Among the most significant global trends that have shaped the monumental changes in the global energy sector, the rapidly growing role of natural gas, which occupies an increasingly prominent place among major energy sources, stands out. According to a report delivered in Moscow recently by Daniel Yergin, vice-chairman of IHS CERA, one of the largest energy consulting agencies in the world, gas will be beating oil to become the planet’s number one fuel by 2030.
Russia, which has the largest gas reserves on Earth, is second in the world in terms of extraction and first when it comes to export. Russia’s gas sector is one of the economy’s main budget revenue generating sectors and gas makes up nearly 60 percent of the overall volume of production and domestic consumption of energy resources. The gas sector also makes up 8 percent of the GDP, provides up to 25 percent of the fiscal revenue and more than 19 percent of the country’s currency receipts through gas exports.
Hence the close attention Moscow is giving to events taking place in the gas markets. Especially since these changes by no means always impact favourably on the state of Russia’s gas industry and its main player – Gazprom.
The growth of the global liquefied natural gas (LNG) market and unconventional sources of gas is resulting in the accelerated growth of the global gas market. The old set-up with three gas markets – Europe, Asia and North America – unrelated in terms of price is becoming a thing of the past. A critical slump in demand coincided with fundamental changes in the market caused by technological progress. A sharp decline in the cost of extracting unconventional, primarily shale, gas in the US resulted in the US considerably increasing their own mining operations to the level of self-sufficiency thanks to shale gas and, in 2009, the US overtook Russia to become the world’s largest gas producer. At the same time, producer countries like Qatar significantly increased their own LNG production capacity, challenging Russia somewhat in the European market.
According to data from BP, at the end of 2012 Norway beat Russia in natural gas exports to Europe for the first time, having increased its own exports by 12 percent, while Gazprom’s exports fell by 10 percent.
The gas market has changed considerably in recent years, which needs to be analysed and discussed by everyone involved in the market. For this reason, the Second Summit of the heads of state and governments of member countries of the Gas Exporting Countries Forum (GECF), which took place in Moscow on 1 July 2013, was not only a long-overdue event but also, to some extent, an emergency measure.
«The need to hold a second summit of GECF leaders is primarily because of the serious changes in the global gas market. Above all, this refers to the shale revolution in the US, as a result of which the geography of LNG supplies has changed and the fuel competition between gas and coal has increased – most noticeably on the European market», admitted Russian Energy Minister Alexander Novak honestly in an interview with Interfax before the opening of the GECF summit. «At the summit, we need to discuss such important subjects as the increase in LNG supplies, the spread of spot contracts without the traditional link to the oil basket, and the ‘take-or-pay’ principle. We will, of course, also discuss the place of long-term contracts on the global gas market».
The leaders of 13 states – Algeria, Bolivia, Venezuela, Egypt, Iran, Qatar, Libya, Nigeria, United Arab Emirates, Trinidad and Tobago, Equatorial Guinea, Oman and Russia, which together control more than 70 percent of natural gas reserves, 45 percent of its exports and a third of all the world’s gas pipelines, along with Kazakhstan, Norway, the Netherlands and Iraq as observers – gathered together in Moscow.
Russia mastered the role of event host perfectly. In his statement, the Russian president rigorously defended Russia’s interests in the sphere of gas exports. «We must jointly resist unjustified pressure and more effectively defend the interests of gas producers and suppliers on international markets. We want our interests to be taken into account fairly», was the leitmotif of Vladimir Putin’s speech. This position was met with understanding by those taking part. It was noted in their joint declaration that GECF members «expressed concerns that certain measures unilaterally introduced by some gas importing countries could have a negative impact on the stability of the gas market».
First and foremost, the Russian president was referring to the energy policy of the European Union reflected in the Third Energy Package, which not only Russia has fallen foul of. «The main thing is to avoid retroactive decisions», the Russian president observed. «We have invested in infrastructure, put billions and billions into the construction of gas pipelines – all according to the rules that were in place at that time. But then they say: the rules of the game have changed. It is an uncivilised decision. How are manufacturers supposed to investment money without knowing what is going to happen tomorrow?»
In their statements, Putin and his foreign colleagues emphasised that it was not the purpose of the Gas Exporting Countries Forum to create a cartel and enter into cartel agreements. At the same time, the issue of cost in relation to the format of future gas contracts was central to the discussions. «The key objective is to solve pricing issues in order to save us from excessive price volatility», said the Russian president, expressing his general opinion. Judging by the final declaration, the countries are in complete agreement that fair and stable prices can only be achieved by keeping gas prices pegged to the oil basket and long-term contracts, in other words by preserving the situation that existed both 10 and 30 years ago. The only question is: how realistic is this? There are still disagreements within the Forum on the basic principles of how the market is organised: some exporters are willing to sell gas on an exchange, while Russia is insisting on long-term contracts and pegging them to oil prices. Consensus on this issue is doubtful, since Qatar – one of the world’s main suppliers of liquefied natural gas (LNG) – clearly does not figure in the plan being drawn up. As is the case with Algeria, not to mention Norway, which has completely rejected the principle of pegging prices to the oil basket and is successfully exporting gas to Europe at spot market prices. Even Gazprom, under pressure from customers, is increasingly being forced to raise the spot share component in its contracts.
