the fossil energy fuel estimated to have the highest demand growth rates in Europe during the rst three decades
in the 21st century. Hence, substantial new gas supplies are needed for the European energy markets in the coming years. In this
article, future European gas supplies are quantitatively projected by using the long-term optimisation model EUGAS, developed
at the Institute of Energy Economics at the University of Cologne in year 2000. The model simulations show no discernible physi-
cal gas scarcity at least for the next 2030 years in Europe, but signicant investments in new production and transportation
facilities will be necessary during this time period. Diversication of supplies and political considerations will have signicant
impacts on the development of new gas resources and on investments needed. Nevertheless, the unit costs of supplies are moder-
ate, and only minor cost driven price increases have to be expected during the coming decadesat least as long as future gas
demand growth does not signicantly exceed current projections.
# 2004 Elsevier Ltd. All rights reserved.
JEL classication: C61; L95; Q41; Q48
Keywords: Gas resources; Security of supply; Transportation infrastructure
1. Introduction
Natural gas is expected to gain rising market shares
in the primary energy market in Europe during the rst
three decades of the 21st century. Today, natural gas
has a share in the primary energy market of approxi-
mately 23% in western Europe (OECD Europe) and of
22% in Germany.
2
According to the IEA, global gas
consumption will increase by more than 95% until year
2030, and gas demand will exceed that of coal by year
2010. The share of natural gas in the global primary
energy market is estimated to increase by 5%, reaching
28% in 2030.
3
The reasons for the increase in natural
gas consumption can be found in the high resource
availability, low specic carbon dioxide emissions com-
pared to other primary energy fuels, and the expected
substantial installation of gas-red power generation
capacity, especially of modern combined cycle gas tur-
bine (CCGT) plants and combined heat and power
(CHP) plants.
The massive increase in natural gas demand in
Europe implies that new gas sources have to be
developed for the European market. But where is the
needed gas expected to come from in the future? In a
number of European countries, current natural gas
production stagnates or decreases. Therefore, the devel-
opment of new sources inside and outside Europe
seems to be indispensable. The main questions that
have to be raised in this context are: upon which gas
producing regions and gas sources will European sup-
plies depend on in the long-term future? To what
extent is Europe able to contribute to European sup-
plies? How much gas will have to be imported from

Corresponding author. Tel.: +49-2211-7091-816.

E-mail address: seeliger@wiso.uni-koeln.de (A. Seeliger).
1
Formerly at the Institute of Energy Economics, University of
Cologne, Germany.
2
IEA (2003a: p. III.6).
3
IEA (2002a: p. 110).
0957-1787/$ - see front matter #2004 Elsevier Ltd. All rights reserved.
doi:10.1016/j.jup.2004.04.014
outside Europe and from which time? By which trans-
portation routes will the gas ow to the European mar-
kets, and where or when might bottlenecks within the
trans-European transportation network appear? Which
political measures have to be taken in order to secure
the reliability of gas supplies even if political, technical
or nancial obstacles threaten gas deliveries from one
or several producing countries, e.g. because gas trans-
ports through transit countries are interrupted?
This article aims at answering some of the questions
raised above by running the long-term simulation
model EUGAS (European Gas Supply Model). In the
following section, the structure of EUGAS is described.
Section 3 provides a summary about the main numeri-
cal assumptions of the simulations. Section 4 highlights
the most important results of the model runs concern-
ing gas production and transportation, whereas Section
5 discusses investments and marginal supply costs.
Comprehensive political implications can be found in
Section 6.
2. Structure of the model EUGAS
4
The model EUGAS is a simulation tool in order to
analyse the future European natural gas supply quanti-
tatively. It is structured as a long-term, dynamic, inter-
regional optimisation model. The objective and the
restrictions of the model are linear (linear program).
EUGAS provides forecasts until the period 2030 (years
20302034).
5
The time periods are extended to ve
years in order to reduce the complexity of the model.
6
The model optimises future European natural gas
supplies provided that European gas demand is satis-
ed at minimum costs (objective of the optimisation).
The logic of the model algorithm is that of a perfectly
informed central decision taker who optimises overall
social welfare. By applying this approach, the market
results of perfect competition are reproduced. Though
the European gas market is currently dominated by an
oligopoly of some major gas producers, the market can
be expected to become more competitive in the coming
years because of the European gas market liberalis-
ation and the emergence of new supplies from upcom-
ing gas producing countries (e.g. Nigeria, Egypt, etc.).
