European Gas Trade: A Quantitative Approach

NOT FOR QUOTATION WITHOUT PERMISSION

OF THE

AUTHOR

JWROPEAIY GAS TRADE:

A QUANIVATIYE APPROACH

H-H.

Rogner S. Messner

M.

Strubegger

July 1954

WP-84-054

Working h p e r s are interim reports on work of the international Institute for Applied Systems Analysis and have received only limited review. Views or opinions expressed herein do not necessarily represent those of the Institute or of its National Member* Organizations.

INTERNATIONAL INSTITUTE

FOR

APPLIED SYSTEMS

ANALYSIS

2361 Laxenburg, Austria

Preface

This second working paper within the series of reports on t h e ongoing activities in IIASA's International Gas Study presents some test applications of the GATE-I model (Gas Trade, Integrated Version). The general outline of this model can be found in t h e report, "Model of European Gas Production, Trade and Consumption" [3]. The GATE-I model has been applied t o demonstrate t h e feasibility of modeling natural gas scenarios and t h e corresponding gas trade among the European subregions.

Altogether four scenarios were developed: a base case t h a t provides an ini- tial test of the prospects for natural gas in future energy strategies for the European continent and indicates t h e trade links needed t o m e e t expected demand; a scenario in which different export price-to-quantity relations a r e assumed for the gas exporting regions of t h e Soviet Union and North Mrica; a supply security scenario t h a t incorporates some gas import dependency policy considerations; and a scenario in which environmental aspects a r e considered in terms of the costs of meeting

SO2

emission reduction requirements for enhanced natural gas consumption.

In sum, given the simplification needed to keep GATE-I relatively compact and computationally fast, t h e main objectives of t h e excercise have been fully met. The quantitative results of applying t h e model t o t h e analysis of gas pros- pects for the above regions should not be considered conclusive, but a r e sug- gestive of possible trends with respect t o gas use in these regions. The prelim- inary analysis is currently being followed up with more detailed investigations.

H-H. Rogner Leader

International Gas Study

CONTENTS

INTRODUCTION

Regional Energy S y s t e m s i n GATE-I Gas Trade Flows

Costs a n d P r i c e s in GATE-I

Dynamics a n d C o n s t r a i n t s i n GATE-I S c e n a r i o s a n d Model Applications The Base Case

NATURAL GAS PRODUCTION AND TRADE

ALTERNATIVE GAS EXPORT ELASTICITY FUNCTIONS

SUPPLY SECURITY SCENARIO

ENERGY CONSUMPTION AND ENVIRONMENTAL ASPECTS

LIMITED SO2 EMISSIONS

CONCLUSIONS

EUROPEAN GAS TRADE: A QUANTITATIW APPROACH H- H.

Rogner,

S.

Messner and M. S r u b e g g e r

INTRODUrnON

At the outset of the IIASA International Gas Study the Energy Systems Group recognized the necessity of deploying an adequate methodological frame- work [I]. Thus work on designing a set of models was initiated in January 1904, a t the time the Study was formally begun. The goal is a set of models reflecting the regional aggregation of the European continent into major exporters and importers of natural gas; these models will account explicitly for the particular conditions of the energy system in each of the regions. The model set will include a trade model (GATE-L) that links the regional models.

Clearly the task of compiling the necessary data and information for developing and calibrating the regional models will require some months. Thus in the interim an integrated version of the model s e t (GATE-I) was developed and demonstrated a t the European Gas Meeting held a t IlASA from April 16-17, 1984. In developing this pilot model special attention was given t o the problem of modeling natural gas trade among the subregions of Europe, given conMcting objectives between exporters, between exporters and importers, or between both.

The principal idea guiding the design of pilot model GATE-I was described in [2]. Briefly, GATE-I possesses t h e follomlng features:

(a) It covers the entire energy chain, from resource extraction t o end use conversion;

(b) It encompasses all of the subregions of t h e European continent (East and West) which eventually will'be accounted for by the individual models;

(c> It accounts for t h e potential role of natural gas in interfuel substitu- tion, given economics of gas usage and t h e competitiveness of gas a t burner tip;

(dl It can determine regional indigenous natural gas supply, gas import desires, and export potentials; balance natural gas demand and sup- ply; and define t h e corresponding market clearing gas price(s).

Hence, GATE-I comprises, in simplified form, all essential features of the planned s e t of regional models, including the trade algorithm of GATE-L. The degree of simplification and the necessary aggregation was governed by the absolute minimum requirements for analyzing interfuel substitution, i.e. corn- petitiveness of natural gas in various energy markets, and interregional gas trade.

This report describes a first attempt in applying this general methodologi- cal framework and some preliminary quantitative results. I t is important t o s t r e s s t h a t the primary purpose of this exercise was t o demonstrate the feasi- bility of this modeling approach for accounting for t h e physical flows of energy from resource extraction t o end-use conversion and natural gas trade flows.

This involved limiting t h e present analysis t o a single objective functional mode (cost-minimization). Thus t h e four scenarios presented in this r e p o r t should be viewed only from t h e perspective of testing the methodology a n d related com- puter software. Neither t h e assumptions about f u t u r e development of t h e model's exogenous parameters and variables nor the numerical results obtained should be considered conclusive.

The geographic aggregation used for t h e GATE-I model differs slightly from t h e configuration presented in the study outline [I]. Again, t h e regional aggre- gation serves t h e purposes of demonstrating the important features of the GATE-I model: practicability was awarded higher priority than perfect reflection of all regional energy systems modeled within GATE-I. For example. t h e regional energy systems of t h e gas exporting regions (Soviet Union, Norway and North Africa), a r e reflected only to t h e e x t e n t necessary for t h e analysis of gas export profiles. The off-shore gas fields commonly referred t o a s Norwegian gas are labeled North Sea, North Africa is used as an acronym for n o t only Algerian gas but all other potential African and Middle East gas exporters.

Table 1 shows the composition of t h e gas importing regions used in this exercise: East Europe consists of t h e CMEA (Council of Mutual Economic Assis- t a n c e ) countries. except the Soviet Union; North Europe comprises Norway, Sweden and Finland; South Europe includes all European countries a t t h e Medi- terranean Sea except France; and Central Europe comprises t h e nine member countries of the Commission of European Communities (CEC) except ltaly plus t h e remaining Western European nations n o t otherwise accounted for.

Table 1. Aggregation of t h e European Countries into Regions.

