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Gas Cartel to Materialize
en.fondsk.ruEnergy of the Future
27.03.2010
Igor TOMBERG
Algeria, the country to host the Gas-Exporting Countries Forum on
April 19, 2010, started sounding out the international reaction to the
plan to convert the so-far consultative group into a gas analog of the
OPEC oil cartel. Algerian Minister of Energy and Mines Chakib Khelil
called for gas export cuts to put a floor under the declining natural
gas prices.
The media cited extensively Khelil's March 18 statement at the OPEC
session in Vienna that the amount of natural gas on offer globally
should be reduced to restore the balance between supply and demand. As
the host of the coming forum, Algeria is in charge of the agenda
which, based on the assessment of the current state of the gas market,
it plans to center around the task of tightening the coordination
between gas-exporting countries. The forum's permanent members are
Iran, Bolivia, Algeria, Russia, Qatar, Egypt, Venezuela, Nigeria,
Libya, Equatorial Guinea, and Trinidad and Tobago.
There may, however, be quite different approaches to coordination.
Judging by Khelil's statement, the forum is supposed to introduce gas
export quotas to exert upward pressure on gas prices. This, however,
is exactly the cartel practice meeting with resolute opposition from
gas buyers.
At the moment the gas market is in such condition that even Algeria,
the country traditionally more cautious than others about hurting
buyers' interests, is forced to push for export caps. Clearly, the
measures would mainly affect LNG suppliers. The US breakthrough in the
sphere of untraditional types of natural gas production, in the
development of shale gas deposits in particular, combined with the
global economic downturn and the LNG supply surge caused an oversupply
of gas on the US market - one of the world's largest - and practically
sealed it off for suppliers. LNG suppliers who eyed the US market and
invested heavily in upgrading gas liquefaction and transit capacities
were hit most by the situation. In Asia Pacific alone, the LNG
capacities to come online in the short term total 34 bn cu m. As for
Europe, the launch of Qatargas-2 and Ras Laffan-3 plants in the Middle
East with the total output of about 40 bn cu m also left its market
oversupplied. According to Wood Mackenzie estimates, the European gas
market capacity in 2010-2012 (excluding long-term contracts ant
take-or-pay schemes) will be somewhere at 70 bn cu m, while the supply
will likely reach 140 bn cu m of pipeline gas and LNG.
The International Energy Agency says at present the LNG supply exceeds
demand by 30%. The LNG volumes that could not be fed to the US
promptly found their way to the European and Asian spot markets,
causing a price collapse - the spot market gas prices at the moment
are a factor of 2.5 lower than at the peak of demand in 2008. The
forecast by the Financial Times is that by the summer the spot prices
will sink to $110 per thousand cu m - a record-low over eight years.
In the meantime Russia, for example, is earning $230-250 per thousand
cu m selling gas in accord with long-term contracts. Not surprisingly,
buyers are minimizing the amounts of gas taken in their framework due
to the availability of much cheaper gas and pushing suppliers to
renegotiate the contract clauses like take-or-pay which guarantee
sellers certain sale volumes.
Russian Vedomosty daily quoted Russia's Deputy Energy Minister A.
Yanovsky as saying that the Algerian export cuts proposal did not
resonate with Moscow since Russia's gas export is based on long-term
contracts. The statement could be the result of miscalculation - the
tendency to minimize the amounts of gas consumed in accord with the
take-or-pay scheme and to switch to the spot market can eventually
compel sellers to agree to lower minimal contracted deliveries. The
evolution would affect both pipeline gas sellers and LNG suppliers.
Last year the latter already had to start offering their clients
previously unthinkable perks like flexibility in delivery volumes or
joint ownership of LNG projects. The pricing situation also leaves LNG
suppliers with a lot to worry about - by October, 2009 the JCC (Japan
Cleared Cargo) LNG price was 14% below the parity price based on
comparing the gas and oil specific heat capacities.
The pipeline gas business fares no better. Gazprom had to serially
waive fines for taking less than the contracted amounts and, worse
than that, found itself drawn into undesirable negotiations over
easing the requirements set by the already existing contracts. The
Russian energy giant is forced to sacrifice revenues and guarantees to
maximally preserve sales volumes. The contraction of gas demand echoed
with an over 50% reduction of the revenues generated by the Russian
gas export to Europe.