Obviously, the spot market itself is both a threat and a challenge to gas suppliers, providing certain opportunities to increase exports and profits. In the winter of 2012 and spring of 2013, the spot markets in both Europe and Northeast Asia were higher than Gazprom’s contract prices. It is not impossible that in the current climate of rapidly changing price and demand vectors on gas markets, it is not the struggle for stability that is important but rather the struggle for manoeuvrability, the ability to instantly assess changes and be able to adapt to them.
Undoubtedly of importance here would be the kind of gas market reforms that would steer clear of unregulated competition, as well as agreements on the use of pricing models for natural gas that would be appropriate for both suppliers and consumers and would take into account the environmental benefits of gas over other energy resources.
Equally as important here would be information and analytical work by the GECF, which so far has not indulged the expert community with any independent research related to developing the gas market. Over the last two years, Leonid Bokhanovsky and his team promised to carry out serious analytical work as part of the GECF Secretariat, but practical results are yet to be seen. Up to now, the Forum has not even been able to offer the market any weighty expert opinions. More importantly, companies, analysts and journalists forget about the GECF between summits, and defining what the Forum does at non-Forum times of the year is not an easy task.
Judging by the reaction of the media and the Forum’s final declaration, Russia has managed to not only set forth its viewpoint on what is happening in the gas markets, but also obtain the support of many of the Forum’s members. However, there is still some uncertainty. There is no doubt that interesting and relevant issues were discussed, but they are more yesterday’s problems. The markets keep on changing. Consequently, even the make-up of the Forum is more in keeping with the pre-crisis period.
Nowadays, nature itself is increasing the volatility of the gas markets and contributing to changes in their configuration. Droughts in Brazil and local hydroelectric power plants are leading to a sharp rise in the use of LNG in Latin America. That is a long way away from Russia, of course, but a major accident involving the «West-East Gas Pipeline» in China is much closer. Along with severe winters in those regions where demand for gas over the winter period had previously been much lower (Europe, the Commonwealth of Independent States, Korea etc.) And the most important thing which is most relevant right now, but which unfortunately did not get much coverage at the Gas Exporting Countries Forum, is the scramble for Asia’s gas markets that is already underway...
I happened to be at the 9th Asia Gas Congress in Beijing in May 2013. Those involved in China’s gas market are worried about the problem of high LNG prices and the possibility of a global deficit of LNG which is already beginning to show. Since the beginning of May, the spot price of LNG for delivery to Northeast Asia has risen by approximately US$0.45/m Btu to US$14.75/m Btu (US$521/tcm). As a result, the price for Asia has exceeded the price for Europe by US$3.20m Btu (US$113/tcm). The trend of the spot price exceeding the contract price remains, starting from winter 2013, and is a reflection of the new situation on the LNG market. The withdrawal of nuclear power stations in a number of major energy consuming countries, as well as a sharp rise in LNG demand in Latin America and the Middle East, has started to create a definite deficit in the market. The lack of supply will continue until at least 2015. According to estimates, the increase over this period will amount to nearly 20m tonnes, which is clearly not enough. The introduction of new facilities in East Africa, Australia and possibly North America is only anticipated after 2015.
At the moment, the premium growth in the price of delivery to Asia will lead to a drop in LNG deliveries to Europe and the redirection of capacity to more expensive areas as a whole, since Europe has access to an alternative in the form of gas pipeline supplies. According to Argus, LNG deliveries to Europe have decreased in comparison to levels a year ago by 39 percent in the first quarter of 2013 and by 31 percent in 2012.
Meanwhile, this change in the situation is already having repercussions. Gazprom recently reported a significant growth in its deliveries to Europe (including Turkey), once again emphasising, and not without grounds, the important stabilising role of pipeline gas in ensuring consumers’ energy security.
Furthermore, the steps Russia is taking towards the Chinese in terms of plans for a massive expansion of gas deliveries to China with a focus on LNG, and the emergence of new active players (Rosneft and NOVATEK), who announced agreements with Asian customers at the St. Petersburg Economic Forum, have given rise to concerns about the ocean and the desire to find out more about the situation. The US sees the Asia region as the main customer of its shale LNG which, according to estimates, will enter the market from 2016 onwards. As such, America has decided to begin by holding talks about the future of the Asian gas market with future competitors – major gas supplying countries to the Asian markets – including Russia. As noted by the Russian media, «It is already being suggested that Russia will be part of a more long-term, albeit less public, format, consultations already having begun regarding the situation of the gas market in Asia».
Igor TOMBERG is head of the Centre for Energy and Transport Research, Institute of Oriental Studies, Russian Academy of Sciences, and a professor at MGIMO (Moscow State Institute of International Relations)