Central Europe Austria, Belgium, Denmark, Federal Republic of Germany, France, Ireland, Luxembourg, Netherland, Switzerland, United Kingdom East Europe Bulgaria, Czechoslovakia, Democratic

Republic of Germany, Hungary, Poland, Romania

North Europe Finland, Norway. Sweden South Europe Greece, Italy, Portugal, Spain,

Yugoslavia

Regional Energy Systems in _GATE-I

The representation of the regional energy systems emerged from an ini- tially uniform s t r u c t u r e for all regions which was modified to reflect t h e energy system characteristic of t h e individual regions. Figure 1 shows t h e initial s t r u c t u r e of t h e regional energy systems: The primary energy resources con- sidered a r e coal, oil, gas, nuclear power, a n d hydropower*. t h e fossil energy 'Nuclear energy and hydropower quantities are expressed in terms of thermal oil

equivalent.

Import Llnks

Gas Imports Gas Exports Industry

Thermal

I

Households

Gas Thermal

Transmission

1 Electricity

I

I

\ - 4 I

Specific

t I

Gas Distribution

I I I

^{I . 4 1}

Onshore Gas --+

Expenskt Onshore Gas c = -

^I

Offshore Gas - Electricity

⁹

Electricity I 1

⁴

Expensive Offshore Gas Gas pmer plant Transmission Distribution.

^{*. fi b}

1 . 1 I ! I

4

I

⁴

Coal Imports

e-

4 l

-

^#

^-

Hydro Power Plant

Heat Distribution Light Oil

Products Limht Oil Peak Power

Conservation 1 1 4 1

^{I . 4}

4

Figure 1. The Reginnnl Energy Syd,em.

forms can be either domestically extracted or imported, or both. The next stage in this schematic representation of the energy chain concerns t h e conversion of fossil a n d nonfossil fuels into electricity or, when necessary, t h e up-grading of fuels, e.g. the refining of crude oil into such products as light oil (including gasoline. gasoil, LPG) and fuel oil.

The different forms of secondary energy, i.e. solids (primarily coal), light oil, fuel oil, gas, electricity and district heat ( t h e l a t t e r used here only for North Europe) a r e delivered t o consumers by means of transmission and distri- bution technologies. Finally, a t t h e site of final energy consumption t h e delivered energy (in the form of final energy) is converted into useful energy.

All components of t h e regional energy systems a r e represented by a s e t of technological data such a s conversion/transmission efficiencies, plant life, average operation-time per year, etc.

The useful energy demand sectors common t o all gas importing regions are:

-

Thermal energy needs in household and service sectors, primarily consist- ing of space and water heat;

-

Thermal energy needs in industries, i.e. low- and high-temperature process h e a t , space heat, etc.;

-

Specific uses of electricity, including all areas of electricity consumption where no substitution by other fuels is envisaged over the next decades;

a n d

-

Specific uses of liquid fuels. i.e. t h e fuel requirements of t h e transport sec- tor and t h e nonenergy liquid fuel demand.

Natural gas exports originating from the USSR and North Africa a r e deter- mined by means of export supply functions which simply relate export prices to the marginal quantities demanded. Within GATE-I, USSR gas export prices a r e given in t e r m s of c.i.f. a s of t h e CMEAflestern Europe border (e.g. t h e point of entry a t t h e Austrian border). The transport costs of Siberian gas from t h e Urengoy fields to t h e Western European border a r e considered as part of t h e Soviet gas export prices, i.e. the export prices a r e subject to the USSR export and foreign currency earning policies and not necessarily t o actual cost recovery considerations.

North African gas export prices a r e calculated in t e r m s of t h e average f.0.b. a t t h e outlet of t h e gas fields t o t h e t r u n k line. Figure 2 gives the assump- tions regarding t h e price-quantity relations underlying this analysis. Natural gas reserves/resources of either t h e USSR or North Africa were not reflected explicitly within t h e GATE-I applications for two reasons. First, t h e gas resources of both regions a r e considered plentiful over t h e time horizon of t h e study. and secondly. it s e e m s reasonable t o assume t h e willingness of both t o export, provided t h a t sufficient n e t backs can be materialized.

North Sea gas reserves a n d resources a r e , however, taken into considera- tion explicitly. In GATE-I t h e s e a r e four reserve/ resource categories, each of which is characterized by different technoeconomic parameters and extraction technologies. The average extraction costs of North Sea gas and t h e corresponding reserve/resource potentials a r e given in Table 2.

The largest natural gas producer among t h e n e t gas importing regions has thus far been the Netherlands. In addition to supplying some 50 percent of domestic primary energy needs with natural gas, t h e Netherlands have exported considerable amounts of gas t o t h e countries of t h e Central European region a s well as t o Italy (South Europe). Given t h e size of Dutch natural gas

Price [$/kWyr]

o ! : : : : : : : : t ! : : : : : : : : ! :

50

-

100 150 200 250

Export Quantity [GWyrIyr]

Figure 2. Relationships Between Gas Export Revenues and Willingness t o Export for t h e USSR and North Africa in t h e GATE-I Pilot Version (Base Case).

Table 2. Gas Extraction Cost and Resource Potential per Region.

Cost Potential

Region Category $/kWyr $/ 1 O ~ B T U l"Wyra

North Sea Cheap 1 42.6 1.4 1.0

Cheap 2 59.6 2.0 3.0

Expensive 1 90.2 3.0 4.0

Expensive 2 105.2 3.5 4.0

Central Europe Onshore 1 26.4 0.9 1.0

Onshore 2 45.4 1.5 3.5

Offshore 1 60.0 2.0 1.5

Offshore 2 100.0 3.3 5.0

Deep 317.4 7.3 10.0

East Europe Cheap 26.4 0.9 1.0

Expensive 42.6 1.4 2.5

North Europe Deep 317.4 10.6 5.0

South Europe Cheap 31.5 1.1 0.3

Expensive 65.5 2.2 1.0

Deep 317.4 10.6 5.0

' 3

1 TWyr of natural gas is equivalent t o 846.4 billion m

.

reserves/resources, t h e c u r r e n t gas exporting policy of the Netherlands, and the fact t h a t Dutch gas exports largely remain within Central Europe, Dutch gas has been treated as a domestic resource of t h e Central Europe region. Clearly, t h e gas production level for t h e Central European region had t o be constrained

so a s to be consistent with Dutch policy on gas. The extraction costs and gas reserve/resources of t h e Netherlands, Central Europe, East Europe, North Europe, and South Europe a r e given in Table 2.

Gas Trade Flows

The interregional gas trade flow possibilities in t h e GATE-I model a r e based on t h e existing European trunk line grid as well as t h e planned extensions (see Figure 3). The level of use of t h e existing gas transmission infrastruc;ture and new transport capacities a r e subject to the cost-optimizing objective function (with t h e exception of the USSR-Western Europe t r u n k lines). As already men- tioned, t h e gas t r u n k lines (and t h e e n t i r e gas distribution infrastructure) a r e t r e a t e d a s individual technologies each with its own technoeconomic charac- teristics.

NORTH EUROPE

4 -

^USSR

NORTH SEA CENTRAL EUROPE EAST EU ROPE

NORTH AFRICA

Figure 3. Possible Gas Flows.