The main parameters, which have impacts on the
model results, are European gas demand, supply costs
and gas reserves. Further on, existing production and
transportation capacities predetermine some of the gas
ows especially during the rst time periods (until year
2010), since past investments in gas facilities are irre-
versible and, therefore, regarded as sunk costs.
In EUGAS, the disaggregated gas demand of all
national states in Europe is given to the model (see
Fig. 1). Gas demand of non-European countries is
taken into account if this demand reduces the gas
reserves available for European consumption (e.g. in
Algeria). The annual gas consumption is split season-
ally into three dierent load periodssummer, winter
and a bipartite transitional period. In order to smooth
the seasonality of the load, existing storage capacities
and publicly known storage extensions are included in
the input data.
European gas demand is satised by both, intra-Eur-
opean production and gas sources from outside Eur-
ope. Gas production comprises exploration,
production, storage and processing close to the gas
elds. The model optimises the extension and decom-
missioning of production capacities as well as annual
production quantities in the most important producing
countries. In EUGAS, the main intra-European gas
producing countries comprise Denmark, the Netherlands,
Norway and the UK. Main non-European producing
countries are some states of the former Soviet Union
(Russia, Azerbaijan, Kazakhstan and Turkmenistan),
Algeria and some other African states (Angola, Libya,
Egypt and Nigeria), and the Middle East (Iran, Iraq,
Qatar, Oman, United Arab Emirates and Yemen). The
Caribbean states Trinidad and Tobago and Venezuela
are taken into account, too. In some cases, essential
producing countries are further sub-divided into sub-
regions, e.g. Russia, Algeria and Norway (see Fig. 1).
Natural gas production is limited by the availability
of gas resources in the producing countries: extracted
gas volumes have to be lower than the resources avail-
able at a certain point of time. In the model, the
decline of resources is reduced by the discovery of new
deposits (exogenously given in the model). Available
gas resources and costs of production are dierentiated
by the average size of the elds, the reservoir depth, the
gas ows per well and (in case of oshore production)
the water depth. Existing production capacities are
integrated into the optimisation.
Natural gas production of less important European
gas producing countries (e.g. Germany, Italy, Romania)
is exogenously given to the model. These are countries
with relatively low gas resources having only local
impacts on gas supplies. In these cases, gas output is
subtracted from domestic demand.
The produced gas has to be transported from the
production regions to the European markets. The gas
4
For further details see Perner (2002).
5
The optimisation runs from 2005 to 2064. The extension of the
optimisation period until 2060 is necessary in order to avoid the so-
called end eect. The technical and economic lifecycle of production
and transport assets comprise 25 years and more. The optimisation
period has to be extended in the same range in order to avoid the dis-
tortion of investment decisions at the end of the forecast period.
6
The term period always refers to the rst year of a ve-year
period (model period 2005 covers the years 20052009, period 2010
the years 20102014, etc.).
292 J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302
is transported by pipelines or as LNG to Europe. Fur-
ther on, long-distance trans-European transports
(within Europe) are simulated. The model optimises the
extension of pipeline capacities, the extension and
decommissioning of liquefaction and regasication
plants as well as current gas ows.
In EUGAS, the transportation network is modelled
as a system of interlinked nodes or hubs and spokes,
which are connected by pipelines and LNG (Fig. 2).
The model includes both, existing and potential con-
nections between the regions. Pipeline capacities
between two countries may be interpreted as single or a
bundle of pipelines. Accordingly, LNG capacities rep-
resent both real single plants and a bundle of plants.
The gas supply costs comprise capacity and operat-
ing costs of gas production and transportation. The
costs of LNG tankers and, optionally, transit fees are
taken into account separately. Costs are discounted by
using interest rates. Dierent discount rates for pro-
duction and transport can be applied, e.g. because of
dierent risk exposures for production and transport.
In this paper, a discount rate of 10% is applied for
both, production and transport.
Apart from costs, long-term supply contracts and
risk diversication can have major impacts on future
European gas supplies. Existing long-term supply con-
tracts can optionally be integrated into the model. In
this case, contracted gas quantities xed in long-term
import contracts are minimum supply volumes to the
corresponding consumption regions. If the sum of con-
tracted gas volumes of a country is higher than its con-
sumption, the import contracts are shortened according
to their proportion in the supply portfolio of the
demand region (pro rata).
The diversication of the gas purchase portfolio of a
gas-importing country is often aimed at minimizing the
risks of potential supply interruptions. Optionally,
security of supply provisions can be integrated into the
model by limiting the market share of a producer or a
producing country in the national gas market.
