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Please enter the digits in the box below:  |  Interviews  |  Leonid Bokhanovsky: Balance between supply and demand for gas to be restored by...


February 04, 2011

Leonid Bokhanovsky: Balance between supply and demand for gas to be restored by 2015

Demand for gas plummeted in 2009-2010, bringing prices down and triggering major changes on the gas market: spot trading grew in scale, and gas production from non-traditional sources was stepped up. Leonid Bokhanovsky, Secretary General of the Gas Exporting Countries Forum (GECF), talks to Interfax about the trends in the world gas market and the GECFs goals.

Question: What were the main trends observed in the gas market over the past year?

Answer: I am pleased to note that most GECF Secretariat projections for 2010 have come true. This once again testifies to the fact that our organization brings together true professionals in the energy markets from all regions of the world.

This year was a challenging one for the global gas industry and was marked by a gradual overcoming of the financial crisis that began in 2008. I want to stress that a single gas market, similar to that of oil, does not exist so the recovery trend in the different regions are different.

In North America and Europe, gas consumption was close to the record levels of previous years. Of course, in many cases, the gas producers were helped by falling temperatures, but still the main reason for the increase was the restoration of the economy and demand for gas as a fuel in the short and long term. The Asian market has been leading the recovery process in gas consumption since the financial crisis.

Another important trend for manufacturers is the partial restoration of gas prices in all regions. I would like to emphasize that I mean an approach to a fair price level, where commodity prices justify new investment in the industry. Otherwise, markets will not avoid uncertainty, seasonal shortages, price rises and falls, that is beneficial neither to suppliers nor consumers of gas. To prevent such adverse events is one of the goals of the GECF.

In the area of liquefied natural gas (LNG) a trend was observed. A sharp rise in shale gas production in the United States led to the formation of surplus LNG, which was originally intended for North America. These volumes were redirected to other markets and were sold there at a less attractive price.

Finally, I wish to emphasize that one of the important milestones for the gas industry in the past year was the establishment of the Gas Exporting Countries Forum as an international organization.

Q.: What is the role of GECF in stabilizing the gas market? What has GECF decided is its main task? What needs to be done?

A.: The Forum is not engaged in the regulation of gas production. GECF will only recommend solutions.

The fact is most of the blue fuel is sold under long-term contracts, which provide guaranteed obligations on the volume. Therefore, in the framework of long-term contracts regulating the produced volume to maintain prices is not possible. Extraction is secondary to demand. Gas is extracted in volumes defined by contracts and daily applications.

The most important feature of our industry is its capital intensity and long investment cycle. To increase the supply of gas in coming years, major investment decisions need to be taken today. And given lower prices and various risks not every market player would invest. Therefore, one of the main objectives of the Forum is maintaining a dialogue between the producers and consumers to ensure sustainable development of the industry.

The results of the work of our organization will help increase the interest of all gas-exporting countries to take part in the ongoing development of a common platform for constructive dialogue with all the other participants of the gas market. The member nations of the Forum have formed a common understanding of the interdependence of the security of supply and the reliability of demand, which was documented in the outcome of the summit of the Group of Eight in St. Petersburg in 2006.

As history shows, in major organization at the level of GECF formation takes many years. We are talking about the stage of forming a team, solving common organizational issues, establishing systems of both internal and external communications, communications with partner organizations established i.e. we have amassed an intangible asset through which the organizations work is really noticeable and is important to the rest of the players in the market. During the year of my tenure as Secretary General these issues have been resolved. The structure of the Forum Secretariat is already formed, development of research staff is in full swing, we are developing an information exchange mechanism between the countries. We take into account the most successful experience and international practice.

In the short term, we face plans to expand GECF by bringing in new countries, establishing fruitful cooperation with international experts to create a single database, data from which could reflect the real situation on the global gas market and give opportunities to build reliable forecasts.

Q.: What are the findings of the analysis for the medium term, GECF prepared? What are the trends in the gas market development for 2011-2015? How high would grow the volumes of consumption and production of gas? How are spot prices and prices of long-term contracts correlated? Will there be an increase in the volumes sold on the spot market?

A.: Apparently, this issue is best answered from the end. The progressive development of the regulatory basis for the organization of the European gas market, namely the introduction of the provisions of the Directive on the internal market in natural gas (2009/73/ES) into national legislation by EU Member States not later than March 3, obliges them to develop an institution of exchange trade in gas, in turn translates into increased speed trading platforms in continental Europe. However, what would be the share of turnover of sales of real goods is a question that cannot be credible assessed under the contemporary conditions of the unstable market situation in EU countries.

In this regard, and as a result of the general uncertainty for the prospect of a global economic recovery in the post-crisis period by experts, there are different expectations of the pace of recovery in demand for gas.

We are optimists and believe that today gas is the best fuel that combines high environmental specifications with relatively low prices. It promotes the growth of consumption in both developing and developed markets. However, regarding the availability of sufficient supply, we have some doubts. The point is the capital intensity of our industry, as I mentioned answering the previous question.

According to our estimates, the adjustment of prices in the spot market and long-term contracts are expected no later than the 2012-2013, restoring the balance of supply and demand by 2015. In Europe, gas supplies will continue to be carried by pipelines, and on the basis of long-term contracts.

According to the GECF participating countries, the most equitable model of gas pricing is pegged to oil and petroleum products basket, reflecting the interests of gas producers and not infringing upon the interests of consumers. Gas suppliers have no effect on oil prices as they are unable to manipulate prices.

Long-term contracts will retain the decisive role. The recovery of demand may change attitude to the spot market, whereas during the financial crisis and unpredictable movements of the spot market at some moments there was a short-term price arbitrage on the spot. After restoring the normal balance between stability, oil-linked long-term contracts will undoubtedly constitute the optimal choice of the consumer, since it offers stable and guaranteed supply volumes at a predictable cost without the possibility of manipulation by the supplier.