Costs and Prices ^'

GATE-I

The technical data characterizing t h e various activities of extraction, primary-to-secondary conversion, transmission/distribution and end-use conversion a r e supplemented by a number of cost and price parameters.

These parameters comprise unit investment costs, and fixed a n d variable operation and maintenance costs. Fuel costs a r e accounted for separately along the entire energy chain; they a r e simply t h e result of adding up all t h e technology costs t h a t have been incurred up t o t h e point of fuel consumption.

At this point the distinction between costs and prices beconles a vital issue. All indigenous operations a r e quoted in t e r m s of their costs, which a s s u c h a r e m a r k e t prices. For example t h e investment costs and operation and

maintenance costs associated with a specific technology can be considered a s market prices in real terms. Or all energy imports are given in m a r k e t prices.

However, the corresponding output of this technology is quoted in t e r m s of costs, i.e. without profits, taxes, etc. Thus, linking a number of technologies distorts t h e distinction between costs and prices. Furthermore, a t t h e end-use level different prices a r e often associated with t h e same fuel depending on t h e scale of consumption. Therefore,. a systematic approach had t o be defined which compensates for this inconsistency between costs and prices.

In t h e GATE-I model historically observed rates for profits, taxes and other related costs were added to t h e output cosJs whenever necessary--i.e. before t h e energy flow enters another stage within t h e energy conversion chain or before i t reaches t h e final consumer. A t t h e end-use level, existing fuel price differentials between large consumers (industry) and households were retained.

Dynamics and Constraints in _GATE-I

The dynamics of t h e CAE-I model over the 30-year study horizon a r e determined largely by t h e following factors:

Changes o j the o b j e c t i v e g r a d i e n t w h i c h in this m o d e l m e a n s c h a n g e s in c o s t s o r p r i c e s . Generally all costs and prices are quoted in real U S dollars at 1980 prices and exchange rates. Essentially this implies constant costs and prices over the entire study horizon. There are, however, a number of excep- tions where real price changes were introduced. For example, nongas import prices are assumed t o rise (see Table 3). Further, t h e gas (fuel) extraction costs and in subsequent stages g a s (fuel) prices increase in accordance with t h e rate of depletion of conventional and inexpensive resources.

Table 3. Price of Coal and Crude Oil Imports.

Price in 1985 Growth (%/yr)

Fuel $/kWyr $/ 1 O ~ B T U 1985-2000 2000-201 0

Crude Oil 242 8.1 2 1.5

Coal 200 6.7 2 1.5

D y n a m i c c o n s t r a i n t s . Maximum growth rates for the buildup of certain technologies. Dynamic capacity buildup constraints prevent sudden and total shifts from one technology t o another. These constraints reflect t h e inherently long lead-times required t o introduce major structural changes in complex sys- tems, such as energy systems.

Resource c o n s t r a i n t s Limiting the t o t a l m e o j a c a t e g o r y of r e s o u r c e s o v e r t h e 30 y e a r t i m e h o r i z o n . Technical and economic considerations restrict t h e utilization of nuclear power plants t o base load supply and disregard t h e gen- eration of peak load electricity. Consequently, the contribution of nuclear power t o electricity supply depends on the shape of t h e demand load curve. In t h e CATE-I model nuclear energy was confined t o a maximum contribution of 35 percent of total electricity supply in t h e regions of Western Europe. Nuclear's

s h a r e in electricity generation for East Europe was fixed a t ^a maximum of 80 p e r c e n t due t o t h e relatively flat load curve and the CMEA policy of strongly enhancing t h e deployment of nuclear power.

Regional policy considerations. Security supply of considerations may impose ceilings on t h e supply dependency of a region or regions on any fuel ( h e r e n a t u r a l gas) exporting region. For t h e c u r r e n t analysis t h e default max- i m u m dependence of t h e Western European regions on a single gas exporting region is essentially unconstrained, i.e. t h e value adopted is 90 percent.

Future energy demand profile. The growth of useful energy demand is one of t h e major dynamic forces affecting t h e development of regional energy sys- t e m s . The demand projections adopted in t h e present analysis (see Table 4) were derived from t h e low projections of t h e International Energy Agency [3].

Table 4. Energy Demand Projections p e r Region (GWyr/yr).

1980 1990 2000 2010

North Europe

HH TH 17.3 16.7 16.7 17.0

IND TH 19.2 21.0 23.0 24.9

SP ELEC 17.2 18. 1 19.0 20.0

SP LIQU 26.6 26.6 26.9 27.4

Central Europe

HH TH ^{201.3 200.3 214.8 230.3}

IND TH ^{154.4 158.3 164.8 173.2}

SP ELEC 83.9 92.7 106.5 123.6

SP LJQU 290.2 294.6 306.6 322.3

South Europe

HH TH 42.4 47.4 52.9 58.7

IND TH 68.4 77.1 92.1 106.9

SP _ELEC 29.1 33.1 38.4 44.6

SP LJQU 97.2 98.7 103.7 110.1

East Europe

HH TH 88.3 100.0 134.4 198.9

IND

TH

150.6 183.6 246.7 331.6

SP ELEC 31.6 35.6 41.3 48.0

SP LJQU ^{53.0 58.5 66.6 75.8}

NOTE: HH

TH

is t h e r m a l u s e i n t h e household sector; IND TH i s t h e r m a l use in t h e industrial sectors; SP ELEC is specific electricity; and SP LIQU is specific liquids.

Scenarios a n d Model Applications

Prior t o any modeling analysis of t h i s kind i t is necessary t o calibrate t h e model to t h e base year or b e t t e r t h e dynamics of the past. A careful model cali- bration enables one t o reflect m o r e accurately t h e energy flows along t h e

e n t i r e energy chain, the existing stock of energy production capacities and t h e i r utilization, the age s t r u c t u r e of the energy infrastructure, etc. In other words, t h e model should reflect the historical development of the energy sys- t e m s as closely as possible. Clearly, t h e r e are limits t o t h e goodness of fit between historical observations and model calculations. For example. t h e GATE-I model i s a member of the MESSAGE I1 model family which in t u r n belongs t o t h e class of dynamic linear/nonlinear programming models. These types of optimization models are difficult if not impossible t o calibrate correctly because t h e real world rarely functions optimally. Also, a model can only be a simplified representation of reality. Consequently. the model's image of t h e energy systems will always differ from reality.

Given t h e available statistics, 1980 proved t o be an appropriate base year for this analysis. The principal setup of the base year, t h e data used, etc. can be found in 121. Primary and final energy consumption in the four European gas importing regions is summarized in Tables 5a and 5b.

Table 5a. Primary Energy Consumption, 1980 (GWyr/yr).