3. Main numeric assumptions of the model
3.1. Natural gas demand
Gas consumption is exogenously given to the model.
In the simulations, a rather moderate increase in gas
demand is assumed. The main driver of the consump-
tion growth, at least in western Europe, is the expected
construction of new gas-red power generation
capacity. Additionally, in eastern Europe, high econ-
omic growth rates induce additional industrial gas
demand. In some southern European countries (e.g.
Spain, Portugal, Greece) the market share of gas is in
general still low. In these countries, gas consumption
is expected to grow in all market segments (power
generation, industrial, commercial and household
sector). Table 1 provides a synopsis of the estimated
Fig. 1. Regional coverage of EUGAS.
J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302 293
development of annual gas demand in Europe dier-
entiated by geographic area.
7
3.2. Availability of resources
The availability of resources is given to the model
exogenously. In order to take the dynamics of gas
deposit discoveries into account, EUGAS dierentiates
between known (proven) reserves and unknown (not
proven) resources. While known reserves are available
by year 2005, unknown resources are exogenously
added to the reserve base in the following time periods.
Total unknown gas resources are discovered until
model period 2060. Table 2 shows the resources avail-
able by period 2005.
8
3.3. Production and transport capacities
EUGAS optimises the construction of additional
production and transportation capacities as well as the
gas quantities being produced and transported by using
these facilities. Existing production and transportation
capacities, that means existing pipeline capacities as
well as LNG liquefaction and regasication terminals,
are given to the model. Further on, facilities currently
under construction are taken into account until year
2005. Table 3 shows the existing capacities of LNG
liquefaction plants in gas producing countries relevant
for the European market. In parts, the existing
liquefaction capacity of these countries is not taken
into account in EUGAS, since this capacity share is
dedicated to markets outside Europe. For example,
LNG from Trinidad and Tobago is not only delivered
to Europe, but also to the US.
9
This means that some
of the LNG liquefaction capacity of T&T has to be
reserved for the US market.
3.4. Production costs
Gas production costs comprise investment costs
andto a much lower extentoperating costs. In the
model, investment costs (calculated as annual capital
Table 1
Natural gas demand (in BCM/a)
2005 2010 2015 2020 2025 2030
OECD Europe 531 604 672 725 771 801
Other Europe 35 44 49 54 56 56
CIS 561 603 638 663 677 693
Others 147 176 197 211 218 219
Total 1274 1426 1555 1653 1722 1768
Fig. 2. Transportation system of EUGAS.
7
Own calculations based on EIA (2003), EU (1999), IEA (2002b),
Cedigaz (2000), UN (1999) and Razavi et al. (1996).
8
See BGR (2003), BP (2003), Cedigaz (2003), ENI (2003), Exxon-
Mobil (2003) and IEA (2003a).
9
For detailed information on LNG terminals see Drewry (2002),
Clarkson (2002), GM (2001), Roe (2001), Drewry (1999) and Cedigaz
(1999).
294 J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302
costs) comprise drilling costs, investments in pro-
duction facilities at the wellhead, pipelines near the gas
elds, processing plants, metering and communication
infrastructure, etc. Additionally, in EUGAS, invest-
ments in production capacities include the costs of
natural gas exploration. The internal rate of return of
gas production is assumed to be 10%.
As mentioned above, gas reservoirs and production
are assigned to one or several dierent resource clas-
ses in the model in order to reect the main cost dri-
vers of gas production. Resources are classied
according to selected criteria like reservoir depth, the
size of deposits, the gas ow rate or the water depth
(oshore elds).
10
Additionally, production costs dier
depending on the production region. Table 4 shows the
range of production costs for some major gas produc-
ing regions.
11
3.5. Transport costs
Construction costs of pipelines are calculated by
using the diameter of the pipes. Costs are derived from
data on pipeline costs in the USA and Canada pub-
lished annually in the Oil and Gas Journal.
12
Onshore,
the specic investment costs are estimated at US$
1200/(kmmm). For more dicult terrain, e.g. moun-
tainous areas, higher cost levels are taken into account.
Oshore, investment costs are 50% above those of
onshore pipelines due to their more expensive laying
technique. The economic lifetime of pipelines is esti-
mated at 30 years, and the internal rate of return on
capital is 10%. Costs for compressors are included sep-
arately.
Investment costs of LNG facilities refer to moderate
cost estimates. Regarding new liquefaction capacity,
investment costs of about US$ 240/(t/a) are applied.