Evidently, conditions will continue to deteriorate, and the market
will be increasingly dominated by buyers. The theme was discussed on
March 22 in the Institute of World Economy and International Relations
of the Russian Academy of Science during the presentation of a report
jointly compiled by the World Energy Markets Research Center of the
Energy Research Institute of the Russian Academy of Science and Wood
Mackenzie. The study entitled The New Era For the Russian Gas Sector:
In Search of Balance described the volatilities Russia's gas industry
is likely to be confronted with till 2030. The unchecked accumulation
of LNG facilities will be driving ever more intense competition
between LNG and pipeline gas and between various suppliers over
markets. The study contained no mentioning of orchestrated gas offer
reduction, but the ideas and forecasts in it seem to reinforce the
case for it. Chaotic proliferation of LNG facilities and injection of
gas volumes that markets are unprepared to accommodate - with no
underlying philosophy whatsoever - are the key causes of the current
price collapses and future uncertainties.
Chances to safeguard the interests of suppliers with the help of
long-term contracts and take-or-pay arrangements of any kind are slim.
Nor should anyone expect the schemes to be instrumental in keeping
market shares or sustaining sales volumes. The entrenched egoism in
the ranks of gas suppliers has already given serious advantages to
buyers, and Khelil's call for coordination among gas-exporting
countries is by all means timely. Hopefully, the call will be heard at
the Gas-exporting Countries Forum in Algeria.
There are indications that Moscow's position is drifting towards that
of Algeria. Russian Prime Minister V. Putin said during the meeting
with Prime Minister of Qatar Hamad bin Jassim Al Thani on March 23
that as the world's two major energy suppliers Russia and Qatar should
coordinate their activities on the gas market. The coordination on the
European market between Russia, Algeria, and Qatar (the trio Iran,
Venezuela, and Oman will definitely join) should open new horizons in
stabilizing the European gas market, perhaps at the cost of a
temporary reduction of gas offer.
Experts in Europe are also becoming aware of the benefits of
regulation and coordination on the gas market which is growing
unacceptably volatile. Jonathan Stern, analyst at the Oxford Institute
for Energy Studies, says: `I don't think we are at that stage [of a
gas cartel] yet. But if prices fall further, we may find ourselves in
a different situation by the middle of this year. Cartels work when
producers are in dire straights.'
Igor Tomberg is the Director of the Energy and Transportation Studies
Center of the Institute for Oriental Studies of the Russian Academy of
Science and Professor of the Moscow Institute of International
Relations of the Russian Foreign Ministry.
en.fondsk.ruEnergy of the Future
27.03.2010
Igor TOMBERG
Algeria, the country to host the Gas-Exporting Countries Forum on
April 19, 2010, started sounding out the international reaction to the
plan to convert the so-far consultative group into a gas analog of the
OPEC oil cartel. Algerian Minister of Energy and Mines Chakib Khelil
called for gas export cuts to put a floor under the declining natural
gas prices.
The media cited extensively Khelil's March 18 statement at the OPEC
session in Vienna that the amount of natural gas on offer globally
should be reduced to restore the balance between supply and demand. As
the host of the coming forum, Algeria is in charge of the agenda
which, based on the assessment of the current state of the gas market,
it plans to center around the task of tightening the coordination
between gas-exporting countries. The forum's permanent members are
Iran, Bolivia, Algeria, Russia, Qatar, Egypt, Venezuela, Nigeria,
Libya, Equatorial Guinea, and Trinidad and Tobago.
There may, however, be quite different approaches to coordination.
Judging by Khelil's statement, the forum is supposed to introduce gas
export quotas to exert upward pressure on gas prices. This, however,
is exactly the cartel practice meeting with resolute opposition from
gas buyers.
At the moment the gas market is in such condition that even Algeria,
the country traditionally more cautious than others about hurting
buyers' interests, is forced to push for export caps. Clearly, the
measures would mainly affect LNG suppliers. The US breakthrough in the
sphere of untraditional types of natural gas production, in the
development of shale gas deposits in particular, combined with the
global economic downturn and the LNG supply surge caused an oversupply
of gas on the US market - one of the world's largest - and practically
sealed it off for suppliers. LNG suppliers who eyed the US market and
invested heavily in upgrading gas liquefaction and transit capacities
were hit most by the situation. In Asia Pacific alone, the LNG
capacities to come online in the short term total 34 bn cu m. As for
Europe, the launch of Qatargas-2 and Ras Laffan-3 plants in the Middle
East with the total output of about 40 bn cu m also left its market
oversupplied. According to Wood Mackenzie estimates, the European gas
market capacity in 2010-2012 (excluding long-term contracts ant
take-or-pay schemes) will be somewhere at 70 bn cu m, while the supply
will likely reach 140 bn cu m of pipeline gas and LNG.
