1. Serbia: Gasification Study prepared by ECA, financed by the WB Branka Tubin Ministry of mining and energy

2. Outline Two key issues: Increased gasification extent prices competitiveness storage supply cases: import and transit Invest in a new import option support increased gasification? incremental volumes incremental investment cost effect on security and reliability preferred investment case

3. Increased gasification

4. Key issues Increased gasification is likely to reduce Serbias already low system load factor, increasing peak demand beyond the daily capacity limit via Hungary Seasonal storage could reduce the winter peak to relieve the import constraint A new import point in southern Serbia would greatly strengthen the system and increase reliability and security of supply A southern import point would facilitate increased gasification in southern and central Serbia, and provide increased reliability, However, the non-enforcement to date of the take- or-pay clause of the transit contract and the flat annual prices from Gazprom, reduce the economic incentive to develop storage

5. Gasification Montenegro Southern Serbia Northern Serbia fully gasified Western and Central Serbia partly gasified Southern Serbia gasification barely begun Montenegro not gasified Western & East Serbia Northern Serbia Belgrade

6. Prices International benchmarks indicate that relative gas prices between customer types in Serbia need to be adjusted to reflect costs Comparison with import prices shows that absolute price levels need to be increased, particularly for small customers with high seasonal swing New Energy agency (regulatory authority) is to be established soon, price methodologies developed and tariff systems approved

7. Relative prices international price comparisons ResidentialCommercial Industrial Relative gas prices for residential and industrial customers in Serbia need significant adjustments $300 $200 $95 $80 $75 $165 $125

8. Annual demand profile high seasonal swing Transit contract daily maximum Expected maximum daily demand Seasonal demand swing in Serbia is very high

9. Current supply and demand with domestic production Transit contract daily maximum Expected maximum daily demand … but with domestic production approximately flat … … the swing is met with imports. Domestic production buys some capacity …

10. Swinging domestic production Transit contract daily maximum Expected maximum daily demand … could buy some more capacity … … but domestic daily output is limited and production is in decline.

11. Review of the current import situation The existing Hungarian import contract does not provide sufficient capacity to meet peak winter demand This situation will worsen with increasing demand and declining domestic production However, most of the import capacity is unused for most of the year Nevertheless, the contract requires that NIS pay for 80% of unused daily capacity under a take-or-pay clause Instead of meeting this requirement now, NIS has negotiated to increase its capacity liabilities in future years The situation is becoming quite serious.

12. Possible solutions negotiate with customers to shift demand from winter to summer negotiate with customers to interrupt gas use on peak days introduce seasonal prices establish seasonal gas storage within Serbia to flatten the import profile secure additional import capacity

13. Seasonal prices for gas reflect the higher value of winter gas (and/or the cost of storage) automatically recover revenues in line with the costs of delivering gas allow the cost of import capacity and transmission capacity to be better reflected in prices encourage those customers who can to reduce winter gas consumption and/or increase summer gas consumption automatically produce lower average prices for customers with flat annual profiles and higher average prices for customers with high swing profiles

14. Annual demand profile high seasonal swing Transit CONTRACT daily maximum The ANNUAL AVERAGE daily quantity is significantly below the daily transit capacity A flat import profile would be of economic value to Hungary and should strengthen Serbias position in contract renegotiations. Expected MAXIMUM daily demand

15. Seasonal storage to release transit capacity Meeting the daily peaks from storage Reduces the transit capacity required Gas from storage Gas into storage On current Serbian demand levels, seasonal storage could release about 4.5 million scm per day of Hungarian transit capacity.

16. Cost of storage Estimated cost of stored gas is reasonable: US$ 33/ mcm

17. Northern Serbia c b Montenegro d Gasification cases Network extensions within Serbia asouth to Dimitrovgrad2843 bwest to Backa Palanka (in 2b and 3b) cwest to Badovinci (in 3c) dsouth-west to Montenegro 1279 ewest to Visegrad 1012 fbranch to Kosovo128 gsouth to Vranje1222 heast to Negotin 1234 jstrengthen backbone2430 kwest ring via Valjevo12&1418 mcentral ring via Trstenik1212 nbranch to Majdanpek (no data) pbranch to Bor103 qbranch to Ivanjica108 Pipeline cost estimates sizeUS$m Southern Serbia g f a h e p n k q m j Western & Eastern Serbia Belgrade

18. Import and transit cases tie in with gasification cases New import connections would: strengthen Serbias weak linear-radial gas transmission system increase import (and transit) capacity increase security of gas supply and may: allow for diversity of supply sources Transiting gas through Serbia would: increase quantities and help the financial viability of new pipelines and may: generate additional revenues for NIS

19. New import and transit investment cases

20. 1a 2b 2c 2g 2a Import cases 1.Major transit routes across Serbia asouth-to-north 485 712 b east-to-west 483 785 Pipeline cost estimates sizeUS$m 2d LNG 2f 2e 1b 2h 2j south- to-north 1a 2e Bulgaria east-to- west 1b 2h Romania