Costs of regasication plants are estimated at US$ 80/
(1000 m
3
/a). In the model, new built LNG tankers are
priced at US$ 175 million per tanker. Tankers are said
to have a standard transport capacity of 135,000 m
3
of
liqueed natural gas. The economic lifetime of all LNG
facilities is 20 years, and the internal rate of return on
capital is 10%.
Optionally, for some transportation routes transit
fees can be taken into account in the model, e.g. for
pipeline transport via the Ukraine. Similarly, tankers
passing through the Suez canal have to pay a fee.
3.6. Technological progress
During the last decades, the petroleum industry
developed a wide range of new technologies for drill-
ing, oil and gas extraction, treatment, etc. The R&D
activities were, at least temporarily, accelerated by a
massive downward pressure on oil and gas prices. Fur-
thermore, petroleum companies had to apply new tech-
nologies in order to develop new technically demanding
oil and gas elds (e.g. high pressure, high temperature
elds in the North Sea, deep water elds, small elds),
Table 2
Resources in main supply countries (in BCM)
Resources 2005
Russia 47,600
Iran 26,000
Middle East 18,810
Trinidad/Venezuela 4760
Algeria 4523
Iraq 3100
Nigeria 2940
Norway 2861
Turkmenistan 2860
Netherlands 1650
Egypt 1560
Libya 1314
UK 1140
Kazakhstan 1050
Azerbaijan 1000
Angola 370
Denmark 160
Table 3
Capacities of LNG facilities (in BCM/a; 2005)
Liquefaction plants Regasication plants
Algeria 30 Belgium 8
Angola 0 France 23
Caribbean 10 Germany 0
Egypt 6 Greece 4
Iran 0 Italy 4
Libya 4 Portugal 3
Middle East 12 Spain 21
Nigeria 14 Turkey 6
Norway 3 UK 4
Russia 0
Table 4
Cost range in main producing areas (in US$/MBTU)
Lowest cost
level
Highest cost
level
Algeria, Hassi RMel 0.3 0.9
Egypt, Nile delta 0.5 0.9
Libya, Wafa/NC 41 0.6 0.9
Netherlands, Groningen 0.2 1.0
Norway, Barents Sea 1.0 1.5
Russia, Western Siberia 0.4 1.3
UK, North Sea 0.9 1.5
10
For a detailed description see Perner (2002: pp. 110127).
11
Calculations are based on Perner (2002), NPD (2003), IEA
(1995), OME (1995), Pauwels (1994) and Masseron (1990).
12
See True (1999), Mohitpour et al. (2001) and True (2003).
J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302 295
and elds in petroleum provinces facing very harsh cli-
matic conditions (deserts, arctic waters, permafrost
regions, etc.).
Future cost cuttings due to technological progress
are hard to predict. In EUGAS, costs of natural gas
production are estimated to decrease by 11.5% per
year because of technological improvements. Further
on, it is assumed that the investment costs of transport
facilities decrease by 0.51.5% per year. Nevertheless,
while an industry becomes more mature, the speed of
accumulation of technological knowledge slows down.
Therefore, the annual cost reductions are diminished
by 3% per year in the model.
4. Net exports and transport routes
In the reference scenario, the simulation refers to
pure long-term supply cost minimisation. Risk diversi-
cation, political constraints for gas production, long-
term supply contracts and other strategic considera-
tions are not taken into account. Nevertheless, transit
fees apply.
4.1. Net exports
Table 5 provides a summary about the development
of net exports to European markets for the most
important gas producing countries.
13
Gas producing countries inside the European Union
are loosing substantial shares in the European gas mar-
ket in the coming years. Due to limited gas reserves,
the UK, the Netherlands and Denmark, which today
deliver signicant gas volumes to foreign European
markets, will become net-importing countries. Net gas
imports to the UK start in model period 2005, but only
to a minor extent of 1 BCM per year. In the following
years, net-imports will increase dramatically reaching
25 BCM per year in 2010 and approximately 50 BCM
per year in 2020. Additional gas will be imported to the
UK by pipeline and LNG. In Denmark and the
Netherlands, import needs are much lower. Both coun-
tries start net-importing in model period 2025.
Norway is the only western European country,
which can raise its gas production signicantly.
Norway increases its gas exports from 75 BCM in 2005
to about 120 BCM in 2030. Nevertheless, the higher
gas output from Norway is not sucient to compen-
sate for the decreasing output of the UK and the
Netherlands. Furthermore, the Norwegian gas pro-
duction is more and more dislocated from elds in the
southern North Sea to unfavourable elds in northern
regions, e.g. the Norwegian Sea and the Barents Sea.