Crude Natural ~ l e c - ~

Europe Solids Oil Gas ~ u c l e a r ~ ~ ~ d 1 - 0 ~ tricity- Total

North 21.0 64.7 2.4 11.4 40.9 0.2 140.6

Central 311.1 593.7 216.0 57.8 53.3 -0.6 1231.3

South 65.2 251.2 39.4 2.4 33.6 0.9 392.7

East 323.5 144.1 89.2 7.8 9.1 5.4 579.1

Total 720.8 1053.7 347.0 79.4 136.9 5.9 2343.7.

a ~ i v e n a s primary energy equivalent.

Table 5b. K n a l Energy Consumption, 1980 (GWyr/yr).

Petroleum Natural

Europe Solids Products Gas Electricity Total

North 15.2 56.1 0.7 24.2 96.2

Central 93.3 498.3 179.5 118.1 889.2

South 32.3 178.1 35.1 39.8 285.3

East 216.8 124.1 69.8 41.9 452.6

Total 357.6 856.6 285.1 224.0 1723.3

Four scenarios were explored in this analysis. The first scenario--the Base Case--provides an initial test of the prospects for natural gas in future energy strategies for the European continent, and indicates t h e trade links necessary to m e e t expected demands. The Base Case represents a relatively uncon- strained scenario where t h e potential of natural gas consumption has been determined entirely by economic considerations. i.e. burrier competitiveness

versus alternative fuels a t the end-use side and net-back yields for t h e gas

producers/exporters.

.

The second scenario assumed different export price-to-quantity !elations for USSR and North African gas; t h e third scenario incorporated some gas import dependency policy considerations. The fourth scenario incorporates environmental aspects by means of confronting the costs of sulfur dioxide (SO2) emission reductions with enhanced natural gas consumption.

Common t o all scenarios is t h e regional economic outlook up t o t h e year 2010. As mentioned above, the economic factors and to t h a t extent assump- tions about future useful energy demand a r e based on the low projections of t h e IEA analysis. Although t h e assumed aggregate economic outlook for Europe is modest, t h e r e a r e notable differences among the regional prospects. For exam- ple, t h e r e is the North-South disparity in economic well-being. The potential for traditional rates of economic growth appears t o be larger for South Europe than for North Europe o r Central Europe. Therefore the assumed energy demand growth r a t e s of South Europe exceeds those of t h e other Western Euro- pean regions. The growth assumptions for East Europe a r e based on personal communication with experts from t h e CMEA region.

Different regional energy demand growth rates have certain implications for t h e market penetration potential of natural gas. Generally, a low energy growth profile is not as favorable for t h e expansion of any specific form of energy supply as a n accelerated growth situation. While in the l a t t e r situation t h e market penetration of, say, n a t u r a l gas could be eased simply by absorbing t h e supply of the incremental demand, in a low growth environment any f u r t h e r m a r k e t penetration means the displacement of other fuels.

Another s e t of exogenous parameters common t o all scenarios is t h e non- gas energy import prices (see Table 3). Further, all dynamic capacity build-up constraints, etc. were kept unchanged throughout t h e scenarios.

The Base Case

North h ~ o p e . The energy demand outlook of North Europe is character- ized by low growth r a t e s of less than 0.5 percent per year for t h e period up to t h e t u r n of the century. All t h r e e countries of this region have successfully advanced the concepts of energy conservation along the entire energy chain during t h e 1990s. Furthermore, s t r u c t u r a l economic change has resulted in strong shifts away from energy intensive activities. The demographic outlook appears relatively stable and other socioeconomic indicators point t o a n almost c o n s t a n t demand for energy-consuming equipment, ranging from housing requirements t o household devices. Hence, t h e r e is little margin left for dras- t i c increases in energy consumption. Most of t h e effective energy savings measures will have been be implemented by t h e year 2000, so t h a t few addi- tional savings can be expected thereafter. This leads eventually t o somewhat higher energy demand growth r a t e s after t h e t u r n of the century than those observed for the years preceding t h i s period.

On the supply side t h e nations of North Europe have adapted t h e i r domes- t i c energy systems to their specific national resource situations. Apart from Norway, North Europe is poorly endowed with conventional fossil resources and both Sweden and Finland import some 50 percent of their primary energy con- sumption in the form of crude oil a n d oil products. During the 1970s both coun- t r i e s used their considerable peat resources and explored efficient uses of wood resources.

The only noteworthy energy resource available in all Rorth European coun- tries is hydropower. In 1980 Sweden a n d Pu'orway generated 60 and 99 percent of their electricity needs from hydropower, respectively; hydroelectricity contri- buted 25 percent t o electricity supply in Finland. Nuclear power plays a n i m p o r t a n t role in t h e fossil resource poor countries of North Europe. Swedish and Finnish nuclear power stations produced 28 and 17 percent of total domes- tic electricity consumption respectively, which by international standards ranks t h e m high among t h e nations producing electricity by nuclear power.

The large contribution of hydroelectricity and nuclear power t o domestic energy supply is also reflected in t h e high electricity share of some 25 percent in North Europe's final energy consumption (which is tnrice t h e s h a r e of t h e s e two s o u r c e s in t h e final energy consumption of Central Europe).

Historically gas has played a negligible role in North Europe's energy sup- ply m e n u . Because of lacking or undiscovered natural gas resources, t h e small quantity of gas produced originated as by-products (e-g. naphta in refineries, o r coke oven and furnace gas) which was t h e n utilized in town-gas systems.

Energy conservation and import diversification have been t h e main objec- tives of Sweden's and Finland's energy policies. Progress in t h e long-distance t r a n s p o r t of gas and t h e development of Norway's off-shore g a s fields created new prospects for t h e introduction of natural gas in Sweden a n d Finland. A n u m b e r of feasibility projects have been launched to examine t h e gas import possibilities from both t h e USSR and Norway.

Investigations have indicated good prospects for natural gas i n Scandinavia and have resulted already in definite contracts. Finland recently decided t o import n a t u r a l gas from t h e USSR, and t h e construction of a pipeline has begun. Sweden will soon import some Danish gas to the southern parts of t h e country. Other g a s import alternatives a r e being investigated.

Norway's c u r r e n t energy policy does not consider t h e consumption of n a t u r a l g a s in domestic energy markets. Norway has t h e lowest population den- sity of Europe, and t h e s e a r e only a few a r e a s of sufficient energy demand densi- ties t o justify building a gas distribution infrastructure. Furthermore, t h e avai- lability of domestic oil reserves c u r r e n t l y overshadows t h e gas option.

The Base Case calculations indicate t h e continuation of t h e present t r e n d regarding t h e development of North Europe's energy system (see Figure 4).

