Overview of the Model
The model takes into account six key factors which will have a bearing on gas prices and security of supply as we go into the future: Demand, Supply, Transportation Capacity and Tariffs, Capacity Constraints, Storage Availability and Use, and the Impact of Regulation.

Gas Trade Routes
The model includes a simple schematic of the European Grid (See Figure 4). The schematic concentrates on the capacity and cost to move gas between countries in Europe rather than a detailed representation of every single pipeline.

The model includes the capacity of each pipeline corridor, together with transportation tariffs where these are known (and estimates where information is not yet publicly available). The model identifies where transportation constraints are likely to occur and allows the user to try out the impact of new pipelines simply by increasing the capacity of existing corridors or adding new routes.

This ability to test the impact of potential projects makes the model valuable to incumbent gas companies and potential new investors alike.

Figure 3: Overview of the European Gas Model

Demand Modelling

Demand is modelled individually for each of the 25 countries included in the model. The first step is to project total final energy demand based on economic trends and energy intensity assumptions. The projections are broken down in to the main sub-markets:

• Residential
• Commercial
• Industrial
• Power Generation

The second stage involves estimating the share of gas and other fuels within each sub-market.

Supply Modelling

Supply is modelled by consideration of historical import and export flows, reserves in the supply countries, and indigenous production. Incremental supplies are added by consideration of the production and transportation costs from the supply countries. Each supply source can be associated with five tranches of supply allowing for existing contracts and future potential supplies to be put in at different costs. The model seeks to minimise the cost of supplying Europe subject to constraints on production and pipeline capacities.

Energy Markets has built up an extensive database of long-term gas contracts for both pipeline delivery and LNG, based on painstaking research and market intelligence. The database currently comprises over 60 contracts involving buyers in 25 importing countries and sellers in 16 exporting countries.

These contracts can be reflected in the model by constraining flows between import and export countries to equal the Annual Contract Quantity (ACQ) of the contracts. Contract flexibility can be simulated by allowing actual flows to fall below the ACQ (allowing for take-or-pay) or above the ACQ (allowing for Valley Gas). The contract price can be simulated to reflect the current oil-related contracts or the user can assume that contracts are renegotiated to reflect spot market prices. Ultimately it is possible to assume that contracts are completely superseded by spot trading simply by removing all contract constraints and letting the model find the least-cost solution.

Transportation

We have also established detailed knowledge of the main international pipeline system linking the 25 countries considered in our model with one another and with the main suppliers from outside Europe including Russia and other FSU countries, Algeria and Libya.

Transportation tariffs are based on published data where it is available, supplemented by market intelligence and Energy Markets own assumptions.

Capacity Constraints

As demand grows, parts of the European pipeline system will become full. Also, as the pattern of supply changes over the next decade or two with gas coming to Europe from new sources, the usage of pipelines will change. Some pipes will become full, some may be by-passed and others will need to be modified to flow gas in the reverse direction to current flows. The European Gas Model can be used to identify where capacity constraints may occur in the future, enabling existing and potential pipeline owners to identify investment opportunities. The effects of proposed and planned infrastructure projects can be examined to identify the impact on existing pipelines and expose risks of stranded assets.

Alternatively the model can be run to simulate the effects on gas prices and security of supply if not enough new capacity is brought on line to meet the potential increase in demand.

Storage

Storage will become an increasingly important feature of the European gas market as hubs and spot trading markets develop. The model simulates the role of storage in meeting seasonal demand and also takes account of the new ways in which storage can be used in a traded market.

Regulation

At this stage we do not know how the markets will react to liberalisation following the implementation of the Gas Directive. The key feature of the Energy Markets model is that it enables a whole range of scenarios to be tested. By imposing constraints on trade volumes and pricing we can simulate the current situation of long-term contracts. By progressively relaxing those constraints we can simulate movement towards an open market for gas. The pace of change can be controlled under any specified scenario by adjusting the rate at which constraints are relaxed.

Figure 3: Overview of the European Gas Model (open window)

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