Production costs in these regions are typically higher
than in the southern North Sea. Further, transport dis-
tances and costs are higher. For example, gas produced
in the Barents Sea is exported by LNG to the
European markets and not by short distance pipelines
like from the North Sea.
Decreasing intra-European gas production has to be
replaced by imports from outside Europe. Moreover,
the additional European gas demand has to be satised
by importation. According to the model simulations,
the most important future gas supplies to Europe will
come from gas elds in non-European parts of Russia.
Though Russia loses market shares in the rst model
periods, it can later raise exports to Europe consider-
ably. The decrease of exports during the rst years is
caused by a decline of gas production of western Siberian
elds, which have to be replaced by new elds in yet
undeveloped gas provincesespecially on the Yamal
peninsula and in the Barents Sea. In the reference scen-
ario, gas elds in these provinces will not come on-
stream with substantial quantities of gas before 2015 in
Yamal and 2020 in the Barents Sea, respectively. After
commissioning, production capacities will reach more
than 150 BCM/a in Yamal and about 100 BCM/a in
the Barents Sea in 2025. In both regions, the construc-
tion of entirely new production and pipeline infrastruc-
ture is necessary. Due to harsh climatic conditions,
essential investments are needed in order to develop
these provinces. As a consequence, Russian production
costs (disregarding transportation costs to European
markets) will increase notably when these regions are
developed.
Algeria, which traditionally exports substantial gas
volumes to Europe, is also able to raise its gas pro-
duction considerably. Gas exports to Europe peak dur-
ing the model periods 20152025. Like Russia and
Norway, Algeria has to develop new gas provinces,
especially the In Salah region (Sahara dessert). Invest-
ments in new production and transport infrastructure
are needed by 2010 and 2015, e.g. in pipelines from In
Salah to Hassi RMel and further to southern Europe.
Nevertheless, the increase of production costs of new
gas sources (disregarding transportation) is lower in
Algeria (up to approximately US$ 0.90/MBTU) than
in Norway (up to US$ 1.20/MBTU) and Russia (up to
US$ 1.00/MBTU).
Other African gas exporting countries will also
increase their gas deliveries to European markets.
Libya will export larger quantities of gas to Europe via
the new built LibyaItaly pipeline (the so-called green
stream pipeline). While the pipeline capacity from
Libya to Europe is expected to be expanded from 8
BCM in 2005 to more than 25 BCM in 2030, no exten-
sion of the liquefaction capacity at the Marsa el Brega
LNG terminal will be realised. Gas from Egypt will be
13
Net exports are dened as gas production minus domestic
demand and exogenous given exports to regions outside Europe, e.g.
gas deliveries from Algeria to Tunisia or from Egypt to Jordan.
296 J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302
delivered to Turkey by an extension of the planned
EgyptJordan pipeline by 2015. Additional Egyptian
exports will be transported to Europe by LNG pro-
duced in the Nile delta (up to 15 BCM/a). Nigeria will
export its gas exclusively by LNG to European mar-
kets, since the projected trans-Sahara pipeline is esti-
mated to be extremely costly, and, additionally, transit
fees would have to be paid to Algeria.
In the model, Iran has a higher growth of gas
exports than all other gas producing countries. In year
2000, Iran was not at all a gas exporting country.
Nevertheless, according to the model results, it will be
one of the biggest gas suppliers to Europe in year 2030.
Due to large reservoir sizes, production costs are low in
Iran (about US$ 0.50/MBTU). Further more, some
existing pipelines can be used for exports, if additional
compressor capacity was installed, and pipeline costs
can in some cases be shared with other suppliers loca-
ted in this region, mainly Turkmenistan and Azerbaijan.
As a consequence, costs of Iranian gas are in some
cases lower than costs of Russian or Norwegian gas
(especially from new developments in remote areas)
not only in southeast but also in western Europe.
Gas from Iran is transported to the European mar-
kets by using both, LNG and pipelines facilities. In the
reference scenario, pipelines run from Iran to Turkey
and then further to Europe by using two dierent
routes: (a) to Greece and southern Italy and (b)
through Bulgaria across the Balkan to central and
western Europe. The Balkan route will start operation
by 2010 with an initial capacity of 6 BCM/a and later
extensions up to more than 70 BCM/a until 2030. The
Italy route does not come on stream before year 2030,
in the model.