Hydropower expands from 152 TWh(e)/yr in 1980 to 180 TWh(e)/yr in 2010, n u c l e a r electricity production increases by 160 percent, whereas for both sources t h e major capacity additions take place after 1990. (We note t h a t in this analysis t h e consequences of t h e 1980 Swedish referendum on nuclear energy have not been incorporated)

The consumption of solid fuels (e-g. coal, peat, wood, shale oil) remains basically stable over t h e 30 year period, while oil consumption is reduced from i t s 1980 share of 49 percent t o 31 p e r c e n t by 2000 and to some 28 percent by 2010. The increases in nuclear a n d hydropower compensate for 50 percent reduction in oil use while t h e remaining 50 percent is covered by n a t u r a l gas.

By t h e y e a r 2010 n a t u r a l gas contributes 12.5 GWyr (or 7.7 percent) t o North Europe's primary energy supply. In t h e light of the practically nonexisting gas infrastructure, the geographic p a t t e r n and absolute values of energy demand densities for natural gas appear reasonable.

The composition of 6nal energy consumption indicated t h a t natural gas faces strong competition in North Europe's energy market. Electricity expands its traditionally strong position in North Europe from 25 percent in 1980 to some 30 percent by t h e year 2010 (see Figure 5). Liquid fuels contribute 40

GW y r1.w

200

Gas

7

Crude Oil

--

Coal

+

Solids

Hydro

Figure 4. North Europe: Primary Energy Consumption o r Equivalent, 1980- 2010, Base Case.

D.H.

Liquids

t1

Figure 5. North Europe: nnal Energy Consumption o r Equivalent, 1980-2010, Base Case.

20 0

1880 -1880 2000 2010

--

Solids

I

I I I I I

I . O

p e r c e n t in 2010 (down from 5 5 percent in 1980), two-thirds of which a r e required t o satisfy specific liquid needs. This is, over t h e period oil use for t h e r - mal needs is reduced by more t h a n 50 p e r c e n t compared t o t h e base year liquid fuel consumption. Liquid fuel for t h e r m a l uses is consumed mainly in t h e household/service sectors, while in t h e industrial sectors gas and solid fuels almost totally substitute for liquids. Gas consumption is restricted t o l a r g e r c o n s u m e r s s u c h as industries t h a t have sufficient energy demand densities t o make gas economically attractive.

Central Europe. In 1980 Central Europe's primary energy consumption a m o u n t e d t o 1231 GWyr, which corresponds t o m o r e than two-thirds of t h e energy u s e in all of Western Europe. Central Europe includes t h e major economically active countries of Europe; t h u s t h e f u t u r e economic a n d energy outlook of Western Europe will largely be shaped by economic developments, say, in t h e Federal Republic of Germany, France, o r t h e United Kingdom. In t e r m s of energy availability t h e region of Central Europe h a s few fossil resources, which a r e also often expensive t o recover. Consequently, t h i s region h a s become t h e largest energy (mostly c r u d e oil) importing region worldwide.

The UK is t h e only country with significant oil resources; b u t even t h e s e reserves supposedly a r e insufficient t o maintain a production level above domestic needs in t h e long r u n .

Similar to North Europe, t h e national energy systems within t h e Central European region reflect t h e difference in national resource endowments. For example, t h e FRG and UK have t h e largest coal resources of Western Europe;

although n o t necessarily based on cost considerations domestic coal supplies almost a t h i r d of t h e s e countries primary energy needs. Coal use in t h e remaining Central European countries a m o u n t e d t o some 17 p e r c e n t in 1980 (or one-half t h e s h a r e of t h e traditional coal producing countries); of t h i s a m o u n t m o r e t h a n 65 p e r c e n t was imported. Altogether coal contributed 2 5 p e r c e n t t o t h i s region's primary energy supply in 1980.

Natural gas resources a r e c o n c e n t r a t e d in the Netherlands and off-shore of t h e UK; minor gas resources c a n be found in t h e Netherland's neighboring countries. Not surprisingly. t h e Netherlands and t h e UK a r e among t h e largest gas c o n s u m e r s of Central Europe, i.e. almost 50 and 20 percent of their domes- t i c p r i m a r y energy consumption, respectively, in 1980. However. t h e s i t u a t i n for n a t u r a l g a s is unlike t h a t of coal where major producers t u r n o u t t o be t h e major consumers. For example in 1980 n a t u r a l gas held a 16 p e r c e n t s h a r e in t h e e n e r g y supply menu of t h e FRG and France. The existence of a gas distribu- tion a n d consumption i n f r a s t r u c t u r e in t h e FRG and many other Central Euro- pean c o u n t r i e s (often in place s i n c e t h e l a s t c e n t u r y when it accommodated coal-generated town-gas) has facilitated t h e m a r k e t penetration of n a t u r a l gas beyond t h e point determined by domestic r e s o u r c e availability. In particular, during t h e 1960s and t h e 1970s gas imports from t h e Netherlands enabled, for example, t h e FRG and France t o base major p a r t s of their energy s y s t e m s on n a t u r a l gas. The

UK,

t h e second major gas producer in Central Europe, absorbs all domestically produced gas a n d still h a s not y e t reached selfsufficiency. Gas imports from t h e North Sea (Norway) and f r o m Algeria (in form of liquefied n a t u r a l gas--LNG) supplement n a t u r a l gas supplies from UK's off-shore fields.

In s u m m a r y , in 1980 t h e g a s picture of Central Europe was dominated by t h e Netherlands which produced 99.4 GWyr o r 46 p e r c e n t of t h e g a s consumed in t h e region. Of t h e total of 216 GWyr of n a t u r a l gas consumed in Central Europe. 56.8 GWyr were imported: 32.3 GWyr from t h e North Sea. 22.2 GWyr from t h e USSR, a n d 2.3 GWyr from North Africa.

The potential for hydropower appears to be limited. The UK and the

FRG,

which together consume more than half of this region's primary energy, have almost reached the full potential of their relatively insignificant hydro resources. France and t h e countries located in the Alpine areas are somewhat better off, but in t e r m s of t h e aggregate no large expansion is expected for Cen- tral Europe in relative t e r m s over and above t h e c u r r e n t 4 percent of primary energy supply. The f u t u r e of nuclear power must be viewed from t h e perspec- tive of t h e different national policies. Generally, t h e prospects a r e good, although major contributions from this technology will depend on its economic competitiveness and sociopolitical factors.

The useful energy demand outlook for Central Europe resembles t h a t for North Europe: Economic activity is assumed to recover slowly and the effects of both s t r u c t u r a l change and energy conservation result in t h e low energy demand projections shown in Table 4. Thus, natural gas must penetrate a stag- nating market and compete with t h e well established energy c a r r i e r s oil, solids (coal), and t o a lesser e x t e n t electricity.

Before turning t o t h e numerical calculations of the Base Case, i t is neces- s a r y t o recall some of t h e exogenous constraints imposed on the future development of Central Europe's energy system. For example, nuclear gen- e r a t e d electricity h a s a ceiling of 35 percent of total electricity production.