21. Major transit cases to be carefully considered Both major transit cases should be considered carefully because: the east-to-west option was declared to be expensive the south-to-north option was declared to be redundant by the Nabucco pipeline Nabucco pipeline Sources: map OMV projections NIS Serbia is advised to pursue import options that would leverage regional developments 55 29 11 17 14 Expected 2010 demand of 5 countries : 125 bcm 30 bcm/y 20 bcm/y Total expected 2010 demand of other potential Nabucco shipper countries: bcm/y Germany 114 Italy? 93 Czech Republic14 Slovakia9 Switzerland 6 Compare Serbia3 ~5

22. But, the way we see Serbia in the region is that new gas pipeline direction across the territory of Serbia would be much easier to construct due to flat terrain in comparison to Karpats mountain region The route to west Europe would be shorter Since central Serbia is only partly gasified there is a number of consumers to be connected Serbia is in a position to have connections with Croatia, Bosnia and Herzegovina, Montenegro, Kosovo and Metohija and Macedonia

23. Albania Import cases 1.Major transit routes across Serbia asouth-to-north 485 712 b east-to-west 483 785 2.Import routes to serve Serbian demand avia Hungary (existing) bvia Croatia 2036 cvia Croatia - BiH 2073 dvia Montenegro20195 evia Bulgaria 2060 fvia Albania 20202 gvia Macedonia 2067 hvia Romania2076 jvia Romania2432 Pipeline cost estimates sizeUS$m 1a 2e Bulgaria Macedonia 2f Montenegro Croatia Bosnia and Herzegovina Hungary Romania 2j 1b 2h Romania 2d LNG 2g 2b 2c 2a

24. Import cases Sorted by capital cost Source/dependenciesUS$ million via Romania (north)Gazprom32 via Croatia North African LNG36 Croatian terminal via MacedoniaCaspian/ Iran67 Turkey-Greece pipeline via Croatia and BiHNorth African LNG 73 Croatian terminal via Romania (central)Russia or Caspian/ Iran76 Nabucco pipeline via BulgariaRussia or Caspian/ Iran 60 Nabucco pipeline via MontenegroNorth African LNG 195 Montenegro terminal via Albania Caspian/ Iran 202 Turkey-Greece pipeline

25. Transit cases 3.Minor transit routes to neighboring countries ato Croatia 2018 b 2036 cto Bosnia and Herzegovina 2039 dn/a e 1012 fto Albania and Montenegro 20140 gto Macedonia 2056 Pipeline cost estimates sizeUS$m Albania Macedonia Croatia 3a Bosnia and Herzegovina 3f 3g 3c 3d 3e 3b

26. Potential transit volumes potential transit volumes in 2015, bcm Croatia 0.5 Bosnia and Herzegovina 1.5 [Montenegro] 1.0 Albania 0.5 Macedonia 1.0 SubTOTAL 4.5 Serbia 3.5 TOTAL 8.0

27. Regional demand annual volumes

28. Delivered cost of gas Based on the estimated capital costs and projected volumes of demand in Serbia and neighboring countries for regional gas transit, the transport cost of new import routes would be less than half the current Hungarian price However, these estimates do not allow for transit fees (rent), so the total transit price may be higher

29. Industry structure Currently a state-owned company for imports transmission distribution + 30 small distribution companies in Vojvodina Transmission a single state-owned company is envisaged who is responsible for imports? Distribution privatize or retain in state ownership two companies or many Regulation give incentives to merge? (as per Bulgaria) exclusive franchises or gas supply competition provide financial incentives to distribution companies to gasify where economic?

30. Conclusions and recommendations

31. Recommendations Increase gas prices to economic levels and reduce connection costs to economic levels to make the gas industry financially viable and facilitate increased gasification Develop storage to: relieve the seasonal import capacity constraint (providing sufficient capacity from the existing Hungarian transit contract for Serbias demand until 2010~2015) provide a reliability reserve for the system Commence discussions with the relevant authorities about supplying gas via Serbia to Montenegro, Croatia, Bosnia and Herzegovina, Albania and Macedonia Enter discussions with the Nabucco consortium to take gas via a new pipeline

32. Regional transit opportunities could significantly increase volumes through a new import pipeline to Serbia Therefore the Government of the Republic of Serbia made a conclusion on necessity to connect gas pipeline systems of Serbia and Bulgaria In order to proceed with the activities leading to realization of this goal our Government proposed MoU to be signed with the Bulgarian side Regional initiative

33. Our Ministry proposed Energy strategy paper, it was adopted by the Serbian Government, now pending Parliament procedure Although commercial- industry development strategy did not exist when this energy strategy paper was prepared, our ministry did decide to work on energy strategy paper. Therefore we believe that even higher gas consumption can be possible in case of dynamic commercial development Energy Law stipulates the necessity to develop programs for energy strategy realization Activities already underway

34. Therefore we decided to start working on guidelines for Serbia gasification action plan National action plan is to be proposed by our Ministry and adopted by the Government Both our guidelines paper and strategy paper are for the territory of central and northern Serbia due to inability to have accurate information from constituent Serbian part- Kosovo and Metohija and we are ready to be liable for natural gas supply of this part of Serbia as well

35. Thank you Branka Tubin Ministry of Mining and Energy branka.tubin@mem.sr.gov.yu www.mem.sr.gov.yu