Other gas producing countries of the Middle East,
Qatar, Oman and the United Arabic Emirates, export
increasing gas volumes to Europe, too, but to a minor
extent. The gas is transported by LNG especially to the
French, Greek and Italian market. Trinidad & Tobago
will also gain a share in the European gas market
(especially in France, Portugal, Spain and the UK).
Contrarily, from Venezuela, only minor gas volumes
will be delivered to Europe, at least until 2030.
4.2. Gas transport
In the model, three main gas ow directions of pipe-
line transport can be distinguished:
. EastWest: From the Yamal peninsula, western
Siberia, the Caspian region and Iran to eastern
Europe and then further to central and western Eur-
ope.
. NorthSouth: From the Norwegian, British and
Dutch gas elds located in the North Sea to western
Europe.
. SouthNorth: From North Africa to southern
Europe.
Fig. 3 provides a summary of the most important
existing and potential pipeline routes and LNG ows
from production to consumption regions.
Especially on the EastWest transport route,
additional gas ows need substantial investments in
new pipeline capacity, e.g. investments in the extension
of the YamalEurope pipeline via Belarus (period
2010) or in the projected pipeline from the Russian
Barents Sea to Germany and Sweden across Finland
(period 2020). Additionally, the refurbishment of old
Table 5
Net exports of main supply countries (in BCM/a)
2005 2010 2015 2020 2025 2030
Algeria 80 106 123 122 122 98
Angola 0 0 0 0 0 9
Azerbaijan 1 5 14 18 18 23
Caribbean 8 10 15 24 24 24
Denmark 6 4 2 0 2 7
Egypt 6 13 32 40 40 38
Iran 10 10 10 13 57 94
Iraq 0 0 0 6 11 12
Kazakhstan 1 8 27 30 24 34
Libya 12 16 29 42 40 41
Middle East 2 10 18 25 34 40
Netherlands 30 27 21 19 5 32
Nigeria 14 20 20 20 27 30
Norway 75 85 95 108 117 123
Russia 196 203 188 217 245 293
Turkmenistan 32 60 55 71 80 71
UK 1 25 17 50 69 94
J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302 297
pipeline infrastructure is in some cases necessary, e.g.
some of the pipelines built in the former Soviet Union
(pipelines from Turkmenistan to the VolgaUral region
and some transit pipelines through the Ukraine). In
Table 6, the capacity extensions of some major pipeline
routes are summarised.
14
European LNG trade will grow signicantly, from
about 60 BCM/year in period 2005 to approximately
150 BCM/year in 2030. Therefore, substantial addi-
tions to liquefaction and regasication capacities are
needed. Table 7 provides a synopsis of the development
of the LNG regasication capacities in Europe. As is
to be expected, the UK will have its comeback as an
LNG importing country in model period 2005, almost
30 years after the decommissioning of Britains rst
LNG regasication plant on Canvey Island. Belgium,
France and Italy will also increase their regasication
capacities signicantly. Portugal joins the group of
LNG importing countries in period 2005, and
Germany follows in 2020.
The extension of transport infrastructure calculated
by the model is, at least in the rst time periods, lower
than the sum of all pipeline and LNG capacities cur-
rently planned and projected. Therefore, if all projects
currently discussed were realised, the European gas
market could face the threat of gas oversupplies in the
rst decade of this century, at least in some regions of
Europe. Taking this potential supply/demand imbal-
ance into account, it seems to be questionable if all
projected pipeline and LNG projects will be realised
according to the announced time schedules.
5. Investments and marginal costs
As mentioned above, large investments in both pro-
duction and transport facilities have to be realised dur-
ing the forecast horizon. As a consequence, long-term
marginal costs of gas supplies are estimated to increase
for all European demand regions. Though todays pri-
ces of imported gas are linked to oil prices on the
European continent, marginal gas supply costs are
expected to become an important factor for future
price arrangements on the wholesale level in a more
and more competitive market.
5.1. Investment costs
Fig. 4 summarises the forecasted investments in pro-
duction and transport capacities required in the model
periods 20052030. Aggregated investments account
for more than US$ 900 billion until 2030, of which
Fig. 3. Export routes to Europe.
14
For 2000 data see Perner (2002), EGM (2001), Cedigaz (2000),
Zhao (2000) and EU (2000).
298 J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302
more than 60% is dedicated to the production sector.
15
Investments in gas distribution and storage are not
taken into account in the model.