Hydropower, which is constrained by t h e region's lack of suitable rivers, becomes very expensive a t t h e margin. Domestic coal extraction to a certain e x t e n t was forced into t h e model solution so as t o reflect various national coal programs t o support domestic coal use as opposed to using less expensive imported coal or other alternatives.

The final energy use in Central Europe (see Figure 6) is marked by t h e sub- stitution of natural gas for liquid fuels (oil products). Natural gas expands its m a r k e t s h a r e from some 20 percent in 1980 t o 28.7 percent by 2010 a t t h e expense of liquid fuels which drop from 56 percent t o 43.6 percent over t h e study period. Hence, n a t u r a l gas absorbs about three-quarters of the reduc- tions in liquid fuel use. The remaining quarter is supplied by electricity (up to 16 percent from 13.3 in 1980) and some minor increases in solid fuels.

It is interesting t o consider how the energy market is affected by this interfuel substitution. Unlike the situation in North Europe, in Central Europe gas penetrates the household and service sectors a t a much higher r a t e than t h e industrial sectors. In the small users/household category gas consumption increases from one-third (in 1980) t o two-thirds of useful thermal energy supply in 2010. Apparently, gas has reached an economically defined limit in this m a r k e t Gas covers all areas with sufficiently high energy demand densities where t h e gas distribution infrastructure costs a r e not yet so high as to prohi- bit gas' competitiveness. In reality, a share of maximum 60 percent might not be obtained. Gas substitutes not only for liquid fuels, but also for solids and electricity. This may suggest some overoptimistic assumptions within the Base Case scenario a n d t h e need t o further analyze and modify t h e energy density a r e a s underlying this pilot analysis.

Gas use for thermal purposes in industries grows a t a slower r a t e than its direct competitors solids and electricity. This is a direct consequence of t h e domestic coal extraction assumed in this scenario. The lower limit of domestic coal production forces t o open the question of how to use this coal. Coal combustion for electricity generation or for process heat supply in large indus- trial plants is t h e most economical approach. Both the indirect and direct

Liquids

1ooQ 800

Solids

0 ^{I I I I 1} 0

f i g u r e 6. Central Europe: Final Energy Consumption or Equivalent, 1980-2010.

Base Case.

-- -

--

^Gas

effects of t h e coal policy in Central Europe restrict t h e expansion of natural gas in t h e industrial t h e r m a l m a r k e t . But t h e r e is another reason for t h e limited m a r k e t for gas. Specific liquid fuel uses amount t o one-third of final energy demand comprising t h e gasoline and diesel needs of t h e t r a n s p o r t sector, etc.

An essentially unavoidable by-product of gasoline and diesel production is heavy fuel oil (the operational mode of t h e Central European refineries a r e assumed to produce a minimum of 10 percent fuel oil output). Similar t o coal, t h e fuel oil m a r k e t consists of e l e c t r i c utilities and industries. Hence, fuel oil main- tains a m a r k e t s h a r e of almost 19 percent within t h e industrial thermal market.

In summary, in Central Europe gas continues t o dominate t h e industrial thermal m a r k e t b u t faces competition from both coal and electricity. By t h e end of t h e study horizon gas supplies 39 percent (up from 36), fuel oil 19 per- cent (down from 28), solids (coal) 30 percent (up from 26), and electricity 1 3 percent (up from 10).

The electricity s e c t o r of Central Europe (see Figure 7) i s characterized by a strong market penetration of nuclear power. which increases its market share from 1 5 p e r c e n t in 1980 t o t h e maximum contribution p e r m i t t e d in this scenario of 32 p e r c e n t o r 519 TWh(e). which corresponds t o a n a n n u a l installa- tion of approximately 2 GW(e) over t h e next 30 years. Hydroelectricity decreases in relative t e r m s from 13.7 t o 12.6 percent b u t in absolute kwh pro- duced hydropower expands by some 20 percent t o 193 TWh(e)/yr by 2010.

Electricity generation based on coal remains almost stable throughout t h e study period. The 600 TWh(e) produced towards t h e e n d of t h e period reflect a market s h a r e of 39 p e r c e n t (1980: 47 percent) and a slight increase of coal combustion of 9 percent. Light oil as a fuel for electricity generation is discon- tinued by 1990, with t h e phaseout of fuel oil completed by 2010.

--

³²

--

²⁴

2 0 0 t Gas

I

150

1

^Liquids

^-

Figure 7. Central Europe: Electricity Generation. 1980-2010, Base Case.

The role of gas in t h e electricity market appears to be that of a swing sup- plier. Since most of t h e other options are constrained, gas not only displaces oil products in peak load supply. but also steps in whenever t h e r e occurs a gap t h a t must be filled. Hence, t h e gas input t o electricity supply varies over t h e period from 10.4 and 14.6 percent.

The primary energy consumption of Central Europe grows by 0.3 percent annually and reaches 1352 GWyr by 2010. Figure 8 illustrates the dynamics of the substitution of n a t u r a l gas and nuclear power for crude oil a n d to a lesser extent for coal. Crude oil consumption decreases from 48 t o 34 percent while a substantial part of this decline is offset by t h e increase of gas from 18 t o some 27 percent. Nuclear power expands by seven percentage points and contributes 11.8 percent to primary energy supply in 2010.

In summary t h e Central European region offers good prospects for t h e market penetration of gas. However, the numerical results--in no way definitive-indicate t h a t natural gas a s a stationary fuel may be confined by an upper ceiling. Although t h e present calculations are based on assumptions t h a t favor the expansion of gas, only 27 percent (as compared t o t h e share histori- cally held by crude oil) of the primary energy market a r e supplied by gas. Gas successfully penetrated t h e t h e r m a l market but given a 35 percent demand for specific (nonsubstitutable) liquid fuels any additional expansion will call for gas t o be offered to final consumers in liquid form.

South firope. In general t h e economies of South European countries are less developed than t h e other Western European economies. In t e r m s of Gross Domestic Product per capita (GDP/cap) t h e value of Central Europe is more than twice that of South Europe. In 1980 the energy intensity in South Europe o r energy input per dollar GDP produced was slightly above t h e energy intensity of Central Europe. Hence, any narrowing of the gap in t h e economic well-being

Crude Oil

C

²⁰

1200

-

1

- m

^Gas

400

Figure 8. Central Europe: Primary Energy Consumption o r Equivalent, 1980- 2010, Base Case.

-- ⁴⁰

n

between South Europe and t h e remaining regions of Western Europe implies energy consumption growth r a t e s in South Europe considerably higher t h a n those in t h e other Western European regions. The useful energy d e m a n d development derived from t h e low projections of t h e TEA [3] reflect t h e aspira- tions of South Europe's economies t o improve their relative economic position within Europe. As will be seen later this translates into the highest primary

energy growth r a e s of all regions of Western Europe.