Q.: Will market volatility decrease, or not? Why?

A.: Spot markets remain volatile, underlying the advantages of long-term contracts. As I noted earlier, our problem (especially in the long and medium term) is to provide conditions for the normal investment cycle and stable development of the industry.

Q.: Will the geography of the consumption of gas change, how will this affect the market?

A.: I would put it this way: there is no single gas market, no one price, but all markets are interrelated, and their interdependence is reinforced.

An important role in the integration of markets is LNG flows which are in constant search for the most attractive markets. This is the normal course of market development. Gas demand is always growing slowly in developed markets with a high degree of gasification, gas penetration in different sectors of industry, electricity in communal and commercial sector. On the other hand, in the new markets the level of consumption is changing rapidly. Most European countries and the European regions of Russia passed this stage of growth of the market several decades ago. Now it is the turn of all the Pacific Rim countries, South America and the Middle East.

At the same time, I would not discount the European gas market. Despite the fact that the Europeans are committed to achieving its ambitious goals to reduce CO2 emissions with huge investments in renewable energy, many studies show that achieving the same results through the development of gas energy would cost hundreds of billions of dollars less. This will mean a change in the fuel mix in these countries in favor of gas and rising demand.

Q.: How much can the share of gas from nonconventional sources grow? What can this lead to? What is the role of GECF in these trends?

A.: We have evaluated positively growth in the production of unconventional gas, primarily shale, as the shale revolution in the United States helped to increase the share of natural gas in the energy balance of this country. Nevertheless, the cost of developing shale gas is much higher than traditional gas. Now companies, producing shale gas in the U.S. barely cover its operating costs. It becomes difficult to maintain the investment cycle, this situation cannot continue indefinitely. Prices will inevitably go up: in order to obtain shale gas, companies must constantly drill new wells, and must be constantly investing.

The competitiveness of shale gas in North America compared to LNG ensures a local nature of the proceeding which does not require transportation of goods across the ocean, as well as liquefaction and regasification.

Despite the fact that the explosive growth of gas production from unconventional sources has become the latest revolution in the global energy sector, further development of this production, we estimate will be restrained. First of all, we believe that there is still not sufficient accumulated experience to be optimistic about globalization of the U.S. experience. In other countries, geological conditions, water scarcity, environmental regulations and laws governing the rights of owners of land for minerals, cast doubt on the possibility of such a large-scale shale globalization.

Q.: Were you able to work out a common position on the EU Third Energy Package, what is it? Do all members of GECF agree? Are there problems with other members of GECF excluding Russia? What compromise can be found?

A.: In the course of its work in 2010 on various communications levels, we raised the topic of the EU Third Energy Package. In the context of the global gas market, it may at first glance appear not to be a priority issue, but it encompasses a lot of protectionist provisions. In addition to the stock trading of gas, the EU Third Energy Package includes a requirement for compulsory third party access and separation of sales and gas transportation. It is believed that this may weaken energy security, increase both the investment risks of the gas industry and the costs of delivering gas to European consumers.

Recent regulatory and management decisions in respect of certain members of our organization led the forum to look afresh at the issues of EU relations with gas suppliers from third countries. Evidence of this was the support given by the Russian Minister of Energy, Sergei Shmatko to the GECF proposal to hold further consultations on the EU Third Energy Package.

Only an integrated approach of all GECF participants on the development of world and European gas markets would allow the Forum to make a worthy contribution to global energy security in respect of natural gas with a view to achieving the proper level of security of supply and demand in all sections of the formation of value-added chain.

Q.: How will the structure of the GECF be optimized? What should be done to enhance its impact on the world market? What is the process of expanding GECF, to attract new members?

A.: First of all, it should be noted that we are a young organization and it is too early to talk of optimizing our structure. Now we are developing the institutional structure and developing its long-term strategy. The last ministerial meeting of GECF, held in Doha in December 2010, contributed significantly to strengthening the framework for the development of our organization.

The Forum seeks not so much to influence the world market as to protect the interests of member countries, who in turn influence the market. Thus, the more effectively GECF performs its functions, the more it will indirectly influence, through its members, the course of events.

I stress again that the GECF cannot influence the trend of the gas market, as it does not get involved in regulating the levels of gas production and prices.

Q.: How do you find working in GECF? What are the merits? Have you any desire to leave?

A.: The post of Secretary General is multi-faceted. This position requires maximum personal expenditure, but it also provides a unique experience and opportunities for development. I can say that I am prepared to invest further in the work of the organization with all my skills and knowledge, and willing to learn and gain new and unique experience.

It is too early to talk of merits, usually they are visible as a result of the process. I think that we have set a good pace of work. In the first months of my tenure the Forum Secretariat was formed. During the first year of GECF a significant number of internal activities of the Forum meetings at the highest level and a long-term GECF strategy organized. The Forum entered the international arena and began to establish contacts with key organizations. At this time, work continues on preparing the 1st Gas Summit and to promote various initiatives.

There is still much to be done, but the energy of the current Secretariat will suffice.

Q.: Are there any disagreements between the members of GECF? For example, between Algeria and Russia, how can they be overcome?

A.: My status does not allow me to comment on the relationship between individual members of our Forum.

The current situation in the gas markets, namely the low spot prices pushes nations to actively cooperate rather than to create conflict situations. In addition, the GECF, as I have repeatedly emphasized, is only in its first year and at this level of institutional maturing controversy simply has nowhere to go.

Our organization is very solid. Nevertheless, small differences can and always will occur. Our recipe is frank dialogue and consensus in decision making.


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