The International Energy Agency says at present the LNG supply exceeds
demand by 30%. The LNG volumes that could not be fed to the US
promptly found their way to the European and Asian spot markets,
causing a price collapse - the spot market gas prices at the moment
are a factor of 2.5 lower than at the peak of demand in 2008. The
forecast by the Financial Times is that by the summer the spot prices
will sink to $110 per thousand cu m - a record-low over eight years.
In the meantime Russia, for example, is earning $230-250 per thousand
cu m selling gas in accord with long-term contracts. Not surprisingly,
buyers are minimizing the amounts of gas taken in their framework due
to the availability of much cheaper gas and pushing suppliers to
renegotiate the contract clauses like take-or-pay which guarantee
sellers certain sale volumes.
Russian Vedomosty daily quoted Russia's Deputy Energy Minister A.
Yanovsky as saying that the Algerian export cuts proposal did not
resonate with Moscow since Russia's gas export is based on long-term
contracts. The statement could be the result of miscalculation - the
tendency to minimize the amounts of gas consumed in accord with the
take-or-pay scheme and to switch to the spot market can eventually
compel sellers to agree to lower minimal contracted deliveries. The
evolution would affect both pipeline gas sellers and LNG suppliers.
Last year the latter already had to start offering their clients
previously unthinkable perks like flexibility in delivery volumes or
joint ownership of LNG projects. The pricing situation also leaves LNG
suppliers with a lot to worry about - by October, 2009 the JCC (Japan
Cleared Cargo) LNG price was 14% below the parity price based on
comparing the gas and oil specific heat capacities.
The pipeline gas business fares no better. Gazprom had to serially
waive fines for taking less than the contracted amounts and, worse
than that, found itself drawn into undesirable negotiations over
easing the requirements set by the already existing contracts. The
Russian energy giant is forced to sacrifice revenues and guarantees to
maximally preserve sales volumes. The contraction of gas demand echoed
with an over 50% reduction of the revenues generated by the Russian
gas export to Europe.
Evidently, conditions will continue to deteriorate, and the market
will be increasingly dominated by buyers. The theme was discussed on
March 22 in the Institute of World Economy and International Relations
of the Russian Academy of Science during the presentation of a report
jointly compiled by the World Energy Markets Research Center of the
Energy Research Institute of the Russian Academy of Science and Wood
Mackenzie. The study entitled The New Era For the Russian Gas Sector:
In Search of Balance described the volatilities Russia's gas industry
is likely to be confronted with till 2030. The unchecked accumulation
of LNG facilities will be driving ever more intense competition
between LNG and pipeline gas and between various suppliers over
markets. The study contained no mentioning of orchestrated gas offer
reduction, but the ideas and forecasts in it seem to reinforce the
case for it. Chaotic proliferation of LNG facilities and injection of
gas volumes that markets are unprepared to accommodate - with no
underlying philosophy whatsoever - are the key causes of the current
price collapses and future uncertainties.
Chances to safeguard the interests of suppliers with the help of
long-term contracts and take-or-pay arrangements of any kind are slim.
Nor should anyone expect the schemes to be instrumental in keeping
market shares or sustaining sales volumes. The entrenched egoism in
the ranks of gas suppliers has already given serious advantages to
buyers, and Khelil's call for coordination among gas-exporting
countries is by all means timely. Hopefully, the call will be heard at
the Gas-exporting Countries Forum in Algeria.
There are indications that Moscow's position is drifting towards that
of Algeria. Russian Prime Minister V. Putin said during the meeting
with Prime Minister of Qatar Hamad bin Jassim Al Thani on March 23
that as the world's two major energy suppliers Russia and Qatar should
coordinate their activities on the gas market. The coordination on the
European market between Russia, Algeria, and Qatar (the trio Iran,
Venezuela, and Oman will definitely join) should open new horizons in
stabilizing the European gas market, perhaps at the cost of a
temporary reduction of gas offer.
Experts in Europe are also becoming aware of the benefits of
regulation and coordination on the gas market which is growing
unacceptably volatile. Jonathan Stern, analyst at the Oxford Institute
for Energy Studies, says: `I don't think we are at that stage [of a
gas cartel] yet. But if prices fall further, we may find ourselves in
a different situation by the middle of this year. Cartels work when
producers are in dire straights.'
Igor Tomberg is the Director of the Energy and Transportation Studies
Center of the Institute for Oriental Studies of the Russian Academy of
Science and Professor of the Moscow Institute of International
Relations of the Russian Foreign Ministry.