-.

_Coal

Hydro ^I

7

-

^Nuclear

I

I I

.

^{I -}

. o

The resource situation of South Europe is t h e poorest in Western Europe.

With t h e exception of Italy, oil and gas resources a r e practically nonexisting, while t h e situation for coal i s only somewhat better. Spain and Yugoslavia have some coal reserves b u t they a r e barely sufficient t o satisfy their domestic needs. Nuclear power has recently r e a c h e d t h e threshold of becoming a n i m p o r t a n t energy source for t h e future. since t h e potential of hydropower h a s n o t been fully exploited so far some additional 15 t o 20

GW

could come online in t h e future.

--

¹⁰

The 1980 primary energy consumption profile of South Europe is dom- i n a t e d by t h e highest oil dependence of Western Europe, i.e. 64 percent of pri- m a r y energy consumption; coal u s e accounted for 16 percent, a n d gas con- sumption for 10 percent. Given the poor resource availability of South Europe, t h e energy import dependence is significant: Oil more than 95 percent, coal 41 percent, a n d natural gas 54 percent.

Italy is t h e only country of South Europe t h a t has a large-scale gas infras- t r u c t u r e in place. In 1980 16 percent of t h e domestic primary energy c o n s u r n p tion was supplied by gas, of which more t h a n 50 percent was imported. How- ever, gas distribution systems, partly originating from the town-gas e r a , a r e being expanded o r newly constructed in most of t h e nations of South Europe.

There a r e a n u m b e r of ex-ante reasons which justify t h e expectations f o r n a t u r a l gas as a major fuel in South Europe's future energy supply. First, t h i s regional energy system has n o t yet reached t h e level of complexity, say, of North Europe. Second, t h e high energy demand growth r a t e s assumed reduce t h e necessity for competition, so t h a t gas could succeed in meeting t h e addi- tional demand. Third, although t h e oil import dependence of this region cannot be reduced by natural gas, t h e expanded use of gas would comply with t h e regional policy of import diversification.

The Base Case calculations result in t h e expected substitution of gas for oil in final energy markets. However t h e sectoral allocations of t h e substitution processes a r e someRrhat surprising. In t h e household a n d service sectors, gas looses its market s h a r e s both in absolute and relative t e r m s , while t h a t of light oil expands drastically. Electricity and solid fuels maintain t h e i r absolute con- tributions b u t decline in t h e i r relative importance.

In t h e industrial sectors a totally opposite development picture emerges.

Gas increases its, m a r k e t s h a r e from 23 t o 70 percent during t h e study period, displacing all its competitors, in particular fuel oil (which decreases its s h a r e in final energy from 4 5 t o 14.7 percent).

The explanations for this outcome a r e straightforward. The energy demand densities in South Europe a r e m u c h lower than in Central Europe.

Additionally, t h e climatological conditions require less space heating, decreas- ing demand densities even further. Since GATE-I operates with a single average demand density. i t does not distinguish between r u r a l and urban areas; t h e average applied in t h e s e calculations is too low t o be able t o distinguish between gas use in household and service sectors. Industrial consumers usually consume larger-scale quantities and also require a less complex distribution infrastructure. Hence, n a t u r a l gas is t h e preferred fuel i n these sectors.

The primary energy consumption of South Europe is depicted in Figure 9.

Natural gas and nuclear power expand t h e i r m a r k e t s h a r e s drastically a t t h e expense of crude oil a n d coal. By t h e e n d of t h e study horizon gas holds a s h a r e of 31 percent, crude oil of 42 p e r c e n t , nuclear a n d hydropower 10 percent each, a n d coal 7 percent. Given t h e reduction of gas use in t h e household a n d service sectors, t h e large contribution of n a t u r a l gas t o primary energy supply m u s t be t h e r e s u l t of gas' penetration into t h e electricity generation sector.

The electricity s e c t o r is marked by t h e phase o u t of all coal- and oil-fired power stations by t h e end of this century. Initially t h e fast introduction of nuclear power plants and t h e additions of hydropower capacities substitute for fossil fuels. As of 1990 gas-fired power plants a r e installed a t an increasing rate.

By t h e year 2010 n a t u r a l g a s fuels more t h a n one-third of all electricity pro- duced.

The Base Case r e s u l t s for South Europe show t h e expected major increase in gas consumption. However, t h e dynamics of t h e substitution processes of gas for o t h e r fuels, a s well a s a careful distinction of energy demand density k e a s , e.g into urban and rural areas, m u s t be f u r t h e r analyzed.

East Europe. The dominant component of t h e East European energy sys- t e m is coal which in 1980 supplied 56 percent of this region's primary energy consumption of 579 GWyr. All countries in t h e region have sufficient coal and lignite resources but often of s u c h low quality t h a t extraction is difficult in t e r m s of both economics and t h e environment. Poland. t h e German Demo- c r a t i c Republic, and Czechoslovakia posses t h e region's largest coal resources a n d are t h e largest coal producers. Poland's production exceeds t h e i r domestic

500 --

400 -r

Gas

300;- -

₈

Crude Oil 200

4

100 Nuclear

H vdro

Figure 9. South Europe: Primary Energy Consumption or Equivalent, 1980- 2010, Base Case.

needs and some 14 percent of their ID80 production were exported. In general, a s coal is t h e only significant energy resource of t h e region, most countries' energy plans call for increased production in the future.

The resource situation with respect t o oil and natural gas does not appear to be as bright. Apart from Rumania t h e r e a r e only insignificant oil resources available and t h e Rumanian reserve-to-production ratio has been declining recently a t r a t e s t h a t suggest t h a t their oil fields will be depleted before t h e end of this century. In ID80 Rumania's oil production did not suffice in meeting domestic oil needs, and Like all the other East European countries Rumania had to import oil. The natural gas resource picture is similar t o t h a t of oil.

Rumania, and to a lesser extent Hungary and Poland, have some gas resources, but t h e domestic production levels fall short of meeting domestic consumption needs. Consequently all East European countries are large importers of crude oil and natural gas. Most of these imports are supplied by t h e USSR but in cases where allocated import quotas were surpassed oil had t o be imported from t h e Middle East against hard currency payments. In 1980 crude oil and natural gas contributed 25 and 15 percent. repectively, t o primary energy supply.

The Base Case scenario specification concerning t h e useful energy demand projections (see Table 4), t h e dynamic capacity constraints and the general energy policy for East Europe a r e t h e result of private communication with experts from t h e C M M countries. The energy policy assumptions of this analysis reflect t h e objective of maximizing self-sufficiency. This corresponds t o minimizing oil and natural gas imports and expanding national coal and nuclear programs t o their limits.