Investments in production facilities include replace-
ment of decommissioned infrastructure in developed
areas as well as new projects. The sharpest increase in
production investments has to be noticed in period
2010, followed by a peak of approximately US$ 140
billion in period 2015. The most important investment
driver is the development of new gas provinces like
Yamal and In Salah. Additionally, gas producers have
to switch to more costly elds in regions yet developed.
For example smaller elds in western Siberia have to
compensate the declining production of super-giant
elds. Larger capacity investments are also necessary in
Turkmenistan and Kazakhstan. A second increase in
investments in production facilities has to be expected
at the end of the forecast period (20252030) because
huge capacity additions especially in Iran, the Russian
and Norwegian Barents Sea and on the Yamal penin-
sula are needed.
According to the model results, investments in trans-
portation facilities are lower than those in production
capacities, at least during the rst years. Several rea-
sons can be found for this outcome: at rst, new built
production capacities can often be connected to exist-
ing pipelines and LNG facilities. For example, most
Russian export pipelines carry currently almost exclus-
ively western Siberian gas. Nevertheless, only minor
investments are necessary in order to link these export
trunk lines to gas reserves in Yamal, Turkmenistan and
Kazakhstan. The same applies for British pipelines,
which can be used to transport Norwegian gas to the
UK. Contrarily, using existing infrastructure is not an
option for Iran and the Barents Sea. Consequently,
total investments in transportation capacities will
increase in the last forecast periods when these pro-
duction regions become important for European gas
supplies.
Further, heavy investments in transportation infra-
structure have been made in the past, especially in the
most recent years 19951999 (e.g. new LNG terminals
in Trinidad, Nigeria and the Middle East, Europipe II
and Norfra from Norway to Europe or Blue Stream
and Yamal 1 from Russia). These investments are not
included in the gures given above.
5.2. Long-term marginal costs
No physical shortage of natural gas will occur in
Europe. Nevertheless, the impact of the required devel-
opment of new gas sources on European supply costs
and cross-border prices has to be taken into account.
According to the model results, an increase in long-
term marginal supply costs from US$ 2.60/MBTU in
2005 to US$ 3.20/MBTU in 2030 can be expected in
OECD Europe. This means that supply costs rise by
approximately 25% during this time period.
Table 6
Capacities of some major gas transport projects (in BCM/a)
2000 2010 2020 2030
AlgeriaSpain (Maghreb-Europe, Medgaz) 12 25 43 43
AzerbaijanTurkey 0 5 18 23
EgyptTurkey (with branch to Cyprus) 0 4 28 28
IranTurkey 0 10 10 73
KazahkstanRussia 6 8 34 43
LibyaItaly 0 12 39 42
NorwayUK (Frigg, Marathon) 7 30 48 106
North Trans Gas (Barents SeaFinlandGermany, Sweden via Baltic Sea) 0 0 7 97
TurkeyBulgaria 0 6 20 64
YamalEurope (PolandGermany) 16 38 38 43
Table 7
Development of regasication capacities (in BCM/a)
2010 2020 2030
Belgium 8 16 16
France 27 36 47
Germany 0 6 16
Greece 5 6 6
Italy 8 8 16
Portugal 3 3 3
Spain 15 15 26
Turkey 10 10 4
UK 4 20 32
15
IEA estimates the required investments at about US$ 1500 bil-
lion between 2001 and 2030 for the considered regions. The share of
investments in production facilities is approximately 70%. The dier-
ence between EUGAS and IEA estimates can be explained by a
longer time period considered by IEA (20012030 instead of 2005
2030). Further, IEA gures include some upstream investments,
which are dedicated to non-European markets (e.g. Russian invest-
ments for Sakhalin) (see IEA, 2003b).
J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302 299
Table 8 highlights the gas cost development for selec-
ted OECD member countries. The cost increases dier
signicantly from country to country. Higher rises in
costs occur in countries
. which are net-exporters of gas in the rst years and
switch to importing in later time periods (e.g. the
Netherlands, the UK) or,
. which rely heavily on one low cost gas source in the
beginning and diversify their portfolio in the follow-
ing years by importing more costly gas from other
sources (e.g. Spain).
Marginal supply cost will have a signicant impact
on European cross-border gas prices, if the current oil
price linkage of wholesale gas prices will be overridden
because of European market liberalisation and increas-
ing competition on the upstream (production) and mid-
stream (importation and long-distance transportation)
level. In this case, gas prices should reect costs of sup-
plies. Because long-run marginal supply costs are
expected to rise slightly, cost reective prices should
develop accordingly in the mid and long term. Never-
theless, since prot margins along the value chain of
the gas business and probably transit fees can be expec-
ted to shrink smoothly, price increases can be lower
than cost increases during a certain period of time.
The model results concerning the development of
supply costs are robust in respect of essential para-
meter variations. For example, if European gas
demand is 20% higher than assumed, supply costs for
OECD Europe will still not exceed US$ 3.20/MBTU in
the long run, but the timing of the realisation of some
of the major gas projects is altered. The reason for the
moderate cost eect is a relatively at long run gas sup-
ply curve for Europe during the considered time per-
iod: The costs of a number of new major gas projects
are in a similar range at the margin.
6. Political implications
According to the model results, sucient natural gas
is physically available for the European market in the
foreseeable future. Huge gas reserves are available
inside and outside Europe. If all major gas projects
currently discussed are realised, even a temporary over-
supply situation might occur in Europe, especially in
some countries like Turkey, where current consump-
tion remains broad behind the forecasted volumes, or
in the UK, where a large number of new import pro-
jects is announced.
Nevertheless, very signicant investments in new
production and transport infrastructure are required in
the coming years in order to bring the needed gas
volumes to European markets. Much private capital
has to be attracted by the gas business in the coming
years in order to satisfy growing demand and secure
supplies. It is a major political challenge to set an
Table 8
Long range marginal costs for some OECD countries (in US$/
MBTU)
2010 2020 2030
France 1.71 2.18 2.86
Germany 2.53 2.81 3.13
Italy 2.16 2.66 3.18
Netherlands 0.24 1.37 2.95
Poland 1.41 2.50 2.83
Spain 1.32 2.33 2.57
Turkey 2.67 2.71 2.64
UK 1.54 2.18 2.35
Fig. 4. Investments in billion dollars per ve-year period.
300 J. Perner, A. Seeliger / Utilities Policy 12 (2004) 291302
adequate general framework for private investments
inside Europe as well as in non-European gas export-
ing countries without distorting the markets.
Above all, the political framework of the gas busi-
ness has to be stable and long lasting because of the
very long economical and technical lifetimes of gas
assets. Erratic political action and ad hoc decisions are
not suitable to acquire the required private capital for
investments. The regulation and reorganisation of the
transportation, distribution and storage businesses
have to be structured in a cautious way in order to give
sucient incentives for investments. The second EU
directive on the electricity and gas market liberalisation
of the internal European market adopted in June
2003
16
incorporates some major provisions on the
restructuring of the gas business (e.g. unbundling of
activities), regulation (e.g. mandatory implementation
of national regulatory authorities) and enhanced mar-
ket eligibility of gas customers. Further, according to
the new directive, new major gas infrastructure projects
(interconnecting pipelines, LNG facilities) can partially
be exempted from third party access provisions in
order to attract investments. Obviously, the EU com-
mission is prepared to accept lower short term gas-to-
gas competition if necessary in order to enhance the
long-term security of gas supplies.
17
According to the model, gas imports and transits are
essential for future European supplies. It has to be
assured that political considerations do not have nega-
tive impacts on transit ows. International agreements
and cooperation like the Energy Charter Treaty can
help to solve disputes between importing, exporting
and transit countries.
Further diversication of gas supplies should be part
of the future European gas import strategy. For
example Finland, the Baltic States and some countries
in East and Central Europe buy their imported gas
today still exclusively from Russia. Spain and Portugal
depend heavily on supplies from Algeria, but both
make great eorts to reduce this dependency. LNG
seems to be the most reasonable and eective option to
increase supply diversication for these countries. For
landlocked states, an extension of pipeline connections
to neighbouring countries is an adequate strategy.
State subsidies granted to selected gas projects (inter-
connecting pipelines, LNG facilities, etc.) should be the
exemption and well justied even if the security of
energy supply is enhanced. For example, in southern
Europe, some new gas infrastructure projects were by
approximately 60% nanced by the state and the EU.
If the economics of these projects prove to be very
poor, the improvements regarding security of supply
turn out to be very expensive for the public. Further,
the optimal allocation of capital is distorted especially
if subsidised gas projects compete with alternative non-
subsidised projects. For example, public subsidies for
the proposed Baltic Sea Pipeline from Russia to
Germany would indirectly diminish returns of existing
transit pipelines in eastern Europe as long as the new
pipeline is used as a bypass. Therefore, the subsidis-
ation of selected gas projects can increase the nancial
risks of other projects and discourage private non-sub-
sidised investments in gas assets in the mid and long
term.
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