The high (compared. t o the Western European regions) final energy demand growth r a t e of 2.4 percent per year in this analysis puts enormous pressure on t h e East European energy supply system. Even with optimistic assumptions

regarding t h e capacity expansion of domestic coal extraction in this region t h e high share of coal in primary energy supply cannot be sustained (coal output rises by some 70 percent from 323 GWyr t o 550 GWyr over t h e s t u d i

horizon),

a n d coal's contribution t o primary energy supply declines t o 52 percent' (see Figure 10).

I

Nuclear ^{- ~ ~-}

I

Hydro

I I

0 - 0 ,

-

o

Figure 10. East Europe: Primary Energy Consumption or Equivalent, 1980-2010, Base Case.

Crude oil consumption declines until 1990 in absolute and relative t e r m s b u t thereafter grows again a t a slightly lower r a t e t h a n total primary energy consumption. By 2010 some 220 GWyr of crude oil a r e being consumed (1980:

144 GWyr). The reason for this rebound of oil use is t h e rapidly groning demand for specific liquid fuels. While during t h e eighties conservation efforts and interfuel substitution permit a reduction in oil consumption this c a n n o t be continued any longer after 1990 given t h e assumed final energy growth profile.

Natural gas replaces liquid fuels in t h e industrial sectors and t o a lesser e x t e n t in t h e household and service sectors' t h e r m a l energy supply, while nuclear power and hydropower substitute for coal, oil, a n d g a s in electricity generation. By 2010 some 50 GW(e) of n u c l e a r power will have t o be installed in East Europe t o m e e t electricity demand. Gas increases its m a r k e t s h a r e from 15 percent t o 21 percent by 2010. nuclear from 1.3 t o 9.5 percent. while hydro- power maintains i t s 1980 s h a r e of approximately 1.5 percent.

A brief look a t t h e development of final energy supply (see Figure 11) shows t h e increasing contribution of all energy carriers. In relative t e r m s t h i s is only t r u e for solids and natural gas; for liquid fuels and, surprisingly despite t h e considerable expansion of nuclear power, for electricity t h e r e a r e declines.

These trends, however, a r e different in t h e household/service sectors and t h e industrial sectors. In t h e former sector solids (coal) and light oil increase in absolute a n d relative terms, natural gas increases slightly in absolute u s e (but declines in share), and electricity decreases in absolute terms. In t h e

Solids

- t

Figure 11. East Europe: Final Energy Consumption or Equivalent, 1980- 2010, Base Case.

industrial sectors gas doubles its m a r k e t s h a r e to 40 percent displacing liquid fuels, solids. and electricity a t varying r a t e s . While solids and electricity a r e still growing in absolute terms, liquid fuels use declines significantly during t h e initial periods and grows again towards t h e end of t h e study period. Again t h i s development is a consequence of t h e specific liquid fuel demand and t h e opera- tion modes of t h e refineries. There is simply too m u c h residual fuel oil avail- able which is best used for fueling large industrial boilers.

In summary, these preliminary r e s u l t s provide some insights into t h e development of t h e East European energy system. However, more analysis is needed. Specially, more detailed information i s needed on end-use conversion, such as energy demand densities, conversion efficiencies, equipment's age s t r u c t u r e , etc.

NATURAL GAS PRODUCJlON

AND

TRADE

In 1980 natural gas contributed about 15 p e r c e n t or 258 GWyr t o Western European primary energy consumption. Interregional gas trade (excluding trade within t h e CMEA block) accounted for 79.2 GWyr or roughly one-third of total gas consumption. In t e r m s of gas import dependence, some 5 percent of total primary energy consumption in Western Europe originated from nonindi- genous regional gas fields. The breakdown of t h e gas import dependence of Western Europe (in relation to n a t u r a l gas consumption) according t o the prin- cipal exporting regions is a s follows: USSR 13.1 percent, North Africa 2.4 per- cent. North Sea 12.5 percent., a n d 2.7 p e r c e n t interregional trade among t h e Western European regions. East Europe imported 37 percent of its domestic gas needs exclusively from the USSR.

In t h e Base Case scenario t h e market for n a t u r a l gas doubles by t h e year 2010, reaching s o m e 27 percent of primary energy consumption or 534 GWyr.

During t h e study period t h e gas import dependence of Western Europe increases from 30 t o 66 percent. In t e r m s of primary energy consumption this implies a dependence of 18 percent. The origins of t h e gas imports are shown in Table 6.

Table 6. Natural Gas Imports per Origin in GWyr and in P e r c e n t of Primary En- ergy Consumption of Western Europe.

Region 1980 1990 2000 2010

USSR 33.8 (1.9) 105.6 (6.0) 144.0 (7.7) 192.1 (9.6) North Sea 32.2 (1.8) 38.5 (2.2) 64.1 (3.4) 77.8 (3.9) North Africa 6.1 (0.4) 31.3 (1.8) 62.9 (3.4) 88.2 (4.4)

The sources of regional gas supply vary between regions and depend on domestic resource availability and their extraction costs a s well a s on t h e geo- graphic location relative t o t h e exporting regions. According t o Table 7 North Europe imports 100 percent of its gas needs from t h e USSR, t h e North Sea and Central Europe (Denmark). In t h e light of t h e gas import price p a t t e r n s assumed in t h e Base Case t h e option of drilling for d e e p gas does n o t s e e m t o be economic.

Table 7. Sources of Gas, North Europe (GWyr/yr), Base Case.

1980 1990 2000 2010

North Sea

- -

^{4.4 7.8}

Soviet Union 1.2 2.9 2.9 2.8

Central Europe

- -

0.5 0.9

Total 1.2 2.9 7.8 11.5

Apart from a steadily increasing gas import dependence, n a t u r a l gas supply of Central Europe is characterized by a decline of domestic extraction activities until t h e t u r n of t h e century; thereafter a rebound of indigenous production occurs which p u t s production back t o t h e 1980 level. As will be explained later.

this development i s t h e direct r e s u l t of t h e gas exporters' price-quantity rela- tions (i.e. t h e elasticity functions which reflect t h e willingness t o export a t a certain price) underlying t h e Base Case scenario. The gas extraction profile of Central Europe shows a gradual transition from c u r r e n t low production cost resource categories towards higher cost categories. For example, by t h e year 2010 t h e traditional on-shore resources (on-shore 1 in Table 8) have been totally depleted and replaced by more costly on-shore and off-shore resource categories.

The gas imports grow steadily (almost by a factor of four) over t h e entire study period. The origins of t h e s e imports vary over t h e study period (see Table 8). Up t o t h e year 2000 all t h r e e principal exporting regions expand t h e i r gas deliveries t o Central Europe. During t h i s period t h e Soviet Union replaces t h e North Sea a s t h e largest gas supplier t o Central Europe. The Soviet gas m a r k e t s h a r e could have been even larger if t h e export capacity. i.e. t h e trunk lines